Apple Investor Amnesia Sets Up a 2013 Value

Antoine Gara - The Street  DEC 26, 2012 1:50 PM

Why Apple may be the new tech sector value investment to trump a disastrous year for Dell, HP and RIM.

 


Apple (NASDAQ:AAPL) entered 2012 as a stock that simply couldn't rise fast enough to account for its underlying earnings growth. Investors who went missing this year may get a near-identical redo in 2013.

Interestingly, while some tech pundits say the last twelve months were a game changer for the iPhone and iPad maker and are calling for the company's eventual demise, Apple enters 2013 in a notably similar state as it did in last New Year's Eve.

While Apple's shares have been a top stock market story in 2012, eclipsing a market cap of $650 billion earlier in the year, the company's most basic valuation is roughly unchanged from year-ago levels. Meanwhile, Apple is in the midst of rolling out the iPhone 5, an updated iPad, and the iPad mini, in a global product launch that compares to 2011 holiday season smartphone and tablet offerings.

So what does it all mean for investors?

For one, those betting on Apple's continued earnings growth will have remarkably similar arithmetic underpinning their 2013 investing strategy.

Apple entered 2012 with a price-to-earnings ratio of 11.53 and it heads into 2013 at a PE of 11.69, a 1.4% rise over the course of the year. Still, Apple's stock is up over 25% year-to-date, even after a similar sized selloff from record highs above $700 hit in mid-September.

The key, as many investors such as David Einhorn of Greenlight Capital Management predicted, is that Apple's profits rose far faster than its stock this year.

In fiscal 2012, which ended on September 29, Apple's earnings surged over 60% to $41.7 billion. In its fiscal fourth quarter, Apple's $8.2 billion in profit reflected a 24% increase from year-ago levels.

While Apple's shares have fallen sharply since it reported underwhelming earnings in October and adjusted first quarter 2013 EPS estimates from $15.49 per share to just $11.75, its new revenue forecast of $52 billion for the quarter still represents a near 20% increase.

Were one to assume Apple can grow earnings in 2013, the company's stock may have a similar trajectory to this year, when increasing profits and investor bullishness pushed the stock to multiples of between 13 times and 15 times trailing 12-month earnings, according to data from YCharts.

Apple's earnings are forecast by analysts polled by Thomson Reuters to increase roughly 17% to $48.8 billion in 2013, as revenue is estimated to surge over 22% to $191 billion, a new record.

Such a scenario might have second order implications that ripple across the tech sector, and in particular to once blue chip stocks like Dell (NASDAQ:DELL) and Research In Motion (NASDAQ:RIMM), which increasingly are in the gaze of value investors and activists.

Dell and Hewlett-Packard (NYSE:HPQ) entered 2012 with PE ratios just above 8 times trailing 12 month earnings, according to YCharts.

Unfortunately, for value investors expecting stock price gains on a bottoming of those historically discounted earnings multiples, Dell and HP had disastrous years, falling over 29% and 44% respectively, year-to-date.

In fact, as Dell's revenue and sales slowed through the year, its multiple has actually fallen. Currently, Dell's PE ratio stands at just over 7 times trailing 12-month earnings. Meanwhile, nearly $20 billion in M&A writedowns means HP has no GAAP earnings to speak of heading into 2013.

RIM's PE multiple has suffered a similar fate as the company turns to losses and an over 20% year-to-date stock loss on declining fundamentals and uncertainty surrounding its launch of BlackBerry 10.

Given the data, Apple investors may well brush of the company's late 2012 stock slump as some stock market pundits question whether this year represents market peak earnings for the nation's largest tech giant.

The real question next year may be whether tech sector value investors decide that in 2013, they'll pull the plug on failed PC-based turnaround bets and a similar stance on RIM.

Were Apple to become the value investing play to recover from value trap bets on Dell, HP, and RIM, it could spark predictable stock gains in the New Year for the former, and further pain for the latter.