Why Apple Shares Remain a Bargain Despite Reaching New Highs

NEW YORK (TheStreet) -- Shares of Apple (AAPL) continued their incredible run Monday, closing at $95.97, up more than 2% during the trading session.

Apple stock is now up 20% on the year to date and are up almost 30% since the end of April. Even more remarkable, since reaching its (split-adjusted) 52-week low of $55.55 last June, Apple stock has surged more than 73%.

Investors who've taken the leap of faith during all of last year's doom and gloom have done well. The repeated trumpeting of Samsung (SSNLF) and Google (GOOG) killing off Apple has been muzzled. But with as much as 73% gains on the line, investors are getting nervous, which is understandable. But it's not time to lose faith.

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As Apple shares demonstrated Monday, this momentum has only begun to pick up steam. With Apple in the midst of a $130 billion capital redeployment plan, which it expects to complete by the end of 2015, there is plenty of room for the share price to run in the next 18 months. That's assuming CEO Tim Cook doesn't surprise investors with another dividend and/or share buyback increase.

The other thing is, despite the recent surge in share price, there is plenty of pent-up demand for the stock. While citing data from Morgan Stanley, a Forbes article noted that Apple's institutional ownership remains underweight when compared to other large-cap companies in the S&P 500. Analysts aren't citing this. But let's not pretend this important tidbit is not material to their bullishness.

This means that investors who are still waiting for a better entry point are doing so at their own peril. Once the institutions begin to pile into the stock, as I suspect is happening already, shares are poised to break their pre-split all-time high of $705 (or $101).

Apple, which received yet another price target increase on Monday, appears revived. While citing higher-than-expected iPhone 6 sales during the third quarter, Analyst Andy Hargreaves at Pacific Crest raised his price target on Apple from $93 to $100.

Apple shareholders rejoiced. I've echoed these sentiments on numerous Apple commentary. But Hargreaves is playing it too safe. From Monday's closing price, this new target represents only a 4% premium. The way I see it, Hargreaves is avoiding a limb that doesn't exists. Not to mention, he's late to the party.

Apple already received three price target increases last week. Rob Cihra at Evercore was first to step up, raising his target by 15% to $115 from $100. This was followed by 30% increase by Walter Piecyk at BTIG, upping his target from $86 to $112. William Power at Baird followed with a 7% increase to $102 from $95.

With Apple's median price target now at $102 and an average target of $101.49, it begs the question whether Hargreaves is even bullish at all. He noted that Apple's upside may be limited "unless the tech company innovates a new product or service." Again, there's nothing new here.

What I think is more important to consider, though, is how quickly Apple has changed the perception that it's become a slow-growth company. Apple's renaissance, which began six months ago, was affirmed when the company's margins maintained its healthy 38.5% level. It was at that point, analysts began upping their price targets.

What's more, these target increases didn't even take into account potential demand from the upcoming iWatch and other potential device categories. Assuming Apple can get 30% of its iPhone users buy an iWatch, the company can generate roughly $6 to $10 billion in long-term Ebitda. This assumes it can achieve gross margin of 45% to 50%, which is conservative.

But no matter how you slice it, with $101.49 now the average price target of two dozen brokers that cover the company, Apple at $95.97 is still a no-brainer buy.

At the time of publication, the author was long AAPL.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AAPL's revenue growth has slightly outpaced the industry average of 2.2%. Since the same quarter one year prior, revenues slightly increased by 4.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although AAPL's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 43.45% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.39% is above that of the industry average.
  • Net operating cash flow has slightly increased to $13,538.00 million or 8.26% when compared to the same quarter last year. In addition, APPLE INC has also modestly surpassed the industry average cash flow growth rate of 5.28%.

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