Apple won't go down forever

The shares are off 9%, but one Fool sees reason to buy

a woman

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It's a fire sale in Cupertino.

Shares of Apple (Nasdaq: AAPL) have now fallen for eight of the last nine trading days, and yesterday was a doozy. The stock fell 2.5%, sliding by US$14.46 a share.

A 9% plunge in Apple shares over the past five trading days is substantial, though the stock is still trading 43% higher in 2012.

Nobody ever said that Apple would ascend in a straight line, but even bears have to be taken by surprise with the swift drop. Naturally no one can say when Apple will bounce back, but let's go over a few reasons why Apple will in fact return to its winning ways — sooner rather than later.

1. Estimates continue to inch higher
It's a game that never gets old. Analysts lay out their profit targets. Outside of a single quarter six months ago, Apple blows through the estimates. Wall Street pros spend the next three months bumping their forecasts higher.

Just look at where we were three months ago. Analysts were expecting the iEverything behemoth to earn US$34.95 a share in this fiscal year ending in September and US$39.19 a share in fiscal 2013. Where are we today? Well, those same pros see Apple generating net income of US$44.23 share this year and US$50.64 a share next year.

Forget the fact that that in three months even the old fiscal 2013 target is too low for the current fiscal 2012 projection. We're looking at earnings estimates that have climbed 27% for fiscal 2012 and 29% for fiscal 2013. In short, the stock may have climbed 43% year-to-date, but the stock's multiples haven't expanded as severely.

2. The forward earnings multiples are too cheap to ignore
Let's stay on Wall Street's estimates. The changes are subtle if we look at weekly windows, but they're still happening. Just a week ago, analysts were looking for US$44.03 a share in fiscal 2012 and US$50.25 a share next year.

When you combine the nearly 1% increase in estimates over the same five trading days that have seen the stock shed nearly 9% of its value, interesting things begin to happen to Apple's valuation. The same company that was trading at more than 14 times this year's projected profitability, and nearly 13 times next year's forecast, is now fetching just 13 times this year's earnings and more than 11 times fiscal 2013's target.

Let's put this a different way: Apple went from fetching 13 times next year's earnings to 13 times this year's earnings. Or, better yet, did you even know that Apple's now going for just 11.4 times the forecast for its new fiscal year that begins in October?

3. The book price fixing scandal is overblown
Apple's stock turned lower after temporarily crossing the US$600 billion market cap last week, but the downturn has gained momentum since the Department of Justice turned its attention to Apple and five publishers. Regulators are now investigating claims that collusion took placeas Apple allegedly worked with major publishing houses to keep (Nasdaq: AMZN) from offering digital books at cutthroat prices.

It's easy to see why Barnes & Noble (NYSE: BKS) took a hit on the news. It's easy to see why publishers have a lot to lose if Amazon is allowed to sell Kindle books as loss leaders, driving down the perceived value of books. How does this hurt Apple, especially when reading books on iPads and iPhones doesn't appear to be a very popular pastime?

4. Analysts are going the other way
You don't see Wall Street lowering its near-term price targets for Apple's shares. Raymond James analyst Tavis McCourt initiated coverage after yesterday's downfall with a "Strong Buy" rating and a price target of US$800.

When you tack on other analysts that are starting to entertain four-figure price targets on Apple in the long run, it's hard to interpret the past week of steady declines as anything other than a buying opportunity.

Apple will bounce back. Given Apple's fundamentals, a resumption of the tech giant's winning ways is inevitable.

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The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

A version of this article, by Rick Aristotle Munarriz, originally appeared at

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