Undervalued Apple shares poised for more gains

According to Icahn, Apple is valued for pennies on the dollar and is "meaningfully undervalued." Photo courtesy Creative Commons
According to Icahn, Apple is valued for pennies on the dollar and is “meaningfully undervalued.”
Photo courtesy Creative Commons

Activist investor Carl Icahn isn’t right about everything, but in the case of Apple Inc., he may have a point.

The Cupertino-based electronics and software company has the highest market value of any S&P 500 component at $511.45 billion and still, it’s undervalued.

Shares of Apple have risen 14 percent to just under $600 since CEO Tim Cook announced plans for a 7-for-1 stock split next month, a dividend hike and an additional $30 billion in stock buybacks during the earnings conference call on April 23.

Icahn, who has been pushing the company to boost shareholder returns, tweeted that he agreed with the buyback and added the company “remains meaningfully undervalued.”

Apple’s price-to-earnings ratio, a commonly used valuation measure, stands at 14.23, well below the S&P 500 index p/e of 17.42, but similar to Microsoft’s p/e of 14.38.

More affordable shares (Apple will be priced at around $100 or less next month after the stock split) could attract more small investors, leading some to predict increased demand for shares and rising prices.

Beyond the stock split and share buybacks, analysts remain bullish on Apple, with the consensus 12-month price target at $628.58, and 44 of 64 analysts maintaining a “buy” rating, according to Bloomberg LP.

Anil Doradla, a William Blair analyst, wrote in a May 9 note that “we maintain our outperform rating and reiterate the upcoming WWDC [Apple Worldwide Developers Conference] event and the Chinese 4G product cycle as reasons for owning Apple.”

WWDC is an annual Apple event that will take place June 2-6. In the past, it has included iPhone reveals, OS X announcements, as well as hardware upgrades. Last year at WWDC Apple unveiled the newest edition of the Mac Pro desktop, Airport Extreme and Time Capsule routers and MacBook Air laptops that included Intel’s at the time latest Haswell processors.

On the software side, last year’s event stood out for the first public showing of the latest OS X edition, OS X Mavericks (10.9) and the showcase of iOS 7, iWork for iCloud and iTunes Radio, a feature that allows iTunes to compete with apps like Spotify or Pandora.

Apple just updated the Macbook Air in April, so probable updates at WWDC next month include the Macbook pro and iMac lines, which were last updated in October and September respectively. Eight to nine months between product updates is fairly standard for Apple.

Some speculate the company could also announce a new iPhone at WWDC, but Apple hasn’t revealed an updated iPhone at the event since 2010.

Skeptics of Apple’s future growth prospects point to a lack of new products (Tim Cook hinted at a new product launch in an April 24 interview with the Wall Street Journal). Apple’s last new product was the iPad in 2010.

Another aspect Apple investors should not ignore is the company’s unclear plans for the vast sums of money on its books. The recent rumor of a $3.2-billion acquisition of Beats Electronics LLC, if true, would only be a small drop in Apple’s more than $130 billion in cash reserves.

“Apple has historically not been a brand acquirer, so the acquisition of the Beats label (if done for its brand) will come as a surprise,” said Doradla.

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