Photo: Ap Image of Tim Cook, Photo illustration by Jay Yarow
One of the big calls of the day: Citi is out with a ‘Buy’ rating on Apple and a price target of of $675/share. That’s about $100 per share or 20% above the current price.Here are the key points of the call, made by Glen Yueng, Walter H. Pritchard, and Jim Suva.
- The company’s pullback is consistent with other big selloffs in the company’s history. Those were then typically followed by rallies of 20 to 50%.
- The selloff is consistent with other large companies that had achieved a size of 4% of the S&P, although those other companies were starting with a larger multiple, so Apple has some downside protection.
- There are clear risks due to A) size and b) the growth of low-end/low-margin phones, but there is still opportunity for the company.
- Tablets, in particular, remain a huge opportunity.
- They point to this chart to show how young and huge the tablet market is (click to enlarge)
- Despite the rapid growth in tables, the opportunity is enormous, with the total industry growing at 32% per year through 2015.
- Even in smartphones, the industry will grow globally by 26% per year through 2015, though again, there are risks to Apple on the low end.
- As for the estimates the lead to the call, they write: “Our target price for Apple is $675, based on the implied multiples derived from growth and value regressions of a sample of large cap technology companies. We believe our methodology reflects the multiples investors ascribe to large cap technology companies. We have found the market is paying an FY2 earnings multiple of 7.23x (Sales Growth %) + 12.51 and price-to-book multiple of -0.058x (ROE) + 4.351. For Apple, our FY2014 sales growth estimate of 17.0% yields an implied P/FY2 earnings multiple of 13.74x. We multiply our FY2014 GAAP EPS estimate of $58.99 by the growth multiple for an implied share price of $810. Our FY2014 ROE estimate of 28.72% yields an implied P/BV 2.69x. We multiply our FY2014 tangible BV/share estimate of $199.76 by the value multiple for an implied share price of $537. We equally weigh our growth and value implied targets to derive an initial target of $674, which we round to $675. The implied multiples, based on our FY14 EPS/book value estimates are 11.4x FY14 EPS of $58.99 and 3.4x FY14 ending book value of $199.76. This compares to the S&P 500’s multiples of 12.4x earnings and 2.1x book value.”
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