Apple is an exciting stock to own. It's one of the few stocks where the underlying business is unquestionably grade A, yet the stock trades as if the business and its prospects are subpar. Case in point: a recent Apple analyst who downgrades his expectations for the business, yet maintains an outperform rating for the stock.
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A bullish downgrade?"Apple Shares Tumble on iPhone Demand Worries," reads a headline from theWall Street Journalthat began making rounds Tuesday, as Apple shares fell about 3% on the same day. The article cited an analyst who said demand for iPhone may be weaker than expected.
"Apple has lowered its component orders by as much as 10% according to our teams in Asia," said Credit Suisse analyst Kulbinder Garcha (via WSJ). The analyst cited "weak demand for the iPhone 6s launched in September," WSJ author Kristen Scholer wrote.
In light of the analyst's conclusion about Apple's component orders, Garcha now predicts Apple will sell 222 million iPhones next year, down from a prior estimate of 242 million. Further, Garcha has reduced his estimate for Apple's 2016 EPS by 6%. But here's what's interesting: In spite of meaningfully lower expectations, Garcha has opted to maintain his "outperform" rating for the stock.
The reason analysts like Garcha can remain optimistic about Apple stock even when they're less confident in the underlying business is because of the stock's conservative valuation. Trading at less than 13 times earnings, Apple doesn't need to grow revenue in order to build shareholder value. With the company's current levels of revenue and cash flow, the tech giant can generate around a 9% annual return on per-share intrinsic value simply by repurchasing shares, and paying out dividends.
Comparing Apple with McDonaldsOne of my favorite ways to illustrate the value in Apple stock at less than 13 times earnings is to compare it to McDonald's stock. Consider McDonald's and Apple compared side by side on some key metrics:
Despite Apple proving to investors it can still grow per-share value considerably, and generate loads of free cash flow (evident by the first two metrics in the table above, respectively), Apple still trades at a significant discount to McDonald's. This is clear by observing Apple's lower free cash flow yield -- measured by annual free cash flow as a percentage of market capitalization -- and its lower P/E ratio.
This isn't to say McDonald's stock is overvalued. The fast-food company obviously possesses many of the characteristics that investors who seek companies with staying power are looking for. But in just a few metrics, these comparisons make a strong case that Apple stock is undervalued.
No wonder investors can remain bullish on Apple stock, even when near-term revenue growth is uncertain: The stock's cheap valuation provides plenty of wiggle room.
The article Apple, Inc. Doesn't Need Revenue Growth to Build Shareholder Value originally appeared on Fool.com.
Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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