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Apple: Unloved Inventory

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Over the last few weeks, a parade of analysts have come out bullish on Apple (AAPL) giving the market an impression of an analyst base overly bullish when the stock is at all-time highs. The reality is the analyst community isn’t actually overly bullish on the stock. My investment thesis remains bullish on the stock heading into year-end realizing the stock and the market are likely due for a sell-off in January.

Apple products

Image Source: Apple website

Not So Bullish

Only last Friday, both Piper Jaffray and Bernstein analysts both came out resoundingly bullish on Apple. The reality is that neither analyst made an overly bullish call to generate some sort of peak bullishness in the stock.

Piper Jaffray was the most bullish analyst, raising the price target of analyst Michael Olson to $305 from $290. The analyst basis the rating on an internal survey that suggests 23% of respondents are now willing to pay an ASP of $1,200 for a 5G iPhone. The number isn’t actually shocking as only a quarter of consumers willing to pay premium prices for a 5G iPhone was already a general view of prospects for next year.

Source: Apple 3.0

Bernstein analyst Toni Sacconaghi sounded bullish with a positive view of AirPods, but the analyst kept a Market Perform rating on Apple with a $250 price target. With the stock at $284, his view should count as a Sell rating considering the expected 10% decline.

Where the Bernstein call is even more bearish than on the surface is the bullish statement surrounding AirPods really isn’t bullish. Mr. Sacconaghi predicts Apple selling 85 million units for 2020 revenues of $15 billion. My previous estimate had Apple reaching 100 million units and sales of $20 billion.

Of 45 analysts, only 25 are Bullish on Apple. Another 20 have a Neutral or Bearish view on the stock.

Source: Seeking Alpha Sell Side Rating

In a similar manner, Cleveland Research came in with a bullish call on Apple earlier in the prior week. Analyst Ben Bollin is positive on revenues beating estimates due to sales of iPhones and wearables.

While all of these analysts making bullish statements might give investors the view of an overly bullish analyst community, the reality is that average analyst ratings are at the lowest level in the last five years. The average analyst has a 3.75 rating and only a $265 price target.

Source: Seeking Alpha Sell Side Rating

Yes, the average price target is now ~$20 below the current stock price of $284. Technically, the average analyst is actually bearish while having the lowest official rating on Apple since the end of 2014.

In 2016, the average analyst rating was up around 4.3 with only a couple of analysts having a bearish view on the stock. Ironically, Apple hit a low in the $90s during the year and the stock has soared ever since as analysts have become increasingly bearish.

The average analyst actually has a view more similar to Tony Sacconaghi. Despite a general disdain for his view on Apple by the likes of Jim Cramer, his price target is more in line with the typical analyst than the current stock price.

Multiple Expansion

The lack of a generally bullish analyst community makes my view on Apple more positive. These analysts are being pulled higher kicking and screaming surprisingly by higher product sales, not growth in services.

If the analyst community was more bullish on Apple, the time to take profits might be towards year-end as the stock reaches $300. The more negative indicator is the net payout yield as stock buybacks have a more limited impact on boosting EPS.

The net payout yield that combines the dividend yield and net stock buyback yield is down to only 6.3%. The stock rallied to the high of $230 last year while the net payout yield spent a large period below the current yield.

ChartData by YCharts

Apple still has nearly $100 billion in net cash so the stock buybacks are a boost to EPS and value positive, but the net payout yield isn’t always the best indicator for the stock. On extreme spikes in the yield similar to the December collapse last year, the net payout yield does provide a flashing buy signal. Otherwise, the net payout yield isn’t always the best short-term signal for this tech giant other than an indication of the ongoing tailwind.

While the net payout yield does typically signal a cautionary warning that even Apple can’t keep up with the stock anymore, the tech giant sector still generally trades at about a higher P/E multiple. The tech giant group of Facebook (FB), Alphabet (GOOGL) (NASDAQ:GOOG) and Microsoft (MSFT) trades at about a 30% premium to the official 19.2x forward P/E multiple of Apple.

ChartData by YCharts

During this whole rally, Apple has hardly closed the gap with Facebook. Despite regulatory problems around the world, the social media giant still trades at a nearly 23x forward P/E multiple.

My previous estimates have Apple earning $15.29 per share in FY21. The P/E multiples above are for comparative purposes, but ultimately the stock trades below 17x EV/FY21 EPS estimates.

Takeaway

The key investor takeaway is that analysts are being pulled kicking and screaming to pay higher multiples for Apple while the market already willingly pays far higher valuation multiples for other tech giants. Despite some generally positive analyst references over the last week or so, analysts really aren’t bullish on the stock providing more juice for a further rally to $300 and beyond. Apple remains an unloved stock in the market.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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