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Apple Still a Strong Buy


While much maligned for most of 2013, Apple's stock has made a nice rebound from its lows.

Apple (NASDAQ:AAPL) jumped in price after hedge fund manager Carl Icahn revealed on Twitter that he's taken a large position in the stock. "We believe the company to be extremely undervalued," Icahn said, who also noted that he's talked to CEO Tim Cook about enacting a larger buyback.

(See also: Apple Inc. Stock Soars on Twitter Frenzy, Yet Value Investors Could Still See More Upside)

Meanwhile, it has been reported that Apple will unveil its newest iPhone at an event on September 10.

In addition, Piper Jaffray analyst Gene Munster sees the iPhone as just the start of Apple's latest product cycle, placing odds on when other devices might be introduced soon.

He sees a 100% chance that the company will introduce the iPhone 5S in September and a refreshed iPad by October. He sees a 90% chance that Apple will also introduce a cheaper version iPhone in September.

The odds that Apple will come out with a TV in the first half of next year, Muster places at 70%, while he sees a 60% probability that an iWatch is introduced before the end of 2014.

He also thinks it is likely that Apple will introduce the iPhone 6 with a bigger screen (4.5-5.9 inches) in the first half of 2014.

Another interesting prediction by Munster, is that he sees Apple introducing a digital wallet with an upcoming iOS upgrade, that would be protected by the fingerprint-reading technology it bought last year when it acquired Authentec.

"We believe now is the time to own shares of AAPL given that we expect earnings will move from being down y/y in the first three quarters of 2013, to flat in the December 2013 quarter, up 15% in March 2014, and up 21% in June 2014," Munster wrote.

He added that with 125 million 2012-model iPhones coming off contract next year, and an 80-90% brand retention rate, he estimated that approximately 70% of an estimated 152 million iPhone sales are "in the bag."

While much maligned for most of 2013, Apple's stock has made a nice rebound from its lows, hitting a six-month high today, and crossing above its 200-day moving average for the first time this year, a good technical signal.

While, operationally, Apple isn't out of the woods-it does face increased competition; its ability to innovate will continue to be questioned until it does come out with something that is more revolutionary than evolutionary, and margins have peaked-it does have numerous attractive qualities for investors.

(See also: Apple Inc. Would Be in Trouble With or Without Steve Jobs)

Chief among them is that the company is still sitting on a pile of cash and investments ($146.62 billion or $142.73 per share), and that, ex-cash, it remains very cheap, trading at around eight times the FY14 (ending September) EPS consensus of $42.37.

The company continues to generate a tremendous amount of cash, equal to about an EV/FCF (free cash flow yield) of 12%, and it's buying back stock and paying out a dividend that yields 2.5%.

In addition, Apple is the most profitable smartphone maker on the planet, by far, and it has one of the most brand-loyal customer bases around.

Importantly, gross margin comps get a lot easier starting in the December quarter (it's fiscal Q1), which should help lead to a return to bottom-line growth.

Meanwhile, at current levels, not much, if any, innovation is priced into the stock, giving investors a free call-option that Apple has another hit product or two up its sleeve. Based on that, we continue to rate the stock a Strong Buy with a target of $600.

Editor's Note: This article was written by Geoffrey Seiler of for MoneyShow.

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