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Apple Inc. Is Still A Value Play

Three months ago, after Apple (NASDAQ: AAPL.US) reported its first quarterly year-on-year profit decline for 10 years, I set out why I see Apple as a value play. But I warned that things would get worse before they got better, with keen Apple-watchers likely to be disappointed by the lack of new product innovations. Investors would need patience to see Apple’s fundamental value reflected in a stronger share price.

Well, at least the first part of my prediction has proved true! From $408 at the end of April the shares sank to $394 last month, recovering to $430 today.

News flow

The news flow hasn’t been inspiring. The iPhone’s new operating system got most attention for the visual re-design of its icons, which went down badly with Apple fans. And the company has been found guilty of leading a conspiracy to fix the price of eBooks. It says it will appeal but otherwise the next step is a trial to establish damages.

The most recent set-back is news that Apple is frantically hiring engineers to work on the iWatch, suggesting that launch of the product is at least 12 months away.  CEO Tim Cook had promised new product announcements starting from this autumn and running through next year, so the iWatch looks like it will be at the back end of that timetable. That’s an epoch in Apple-watching time.

Fundamental value

But I still believe in the fundamental value case for Apple. It’s a dominant — albeit no longer the dominant — player in a market that still has lots of untapped potential. Emerging markets offer big growth prospects, with China the prize jewel. Competition is tough and margins have shrunk, but that’s what happens in maturing industries.

Apple is cheap. The shares are trading on a forward price-to-earnings ratio of 10.6, just half the S&P 500’s 21.1 and well below the industry average of around 15. It yields a decent 2.7%, and there’s plenty more firepower available to boost shareholder returns. It’s a prodigious cash generator with a $140bn cash pile.

Mr Cook more than doubled — to $100bn, a quarter of Apple’s current market cap — the amount of cash to be spent on a share buy-back programme lasting to the end of 2015. In itself that should, in the broadest terms, increase earnings per share by a third.

Innovation

Of course, to survive — let alone thrive — Apple must innovate. But that’s its stock in trade, so it’s not a massive bet to have faith new products will come along. The expectations built up around Apple make it a victim of its own past success.

However the short life-cycles of consumer electronics products, and the fickle nature of consumers, do add vulnerability to Apple’s earnings.  So it doesn’t qualify for the Motley Fool’s pick of the best five dependable shares that could form the core of any portfolio — though, like Apple, they too have dominant market positions, healthy balance sheets and robust cash generation. To find out which they are, you can download this exclusive report — it’s free.

> Both Tony and The Motley Fool own shares in Apple.