In this latest installment of Using a Value Line Report, we will be highlighting a company that has arguably become one of the most influential and innovative manufacturers in the global personal technology market, if not the most recognizable name in modern technology to date, Apple, Inc. (AAPL – Free Apple Stock Report). Indeed, among the many newsworthy developments we will discuss in this review, the bit that commands the most attention of late is undoubtedly the tech titan’s debut on the Dow Jones Index, a nod which many would contend has given the equity an overdue badge of credence that elevates it among the investment elite.
The company has risen to unfathomable greatness from its early beginnings in a garage in Cupertino, CA during the late 1970s. The brainchild of Steve Jobs and Steve Wozniak, Apple went from being a minuscule player in the personal computer space for two decades to becoming the largest publicly traded company in the world by market cap. In fact, Apple is more than double the size of the second-largest company on that list, Exxon Mobil (XOM – Free Exxon Stock Report). Even though the stock has been a major market powerhouse for over a decade, inclusion in the exclusive blue chip index is assuredly the icing on the layer cake of accolades the company has achieved over the years. Too, taking the place of Dow veteran and telecom monolith AT&T, Inc. (T) is somewhat of a symbolic triumph in and of itself, a testament to the rise and dominance of the next-generation digital age and its corporate leaders. This review will offer some insight regarding the benefits and caveats to joining the Dow, as well as analyzing the Value Line page to demonstrate the stock’s investment merits and potential pitfalls.
Many have speculated as to the reason it took so long for Apple to be added to the Dow 30. Postulations aside, the broader consensus has widely been accepted that the company has long deserved a slot. Apple’s price appreciation over the past decade has been stellar, to say the least. Needless to say, industry-changing products such as the iPod, iPhone, iPad and the soon-to-be-launched ``Apple Watch'', have proven fruitful for the company’s investors. The shares’ exciting run is displayed in the Graph in the upper portion of the Value Line page. The price chart (split adjusted) and cash-flow line were off to the races beginning back in 2008 during what may have been the deepest trough of the latest recession. Since then, these indicators have ascended at a striking pace, albeit from a depressed recession-induced base.
To wit, a glance at the historical price ranges reveals that Apple has proven to be a ten-bagger for the ages, as an investment in AAPL shares at their peak in 2005 would have yielded more than a 1000% return (split adjusted) at the price listed in the Top Label section just above the graph, as of the last report dated January 2, 2015. Furthermore, the forward-looking P/E multiple, which also resides in the Top Label, suggests that the stock is trading at a fairly market-neutral valuation. In addition, shifting over to the Ranks box, the equity’s Safety rank is 1 (Highest) and its Beta score of .85 indicates below-market volatility. These data points, coupled with the company’s superlative grade for Financial Strength (A++), suggest that Apple carries limited risk.
On the other hand, AAPL’s pre-split pricing was a primary reason as to why it was kept off of the index. Apple’s seven-for-one stock split last June was what really opened the door to the Dow, as this factor solidified the stock’s alignment with all of the Dow Jones eligibility criteria. Among these prerequisites are demonstrating sustained growth, being popular among a large pool of investors, and being a large-cap stock priced similarly to the other Dow-30 components in the price-weighted index. In addition, according to the S&P Dow Jones Indices Committee, a recent four-for-one stock split at Visa (V – Free Visa Stock Report) lowered the collective average of the Dow, thereby prompting the need for a pricier component.
Nonetheless, not unlike the Tree of Knowledge in theological lore there is some uncertainty as to whether the fruit borne of this labor will be bitter or sweet. Indeed, being added to the Dow is often considered a pinnacle accomplishment in the investment world. However, there is some evidence to support the theory that the initial impetus that results from inclusion is often followed by a period of stock-price declines. Moreover, many industry experts attest that being added to the Dow may well herald the twilight of the stock’s impressive growth run over the past several years. There are many experts that point to historical data, which suggest that share prices generally rise briefly upon the news of induction and then typically fall in the weeks following their addition to the Index. Additionally, while the flattery of being called up to the Dow indicates the stock may have reached the proverbial mountain top, it could also suggest that Apple’s product tree has matured along with its growth potential. Evidence to substantiate this notion can be found in the 3- to 5-year Projections box, where it becomes apparent that the equity’s total return potential out to late decade is somewhat lacking.
Meanwhile, an interesting sidebar here is that being deleted from the Dow often leads to price dips that create good opportunities for investors that are bobbing for value in a pool of companies with solid fundamentals that have pulled back under largely psychologically driven pressure. In fact, several names that have had their Dow membership revoked have enjoyed solid rallies over the past couple of years, including Alcoa (AA) and Hewlett Packard (HPQ). Though it is way too soon for this brand of conjecture regarding AAPL’s performance, some may find it meaningful that after hitting an all-time high of $133.60 in late February (not reflected on the most recent report), the stock has flagged a bit since the Dow announcement.
Refocusing our attention to the Value Line report, however, we believe fundamentals are favorable for Apple. Moreover, we support analyst Justin Hellman’s position that “Aside from the compelling growth story here, Apple boasts great finances, and will probably continue to return excess cash to shareholders in the form of dividends and stock buybacks.” This statement reflects Mr. Hellman’s overall tone in the Analyst Commentary, which can be found in the bottom-half of the report. Furthermore, there are a number of data regions on the page that also corroborate this view. A look back at the Ranks box reveals that the stock is ranked 2 (Above Average) for Timeliness, which suggests that AAPL’s price performance will outpace the broader market means in the year ahead. Too, shifting one’s attention over to the left side of the page, the Annual Rates box displays that the company’s revenue, cash flow and earnings, while expected to slow considerably from historical levels, remain in the double digits. These are sound growth rates, even absent a foreseeable catalyst. Still, assuming Apple continues its tradition of dynamic and innovative product development, we envision future product launches that may well boost profit gains and command higher multiples beyond our 3- to 5-year projection range. All told, we believe that Apple stock is a worthy component of any balanced portfolio.