More Upside in Apple Inc. (AAPL)

Stock: Apple Inc. (AAPL)

Fundamental Story:

Apple is an elite company managed by the brilliant, Steve Jobs. Jobs brought AAPL back from near-bankruptcy in the mid-90s and reinvented the company three times over. Apple has four main product lines: iMac (44% of FY08 sales), iPod (28%), iTunes (10%) and iPhone (6%).

iMac
Apple introduced the iMac in 1998 as part of its turnaround campaign in the personal computer market. Recent growth rates have begun accelerating with US market share of under 3% just a few years ago to now 8% of the market (about 3.3% worldwide). Macs seem to create significant customer loyalty and once a person "makes the switch", they do not seem to return. Apple's moves into the portable music player market and the cell phone market have helped increase iMac sales. iMac, with 8% of the US personal computer market, could be close to reaching critical mass and has the potential for a strong momentum upswing in sales if a major tipping point in consumer acceptance occurs. Microsoft's releases of Vista and Windows 7 have been met with lukewarm reviews and customers may be hungry for something truly new and original in the computer operating systems space. Jobs would not surprise me if he initiated a major push for innovation in this market.

iPod & iTunes
The iPod hit the market in 2001 and almost immediately exploded. Apple is dominating the portable music player market selling 9.2 million iPods in FY08. The large growth in iPods continues to fuel downloadable music sales now accounting for a surprising 10% of total sales. Apple took on the music piracy market by force filling the void well by offering low-priced songs to end users. In this way, record companies at least earn something and the consumer stays within the bounds of the law. Continued growth is likely as the iPod becomes the device of choice.

iPhone
The iPhone is just simply a better phone. The innovations in this arena are quickly stealing market share from a myriad of competitors. With the product just two years old, there is still great room for growth. The iPhone sold 13 million units in just over a year on its debut. Continued success is likely with a new push coming from the second-generation, iPhone 3G. Apple now has agreements to sell the iPhone in over 70 countries.

Apple has yet to become a major global name giving it incredible room for growth. For FY08, 45% of sales were from the US, 23% from Europe and 19% from Japan. A major foray into Asian markets could continue stoking growth in the company. Jobs, working with chief designer, Jonathan Ive, has created products with incredible aesthetic appeal and truly innovative features. These products carry a great deal of momentum in sales that has only hiccuped during the 2008 recession. As global growth resumes, Apple will be a major beneficiary.

Apple carries $24 billion in cash on its balance sheet with absolutely no long-term debt. This financial condition gives Apple unparalleled flexibility to pursue new initiatives into the global arena and product improvements. The company touts a 5-year growth rate in sales of 34% on improving margins producing 75% growth in net income. The year 2009 produced below 5-year average growth registering 17% growth in earnings per share.

On trailing 12-month earnings per share, Apple trades at 31 times earnings. Assuming a 20% growth rate for 2010 as the economy rebounds globally, Apple trades at 26 times forward earnings of $7.55 per share. With that, Apple has a relatively mild PEG of 1.3. Given its earnings momentum the shares could trade much closer to a PEG of 2 before being considered expensive. A PEG of 2 on 20% growths values the stock at over $300 per share.

Technical Story:

Apple is one of the very few stocks trading at all-time highs while the market remains 40% below highs made in October 2007. This shows high relative strength and indicates strong buying interest. Continued upside in global markets should push Apple shares much higher. A strong breakout to new highs should bring technical breakout momentum traders into shares. Stocks are either trending or consolidating from a very basic point-of-view. Apple has trended all year but more recently entered a consolidation after pushing through previous all-time highs in October. Now may be a risk-to-reward time to pick up shares below $190 before a push to new highs and continued upside momentum.