Fact: Apple got cheaper last week

Can share price increases make a company less expensive?

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Apple (Nasdaq: AAPL) shares may cost more than they did a week ago, but that doesn't make the stock more expensive.

Confused? Stick with me. I promise that this will make sense soon.

Shares of the world's most valuable company climbed 5.2% last week, reversing a lot of the damage done during the two prior weeks of stinging declines. However, Apple's earnings multiples — both trailing and forward-looking — have actually improved over the past week.

Let's start with Tuesday night's quarterly report. Apple's fiscal-second-quarter profit of US$12.30 a share made headlines by blowing past the US$10.04 a share that Wall Street was expecting. More importantly for our purposes, it replaced the US$6.40 a share that Apple earned during the same fiscal period a year earlier.

In a split second, Apple's trailing earnings — the sum of its profitability over its past four quarters — soared 17% from US$35.11 to US$41.01. What happens to a trailing P/E ratio when earnings growth outpaces a stock's capital appreciation? It gets cheaper.

At a price of US$603, Apple closed at a trailing earnings multiple of 14.7 on Friday. A week earlier, Apple closed with a higher P/E of 16.3 even though the stock was at US$572.98.

Good?

It gets better.

Future shock
As analysts realise that they have vastly underestimated Apple's earnings potential — something that has happened every quarter for years outside of a single report six months ago — they also begin to tweak their outlooks higher.

Obviously analysts have to do this for fiscal 2012. They missed on the bottom line, on average, by more than US$2 a share! However, in tweaking this fiscal year's model, they can't just leave fiscal 2013 and beyond the same. Why should a company that's growing faster than they expected suddenly be growing slower than they were originally forecasting for the following year?

Over the past week, the consensus estimates for Apple's earnings in fiscal 2012 and fiscal 2013 have risen 5.6% and 6%, respectively.

See how the forward estimates climbed marginally higher than the stock's 5.2% ascent? Yes, that's Apple getting cheaper.

Apple now trades at 12.9 times this fiscal year's per-share target of US$46.87 and 11.2 times next fiscal year's target of US$53.93 a share.

The moral of the story is that Apple did get cheaper last week. Feel free to point that out to the person who thinks that Apple's stock ran away from them last week. The only thing that ran faster than the stock last week — thankfully — is the stock's profitability.

Next time you see the price of BHP Billiton (ASX: BHP), Woolworths (ASX: WOW), Telstra (ASX: TLS) or Insurance Australia Group (ASX: IAG) move higher or lower, don't just accept the move at face value. The stock that drops might just be more expensive than the one that just jumped.

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A version of this article, written by Rick Munarriz, originally appeared on fool.com

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