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Wednesday, October 21, 2009

How About Those New Apple Price Targets?

In our Apple (AAPL, $199) post yesterday, we noted that "Bullish Wall Street analysts will adjust their forecasts and raise target prices (back of envelope, simple approach without considering seasonality and product cycles: annualize the reported $1.82 for $7.28 forward EPS; applying P/E multiple of 30 times yields target price of $218; applying three year average P/E multiple of 37 times yields $269)."

Where did the Street come out? Somehow nearly all within our "back of the envelope" $218-269 range -- for a summary, please see Eric Savitz's Tech Trader Blog in Barrons (busy man - we suspect he has help). We normally won't relay Wall Street targets/estimates as our focus is on our own research, but we find the large sample of very similar target price "results" (per Barrons post) interesting.

Of course, it's not difficult to derive a new price target based on an average historic P/E multiple and an upward revised EPS estimate -- the hard part is estimating the EPS before the big stock move and getting "the call" right. Per the below table sourced from Barrons, more analysts are positive now than three months ago.

As we indicated yesterday, despite the implied upside, we're not buying since we prefer to purchase businesses with much lower multiples when the sun is NOT shining on the company/stock. A lower multiple provides a margin of safety should something go wrong. In addition, based on Apple's trailing twelve month results, free cash flow was $9.0 billion - or, a 5% FCF yield on the current share price. We generally view a FCF multiple of 20 times (5% yield) as fair for a difficult to replicate franchise and prefer to buy businesses with yields of 10% or greater.

Happy investing,

Jeffrey Walkenhorst

Disclosure: no position.

© 2009 Jeffrey Walkenhorst
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