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After a Year Long Dip, Apple Inc. (AAPL) Stock is Back: Has it Gone Too Far?

Apple stock

Apple Inc. stock, on Wednesday, closed higher for the seventh consecutive day, lifting the Dow Jones industrial average. While guessing Apple’s valuation, it is essential to recognize that Apple’s earnings projections for the coming quarter are just 20 cents less than the all-time high reported in the Q4 of 2015. Hence, the analysts are looking for a strong growth in the Q3 of 2016, notes MarketWatch.

Lower PE than S&P 500

MarketWatch says their earnings observations are based on trailing 12-month data. And, based on their observations, the analysts are anticipating a 14.25% improvement after the next earnings report is released. However, y-o-y growth rates are more subdued. This year, the yearly growth rate is expected to be 3.82%, but analysts expect that to hike to 8.47% next year. The yearly growth rate for earnings was (6.96%) as of the Q2 2016, but significant improvements are anticipated in this immediate quarter.

Apple Inc. (NASDAQ:AAPL) Store

If price remains the same, the P/E multiple, which is 13.21 currently, is expected to ramp to 13.69 at the end of 2016. But, if the analysts are accurate in their expectations, and the price remains the same next year, the multiple is going to drop to 12.62, notes MarketWatch. Compared to about 25 times earnings for the S&P 500, it is very low.

However, “we must prudently compare the multiple to earnings growth to get a proper assessment of valuation,” says MarketWatch, who used PEG ratio approach to get a proper assessment of valuation.

What PEG ratio tells us about Apple

MarketWatch says their determinant for fair value for seasoned companies is with PEG ratio between 0 to 1.5. Negative PEG ratios are indicative of contracting earnings growth while peg ratios above 1.5 typically indicate excessive valuation. An exception to this are fast-growing companies, but big names like Apple Inc. “do not usually experience the type of growth necessary to warrant excessively high PEG ratios.”

If analysts are correct about their expectations and the price remains the same, then the PEG ratio for Apple is likely to be 3.58 for 2016. But, if the price remains the same and analysts are right about their expectations at the end of year 2017, the PEG ratio will drop to 1.49. This means that after 15 months, the PEG ratio will be at the upper end of the determination for fair value, but valuation for today remains excessive.

Also, if the calendar 2017 expected earnings growth suffered any setback, it would increase the PEG ratio beyond 1.49, suggesting excessive valuation. Then, updates to the 2017 earnings projections would bring the “the PEG ratio lower into a territory determined to be fairer value,” notes MarketWatch. Overall, based on earnings-growth mode, Apple Inc. appears to look immediately expensive.

On Wednesday, Apple shares closed up 0.89% at $117.34. Year to date, the stock is up over 9% while in the last one-year, it is up almost 5%.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.