Assignment
For the assignment, continue to do research on the company Apple. You will be doing research about the valuation of the company to try to determine if its stock price is overvalued or undervalued. You can use Google Finance, Yahoo Finance, or similar Web pages to find the financial information about this company.
Write a 2- to 3-page paper with the following items:
- What is the P/E ratio of this company? How does the P/E ratio compare to other companies in this industry? Based on the P/E ratio, do you think the company is overvalued or undervalued?
- Find the company’s balance sheet. Calculate the book value of each share. This can be done by taking the total assets and subtracting total liabilities. Then divide the number you get by the total number of outstanding shares. Is the number you get higher or lower than the current price of the share? Based on what you’ve found, would you say the stock is overvalued or undervalued?
- Finally, do a search on what different analysts have to say about your company. Do they generally recommend buying the stock or selling the stock? What reasons to they give for their assessment? Find at least three analyst reports about this company.
Solution
1-What is the P/E ratio of this company? How does the P/E ratio compare to other companies in this industry? Based on the P/E ratio, do you think the company is overvalued or undervalued?
Stock Valuation or Bond valuation can be done through various methods. There is Discounted Dividend Model, CAPM Model, Ratio Analysis, etc. Companies and investors use their preferred method of valuation to gain the insight on the valuation of the stocks or bonds. Each model provides its benefits and has its limitations. It depends on what an investor is looking for and how to use it properly to get the best results (Gitman, 2005).
As per the Morningstar, the price per earnings ratio as of now of Apple Inc is a $17.29 (Morning Star, 2018). The quote or price on April 6, 2018, for the stock of Apple, was up by 1.19 going to $172.80 (Morning Star, 2018). The total earnings of the company Apple Inc in its last reported 10 K SEC filing for the year 2017 is reported at $ 48.35 Billion (Apple Inc., 2017). The calculation of the Price/Earnings Ratio is done by the formula:
Price per Earnings Ratio= (Share Price)/(Earnings Per Share)
For this, we need to know the Earnings per share. Morningstar and the annual report of Apple Inc 2017 show diluted earnings per share of Apple Inc as $9.21 (Apple Inc., 2017). The total income in 2017 for Apple Inc, as mentioned earlier is $48.39 Billion. The Earnings per share is calculated as:
Earnings Per Share= (Net Income)/(Number of Shares)
The diluted number of shares used to compute EPS is 5,251,692 (Apple Inc., 2017).
Earnings Per Share= ($48.35 Billion)/5,251,692
Earnings Per Share=$ 9.2
We can use this to calculate the Price/Earnings Ratio:
Price per Earnings Ratio=$172.80/$9.2
Price per Earnings Ratio=$ 18.77
The calculated P/EPS shows that there is a slight change in the amounts mentioned in Morningstar and the one computed here. It is because of the reason that the EPS for this ratio is computed for the last twelve months, while we have computed it on the basis of 2017 EPS.
However, both show that the investors are willing to pay a higher price for the stock of Apple Inc as compared to the relative earnings it is yielding per share. The Price per earnings ratio of $18.7 shows that the investor is willing to pay $18 for earnings of $1 from Apple Inc. As per the valuation through this ratio, this seems a high price for just one dollar of earnings. However, if this earning is expected to increase in the near future, then this price would seem not so expensive. However, the risk persists. Thus, we can say that the Apple Stock as per the Price per earnings ratio is overvalued.
2-Find the company’s balance sheet. Calculate the book value of each share. This can be done by taking the total assets and subtracting total liabilities. Then divide the number you get by the total number of outstanding shares. Is the number you get higher or lower than the current price of the share? Based on what you’ve found, would you say the stock is overvalued or undervalued?
For computing the book value of a share, we need to know the value of total shareholder equity and the number of shares. The total equity of Apple Inc in 2017 is reported as $ 134,047 million. The book value can be calculated as;
Book Value Per Share= (Total Equity)/(No of Shares)
Book Value Per Share= $134,047/5251,692
Book Value Per Share=$ 25.5 per share
The book value of the company is lower than the share price of the company. It shows that the stock of the company is priced at a higher price than the value of its assets. It can be deduced as the overvaluation of the stock.
3-Finally, conduct a search on what different analysts have to say about your company. Do they generally recommend buying the stock or selling the stock? What reasons to they give for their assessment? Find at least three analyst reports about this company.
i-NASDAQ:
The Analyst recommendation of the NASDAQ website shows each recommendation as per Zack’s standard rating and a consensus recommendation are given based on the average of the values. The consensus recommendation is more towards strong buy. The price target for 12-month analysis is at $194. It means that analysts expect it to increase. The momentum of the analyst’s sentiment for Apple price in the future has declined by showing that 3 to 4 changes in analysts’ recommendations were reported. The earnings growth of Apple Inc is also higher than the industry growth rate (NASDAQ, 2018).
ii-The Zack’s Research:
The Zack’s Research Daily analysis of Apple stock has shown that the stock is a buy-rated stock with an increment of 48% from last year, while outperforming the S&P Index and the Zack technology sector as well. The company has witnessed steady sales of iPhone X. The company has improved its revenue in the services, iPad and Mac segments. The expected benefit from the demand of the iPhone X is going to provide sustained momentum in the stock. The analysts have been surprised by the surprise increase in the earnings as compared to the estimates as the unit iPhone X is quite expensive at $999 specifically for a market like India (Vickery, 2018).
iii-Wall Street Journal
The analyst’s ratings of the Wall Street Journal for the stock of Apple Inc in the last three months have remained at overweight. However, the analysts have shifted somewhat from strong buy to hold. The number of analysts shifted is 8. The stock price target by wall street journal analysts shows an average price of $191.88. On the whole, the estimates of per-share earnings have remained close to the estimates and within the analyst range except for the earnings surprise of Q4 2017 which reported higher sales than estimated. (Wall Street Journal, 2018)
Conclusion
The compiling of the all three analysts ratings and analysis shows that even though the analysts are suggesting a buy rating for the stock of Apple Inc the sentiment is lowering on the whole. The earnings and results which were less than expected in the last year have recovered from the strong sales of iPhone X, and the demand persists. Thus, it can be said that the stock is expected to increase in its value in the coming months. Hence, a buy-rating is given to Apple Stock.
The valuation of the stock of Apple Inc by Price per earnings ratio and by the book value per share shows that the stock is overpriced regarding the value that the investors are willing to pay for it as compared to the earnings and its assets value. However, the analyst’s valuations show that the company stock is still expected to go high because of the high demand for iPhone X in the market even with its high price.
References
Apple Inc. (2017). Apple Inc 10K Report 2017. Retrieved April 6, 2018, from http://files.shareholder.com/downloads/AAPL/6128778344x0xS320193-17-70/320193/filing.pdf
Gitman, L. (2005). Chapter 7: Stock valuation. In Principles of Managerial Finance. Pearson Education. Retrieved from http://wps.aw.com/wps/media/objects/222/227412/ebook/ch07/chapter07.pdf
Morning Star. (2018, April 6). Apple Inc. AAPL. Retrieved April 6, 2018, from http://www.morningstar.com/stocks/xnas/aapl/quote.html
NASDAQ. (2018, April 6). Apple Inc. Stock Research – Analyst Summary. Retrieved April 6, 2018, from https://www.nasdaq.com/symbol/aapl/analyst-research
Vickery, M. (2018, January 3). Top Analyst Reports for Apple, Mastercard & 3M. Retrieved April 6, 2018, from https://www.zacks.com/research-daily/142536/top-analyst-reports-for-apple-mastercard-3m
Wall Street Journal. (2018, April 6). Per-Share Earnings, Actuals & Estimates Apple Inc. Retrieved April 6, 2018, from http://quotes.wsj.com/AAPL/research-ratings
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