Apple [AAPL] has had a strong to 2019 with its shares rising 37% to $216.70 up to 11 September. It has made solid progress since the shock profit warning in early January when it cut sales forecasts because of the Chinese economic slowdown.
The tech company has gained its significant ground despite another Chinese headache: the US/Chinese trade war. Although iPhones have not been targeted as of yet, this will change in December when a 10% US tariff on $300bn worth of Chinese imports comes into play. This matters for Apple as the iPhone, Mac and Watch are assembled in China.
So, will Apple’s share price continue to blossom or is it set for an autumnal fall?
A hike is coming
Apples iPhone 11 and new Apple Watch shared the stage with services and online content, as the company look to cement a shift from hardware, and more specifically, the smartphone market.
The tech company’s launch of services this autumn will include Apple’s TV+ streaming service and the Arcade gaming subscription service.
This pivot also comes as Apple face ongoing antitrust scrutiny, and the firm didn’t miss the opportunity to promote its privacy capabilities, claiming the latter is “built from the ground up” within each device.
“Apple shares have yet to recapture the all-time high reached last September. The major reason for this is poor earnings momentum and investors will be looking forward to the launch,” said Russ Mould, AJ Bell Investment director.
Trade talks in October between the US and China could lead to a positive resolution of the dispute and lift the threat of that smartphone hike. Conversely, failure would cast a gloom over Apple’s shares.
But perhaps, some analysts suggest, it is not that simple. According to Stone Capital, the financial impact of a December tariff imposition will be limited as Apple shifts production away from China and towards India and Vietnam. It said that Apple’s FY20 earnings per share target has been maintained at $14 with the potential of a $0.25 hit from tariffs.
TF International Securities analyst Ming-Chi Kuo says moving production away from China will meet US market demand for iPhones in 2020. Kuo predicts that a 10% tariff will ‘only’ hit Apple for $1.9billion.
“My guess is that Apple will take some minor price increases and split some of the costs with suppliers like Foxconn and Pegatron,” Kuo added.
“My guess is that Apple will take some minor price increases and split some of the costs with suppliers like Foxconn and Pegatron” - TF International Securities analyst Ming-Chi Kuo
What else should traders be looking at?
Apple’s P/E ratio of 18.11 (TTM) is, like many tech stocks, high, but it may be more telling to study its EV/E valuation, which measures a company’s return on its capital investments.
Whilst the P/E metric gives valuation of the equity portion of a company and can get overvalued by market perception, the Enterprise Value – a company’s equity value or market cap plus debt less cash and EBITDA – can give a clearer picture of future earnings potential.
At $213 Apple trades at an attractive EV/E (enterprise value/EBITDA) multiple of only 13x, according to Stone Fox Capital. That suggests that – as a result of the overstated macroeconomic risk - the stock is undervalued and should be attractive to traders.
Further incentive to buy shares comes from Apple’s declaration in its third-quarter report to hike its share buyback program from $100bn to $175bn. It has also raised its cash dividend from $0.73 to $0.77 per share.
The group has recently completed a $7bn bond sale, adding to an existing cash pile of around $210bn. It will use the sum to pay for the buybacks, fund capital expenditure, repay debt and make acquisitions.
|PE ratio (TTM)||18.40|
|Operating margin (TTM)||24.87%|
Apple share price vitals, Yahoo Finance, 11 September 2019
According to the FT, the consensus of analysts following Apple is ‘outperform’ with a median 12-month price target of $225.
Not all is rosy for Apple, however. Its revenues have declined over the last two quarters - although for the fourth quarter it has forecasted revenue of between $61bn - $64bn, up from $61n previously.
“After a 10% year-on-year drop in EPS in the second quarter of the fiscal year to September and a 7% drop in the third, guidance given by chief executive Tim Cook still leaves analysts pencilling in a 3% year-on-year slide in the fourth and final period at $2.83. This is Apple’s third profits slide of the decade,” adds Mould.