Cult Stocks: Apple of the Market's Eye

As long as loyalists have realistic expectations, I don't think they will be disappointed going forward. I wouldn't expect 100% annual returns at this price anytime soon. But with what the company continues to do today, its earnings should continue to grow in at a low double-digit rate for a few years. EPS in 2010 could easily exceed $13, or more than double the 2009 figure of $6.30, by my estimates.

Despite this anticipated growth, Apple shares are trading for less than 14x forward earnings. On an EV basis, it's trading at less than 13x forward earnings. That's a similar valuation to HP, despite the high probability that Apple's earnings growth rate will be significantly higher.

The problem for Apple is size. A smaller tech company with the same rate of growth could easily command a 30-40x P/E multiple. Amazon(AMZN), for example, trades at over 50x trailing earnings, despite net profit margins of less than 4%. But Amazon earned $902 million, so that gives it a market cap of around $50 billion. By comparison, Apple earned $8.2 billion in income in 2009, nearly double its 2008 figure. If it were assigned a 50x earnings multiple, you'd be looking at a market cap of nearly half a trillion dollars. That would be greater than the market cap of Microsoft(MSFT), Intel(INTC), HP and Dell combined.

Needless to say, I don't think a $200 billion company deserves anything near a 50x earnings multiple. Yet, if growth remains robust, the earnings multiple should remain in the mid-teens, if not expand a little. In that case, Apple shares should continue to appreciate along with income growth. If Value Line's 2013-15 EPS estimate of $26 is close to accurate, an 18x earnings multiple yields a share price of more than $450 a share. So, even if EPS is off a bit, or the multiple contracts, Apple shares should continue to whip up shareholder loyalty.

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