Take a bite. Apple shares are dirt cheap

chart_buzz_apple_pie2.top.gif By Paul R. La Monica, assistant managing editor


NEW YORK (CNNMoney.com) -- 2010 has certainly been the year of Apple.

The stock is up more than 50% on the back of explosive sales and earnings growth. In case you haven't heard, they sell these popular little tech doohickeys known as iPhones and also introduced something called the iPad this year.

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Apple's market value is now this close to $300 billion. Exxon Mobil (XOM, Fortune 500), with a market value of more than $360 billion, is the only company in the United States that's worth more than Apple.

So can Apple (AAPL, Fortune 500) possibly duplicate its success of this year? It's tempting to declare that the stock must be expensive. But that would me a mistake.

Apple, despite its gaudy sounding stock price of over $320 a share, is actually, dare I say it, a bargain. Shares are only trading at about 17 times earnings estimates for this fiscal year, which ends in September 2011.

Analysts currently expect Apple to post a profit increase of nearly 26% in fiscal 2011. So the company is trading at a sizeable discount to its anticipated growth rate.

"Pretty much everything is going right for Apple at this point and the stock actually looks cheap," said Jason McPharlin, portfolio manager at Northstar Capital Management, a Palm Beach Gardens, Fla. investment firm. Apple is Northstar's top holding.

It's also worth pointing out that the price-to-earnings ratio looks artificially high for several reasons.

For one, Apple famously lowballs analysts and investors. Nearly every quarter, it issues earnings forecasts that it eventually has no problem surpassing.

In October, Apple reported a profit of $4.64 a share for its fiscal fourth quarter of 2010. When Apple reported third-quarter results in July, it issued a forecast of just $3.44 a share for the fourth quarter.

And even though analysts have caught wise to Apple's practice of underpromising and overdelivering and usually issue estimates that are higher than Apple's, the consensus still often winds up being too low. Wall Street was expecting earnings of $4.08 a share for the fourth quarter.

Another factor that has to be taken into consideration is Apple's Fort Knox-esque treasure trove of cash. The company finished September with $51 billion in cash and marketable securities on its balance sheet. That works out to about $55.61 a share.

If you subtract that from Apple's current stock price and use that figure to calculate its P/E multiple, Apple's core (pardon the pun) business is trading at just 14 times earnings estimates.

To put that into context, the S&P 500 is also trading at 14 times 2011 profit forecasts. And the broader market isn't growing at nearly as rapid a clip as Apple is.

"Apple is the single most attractive growth stock I know. There's Apple and there's everybody else," said Jon Burnham, manager of the Burnham Fund in New York. Apple is the fund's largest holding. Burnham said he bought it in 2005 when the stock was trading in the $40s and hasn't sold a share since.

Burnham points out that other hot tech companies that compete with Apple in some businesses, such as Netflix (NFLX) and Amazon.com (AMZN, Fortune 500), are far riskier stocks than Apple because they are both valued at about 50 times 2011 earnings estimates.

There are also several things to look forward to in 2011 that could further juice (oops, another pun!) Apple's growth prospects.

Ted Parrish, co-manager of the Henssler Equity Fund in Kennesaw, Ga., said investors shouldn't underestimate the potential for Apple to gain more market share with Mac desktops and notebooks -- particularly with corporate customers. Apple is the fund's second-largest holding.

"There is a lot of room for growth with the Mac business," he said. "A lot of businesses still have Windows-based PCs and there should be more of a migration to Macs because let's be honest: Apple's products work and operate well."

McPharlin noted that the company could experience another big jump in growth if it is able to finally make waves with its Apple TV product, which streams movies and shows to high-definition televisions. The latest iteration was launched in September.

"Apple still needs to do a better job of getting into the living room of consumers," he said.

And oh, there's also the long-simmering rumor that the iPhone will come to Verizon (VZ, Fortune 500) sometime in 2011.

Of course, there are some clear risks to the Apple growth story. Parrish points out that increased competition from new phones such as Motorola's (MOT, Fortune 500) popular Droid, could put pressure on the profit margins of the iPhone.

And the bull case for Apple also depends on the belief that the company will continue to innovate. But why bet against Steve Jobs in that regard?

Consider that a product that didn't exist until 2007 (the iPhone) accounted for 43% of Apple's total sales in the fourth quarter. And the iPad, despite only being launched this year, already makes up 14% of sales.

"What's different about Apple now as opposed to years ago is that there are so many products," Burnham said.

That's a key point. The problem with many tech companies is that investors fall out of love with them once they start to show signs of maturing. Witness the lackluster stock performance of Microsoft (MSFT, Fortune 500) and Cisco Systems (CSCO, Fortune 500), for example, for the past decade when compared to Apple.

But it's hard to mature if you constantly reinvent yourself.

-- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

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