Turkey of the week: Great company, not-so-great stock

By Paul Hill Nov 06, 2009

Paul Hill

Share with
friends:

Comments (0) Print this article

Having more than doubled since March, swept up on the back of the new iPhone 3GS launch, Apple now trades at near all-time highs. But it's crucial to differentiate a great firm (which Apple is) from a great stock (which it isn't).

True, Apple's latest results blew the doors off expectations. High points included the popularity of its iPods and iTunes (26% of sales); Mac computers (40%); iPhones (23%) and software (11%).

But before celebrating, investors need to realise that this is a very fast-moving and cut-throat sector. Average selling prices for electronics are being shot to pieces, with 20% a year reductions commonplace. Worse, Apple's products stick out like expensive, luxury sore thumbs in an increasingly price-conscious world.

If consumers start to trade down, Apple will be in trouble – forced into a round of discounting and perhaps even into introducing its own range of low-cost gadgets. Either route would damage juicy 22% operating margins. And this may happen soon, given that competition is hotting up. Dell and HP have just launched a series of great value PCs using the new Windows 7 (a non-Mac platform). Meanwhile, Google's Android, the Blackberry Storm, Nokia's N97 and Palm's Pre are fighting for smartphone space. And what happened to Motorola's cutting edge RazR device is salutary: it went from hero to zero in the space of just three years.

Apple ( NASDAQ: AAPL ), tipped as a BUY by Canaccord Adams

Sure, Apple is not going bust anytime soon, especially since it has $23.5bn of net cash. However, its valuation is stretched. Wall Street predicts 2010 sales and underlying EPS of $44.3bn and $7.71. This puts the stock on an over-hyped earnings multiple of 24 with the prospect of having to deliver a challenging 21% increase in profits next year.

That's tough if there is a double-dip recession just as rivals put pressure on price. I value Apple at ten times 2010 Ebita. After adjusting for the cash pile, I get an intrinsic worth of about $137 per share, or 25% below current levels. That's why, after the recent purple patch, it's time to cash in.

Recommendation: SELL at $193

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Comments (0)

Published in Tips & advice | More articles by Paul Hill

Share with
friends:

Related articles

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>