April 23, 2013 (3:15 pm)
We’re working on a new thesis. As you can see in the chart below, shares of Apple spent 24 months in the 18x-24x PE range before dropping (high to low) 10 points to a new range. The shares remained within the 14x-18x PE range for 18 months before recently dropping (high to low) another 10 points to its current high 8x PE.
The last two PE “ranges” lasted 6-8 quarters. We expect the pattern to continue, since it’s clear that Apple investor become comfortable trading within a range for an extended period of time. We do not expect Apple to trade below an 8x PE ratio even on weak earnings this afternoon. 8x PE would represent approximately $330 – we don’t think this price will be reached (other than a capitulation event). Therefore, we expect the new PE range to be roughly between 9x-12x PE. Based on our current estimates for the rest of the year, this would equate roughly to $360 to $540 through its October earnings report.
This assumes that momentum does not return to Apple. This assumes that growth investors have essentially fled the stock. It would not be difficult for a value/income stock to reach a 12x PE. Just look at Microsoft. It currently trades at 16x PE. So we believe our 9x-12x case is very conservative. If excitement does return to the stock with a hint of a new iTV or China Mobile agreement, we could easily watch the shares return to that 16x PE level. It is not unfathomable (or even unreasonable).
We look forward to the earnings report, which should be released a 4:30pm EST. We’ll be back with more this afternoon.