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.
It gets better.
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.
If you’re looking in the market for some high yielding ASX shares, look no further than “Secure Your Future with 3 Rock-Solid Dividend Stocks”. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.
- Why we might be wrong about Bernie Madoff
- ASX gold stocks are getting hammered
- 4 ASX stocks that jumped more than 15 per cent last week
The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).
A version of this article, written by Rick Munarriz, originally appeared on fool.com
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th