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Is it fair to say that the stock of Apple Inc. AAPL, +0.79% the world’s largest company by market value, is hated?
By this measure, yes: Its price-to-earnings ratio puts it in similar territory to the biggest U.S. banks:
Company Ticker Closing price - Jan. 25 Consensus 2016 EPS estimate Price/consensus 2016 EPS estimate
Apple Inc. AAPL, +0.79% AAPL, +0.79% $99.44 $9.48 10.5
Wells Fargo & Co. WFC, +1.52% $47.66 $4.29 11.1
J.P. Morgan Chase & Co. JPM, +2.34% $55.66 $6.09 9.1
Bank of America Corp. BAC, +2.24% $12.96 $1.52 8.6
Citigroup Inc. C, +2.76% $39.55 $5.32 7.4
Source: FactSet
To illustrate just how harsh it is to value Apple in a way similar to the nation’s largest banks, take a look at this comparison of returns on common equity (ROCE) over the past 12 months (through Monday):
Company Ticker ROCE - past 12 months
Apple Inc. AAPL, +0.79% AAPL, +0.79% 39.84%
Wells Fargo & Co. WFC, +1.52% 13.15%
J.P. Morgan Chase & Co. JPM, +2.34% 10.03%
Bank of America Corp. BAC, +2.24% 4.83%
Citigroup Inc. C, +2.76% 5.97%
Source: FactSet
On Sept. 10, I called Apple’s stock a bargain, pointing out that the shares traded for just 12.3 times the consensus fiscal 2015 earnings estimate, which was a whole lot lower than the S&P 500’s and also considerably lower than that of many large-cap companies.
Shares of Apple have returned a negative 11.3% from Sept. 10 through Monday, with dividends reinvested, while the S&P 500 SPX, +1.37% has returned a negative 3%.
Egg on my face? Hardly, as I was pointing out Apple looked like a “bargain for long-term investors.” Long-term, as in a commitment of at least several years.
So where are we now, heading into Apple’s fiscal first-quarter earnings announcement scheduled for Tuesday?
Here are the largest 10 S&P 500 stocks, by market capitalization, along with their price-to-earnings ratios:
Company Ticker Market capitalization ($billion) Closing price - Jan. 25 Consensus 2016 EPS estimate Price/consensus 2016 EPS estimate
Apple Inc. AAPL, +0.79% AAPL, +0.79% $531 $99.44 $9.48 10.5
Alphabet Inc. Class A GOOGL, -0.03% $460 $733.62 $34.22 21.4
Microsoft Corp. MSFT, +0.70% $414 $51.79 $2.76 18.8
Exxon Mobil Corp. MSFT, +0.70% $308 $73.98 $2.89 25.6
General Electric Co. GE, +1.09% $283 $28.04 $1.50 18.7
Amazon.com Inc. AMZN, +0.16% $280 $596.53 $5.58 106.8
Johnson & Johnson JNJ, +3.98% $267 $96.40 $6.38 15.1
Wells Fargo & Co. WFC, +1.52% $243 $47.66 $4.29 11.1
Facebook Inc. Class A FB, +0.28% $221 $97.01 $2.88 33.7
AT&T Inc. T, +0.73% $215 $35.00 $2.84 12.3
Source: FactSet
For Alphabet Inc., which used to be called Google, we have included the combined market capitalization for the company’s Class A and Class C shares, even though we listed only Class A on the table.
Apple Dials In India's Smartphone Market
(1:40)
As prices of older iPhone models fall, Apple is seeking a bigger piece of the smartphone pie in India, ramping up advertising and expanding distribution. The WSJ's Newley Purnell lays out the plan. Photo: Getty Images
Looking at the P/E ratio column, it’s obvious that despite the company’s high market capitalization, investors don’t like the stock. Apple just isn’t valued the way other companies are.
You’ve probably seen countless stories about how horrible it is that most of Apple’s revenue comes from one product line, the iPhone, and that there are so many cheaper smartphones available. Both of those points are true, but cheaper smartphones have been around for years, and there’s no denying Apple’s “brand cachet,” especially in China.
Here’s the same group of companies, showing how much they increased sales and earnings per share, over the past 12 reported months (through Monday):
Company Sales per share - past 12 reported months Sales per share - Year earlier Growth of sales per share EPS - past 12 months EPS - year earlier Growth of EPS
Apple Inc. $39.97 $29.85 34% $9.20 $6.43 43%
Alphabet Inc. Class A $102.79 $94.46 9% $22.10 $19.14 15%
Microsoft Corp. $11.06 $10.93 1% $1.49 $2.55 -42%
Exxon Mobil Corp. $61.89 $89.73 -31% $4.74 $7.94 -40%
General Electric Co. $13.02 $14.67 -11% $0.17 $1.50 -89%
Amazon.com Inc. $212.75 $183.37 16% $0.69 -$0.47 N/A
Johnson & Johnson $25.01 $25.92 -3% $5.23 $6.04 -13%
Wells Fargo & Co. $17.38 $16.98 2% $4.15 $4.10 1%
Facebook Inc. Class A $5.61 $4.29 31% $0.99 $1.05 -6%
AT&T Inc. $25.75 $25.04 3% $0.92 $3.27 -72%
Source: FactSet
For sales-per-share growth, Apple blew away all those companies, except for Facebook Inc. FB, +0.28% For growth of earnings per share, none came close to Apple’s performance.
Again, there’s plenty of fear that Apple’s growth is slowing, because of the continued flow of bad economic news out of China, and the reports of declining supply orders. But the consensus among sell-side analysts is that Tuesday afternoon the company will report fiscal first-quarter sales per share of $13.82, up 10% from $12.61 a year earlier, and EPS of $3.23, increasing 6% from $3.06 a year earlier.
Also see: 10 fascinating facts about this troubled stock market
Those are indeed low expectations for Apple, and it shouldn’t really be much of a surprise if the company beats those numbers, since keeping expectations low, and having analysts follow suit, is how the quarterly-earnings game is played on Wall Street.
Do you think people will stop believing the iPhone is “cool enough” to command a premium price? Do you believe that Apple will be unable to continue growing its sales and earnings at a decent pace? The investment consideration needs to be independent of your own personal decisions over which smartphone or other piece of equipment to buy.
By the numbers, Apple still looks like a cheap stock, despite its recent underperformance. Even with a slowing growth rate, the company’s earnings can be expected to support a significantly higher P/E valuation over the long term.