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Apple growth trading at GE value

Speaking of correlation

General Electric, the largest holding in the S&P 500 Value Index Fund, has a forward price-earnings ratio of fourteen. Apple, the quintessential growth stock and largest member in the S&P 500 Growth Index Fund, sports a P-E based on forward 12-month estimates of just 15.5 right now.

via CNBC’s Fast Money : Growth Vs. Value Confusion as Apple, GE Treated Equally – CNBC.

  • anonymous

    Well, presumably GE's earnings are "safe" coming form stable market positions, while Apple's are "fleeting", coming from consumer hits, subject to price erosion and disappearance, kind of like Mot's Razr. Or so the theory goes…

  • Rory

    A 12-month forward P/E, by definition, incorporates the growth expected over the next year.

    Looking at Reuters estimates for the last twelve months and next twelve months shows the following implicit growth characteristics of these valuations:
    GE's last twelve months normalized EPS was $1.01 and consensus for the next twelve months is $1.17, implying a growth rate of 15.5% (not too shabby for a "value" stock, btw)
    AAPL's LTM EPS: $12.33, NTM: $16.64, Y-o-Y g: 35.0%. Thus there is an extra 19.5% of growth value built into the P/E ratio. If Apple were expected to grow at only 15.5%, then the "E" in their P/E would be $14.25 instead of $16.64 and their P/E would be 18.2 instead of 15.5.

    All of that aside, since when is 14.0 equal to 15.5? If GE could expand their multiple from 14.0 to 15.5, their market cap would go up by about $20bn (conversely, if AAPL's multiple contracted to 14.0 then they would lose $24bn). That may not sound like a lot, but $20 billion here, $24bn there–pretty soon you are talking about real money…

    • http://www.asymco.com asymco

      Apple hasn't grown its business at 35% for a long time. Here are quarterly EPS growth rates since CQ4 2006:
      77% 85% 75% 58% 59% 40% 32% 155% 37% 46% 61% 11% 47% 86% 75%

      My forecast for the next two quarters:
      74% 55%

      Only during the great recession growth dropped to 37% for one quarter and 32% in June 2008. (The 11% growth in Q309 was due to the 155% a year earlier during the 3G launch quarter.)

      If this company is to be considered as valuable as one that grows at 15% then I think valuation has become decoupled from fundamentals.

    • http://www.asymco.com asymco

      I might also add that Apple in 2006 was a different company. More than half of current revenue is from products that did not exist four years ago (iPhone and iPad). These new products have arguably created new markets and they are growing with minimal competition in these markets. Which is why they have demand far in excess of supply. Which, in turn, allows growth rates constrained only by production ramps, and those ramps are probably limited at 100%. So whereas the Mac and iPod businesses will grow subject to buffeting of the macro conditions, the iPhone and iPad will grow much more rapidly.

      I don't see how these dynamics are correlated to the products that GE sells.

  • http://raytraced.tumblr.com bfl

    @asymco said: "I don’t see how these dynamics are correlated to the products that GE sells."

    A heroic example of restraint. :)

  • Rory

    I don't see how AAPL's stock price is correlated to GE's.

    You didn't address either of my fundamental points:
    1) Forward P/E is a poor way to look at how the market thinks about growth, because high growth assumptions will drive up both the price and the forward earnings, essentially canceling each other out.
    2) 14 != 15.5

    At what multiple do you think Apple should be trading?

  • http://www.asymco.com asymco

    One more point: EPS TTM is 13.28 not 12.33.