D.A. Davidson: Buy Apple on the big dip

From a note to clients Friday by analyst Tom Forte snagged by Barron’s ($):

Investors should buy Apple stock on the big dip, according to D.A. Davidson.

The firm’s analyst Tom Forte reaffirmed his Buy rating and $280 price target for smartphone maker’s shares, citing its inexpensive valuation.

“We believe the near-term challenges, including lower unit sales in emerging markets, are more than priced into shares,” he wrote on Friday. “In fact, as Apple is able to further show its ability in mitigating tariff risks, we think the shares at current levels provide an attractive buying opportunity.”

Apple (AAPL) stock was up slightly to $156.75 on Friday. Its shares have dropped nearly 30% since the end of October, as concerns mounted about weak demand for the newest iPhone models, amid guidance warnings from several component suppliers.

The analyst noted even in a bad scenario where the trade conflict between the U.S. and China escalates, Apple can move its production outside the Asian country. He also said the company may increase its stock buyback plans and raise its dividend.

Maintains Buy rating and $280 price target.

My take: Despite the big dip, most of the bullish Apple analysts are sticking with their guns. Last time I looked, the average 12-month price target was $216, nearly $60 (38%) above Friday’s closing price.

10 Comments

  1. Fred Stein said:

    Apple’s dividend will likely double in five years or less, approaching a 4% yield based on AAPL’s current prices.

    This hold even if global issues create a 20% impairment relative to FY2018 and Apple continues flat for the next five year The current cash position and future cash flows are that strong. The payout ratio is only 22%.

    In this scenario, the stock prices would remain low until yield investors figure this out.

    More likely Apple will grow regardless of iPhone cyclical and seasonal variations

    0
    December 29, 2018
    • Dan Scropos said:

      In 5 years, if my estimations pan out, Apple will have 3.2 to 3.4 billion shares. If earnings just grow moderately, there should be a mountain of cash for a nice dividend. I base my share count on 3 more deployments of $100 billion for repurchases at $200, $250 and $300, sometime within the next 5 years.

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      December 29, 2018
      • Robert Paul Leitao said:

        Dan:

        As of the end of FY2018, Apple’s net equity balance was just over $107 billion. I don’t see a need to continue the massive share repurchase program beyond perhaps an additional expansion of the program to be announced in April.

        I don’t think management will deploy net income (as opposed to retained earnings) on an ongoing basis for share repurchases. Through the end of FY2018, the company has repurchased 27% of the fully diluted share counts since the peak in FQ4 2012. There’s no reason for the company to stop the repurchases now, but as the company reaches its planned net cash neutral position, I expect dividend growth and a focus on strategic investments to take center state.

        Although interest rates remain below historical norms at this time, as rates rise so do the opportunity costs of investing in equities. Apple can continue to return capital to shareholders through a rising dividend with a smaller share repurchase program to eliminate “share creep” from stock-based compensation. Total return becomes more important as interest rates rise.

        Share repurchases are good, but share repurchases combined with rising net income is much, much better. In my view, net income growth is the primary driver of Apple’s share price appreciation.

        Due is large part to the tax rate changes, FY2018 & FY2019 may be the first back-to-back years of record net income for the company since FY2011 & FY2012. In my view, the Street lacks confidence in Apple’s ability to deliver net income growth on a consistent and ongoing basis beyond FY2019.

        I have confidence in Apple’s ability to continue to expand its global economic footprint while increasing revenue and net income. But the Street is currently forecasting low single-digit revenue growth in FY2019 & FY2020. There’s no better time to repurchase shares than now as expectations for growth remain modest.

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        December 29, 2018
    • Robert Paul Leitao said:

      Fred:

      Good point. Apple’s pays out a low percentage of net income as dividends. The company is in the enviable position of being able to disburse hundreds of billions in retained earnings to shareholders through an ongoing reduction in the fully diluted share count while increasing the dividend at the rate of about 10% per year and fully funding planned strategic investments to fuel future growth.

      The only “problem” with Apple is the Street’s obsession with iPhone unit sales. Net income is likely to rise in FY2019 along with the quarterly dividend per share.

      1
      December 29, 2018
      • Fred Stein said:

        Yes, iPhone worries and trade war worries weigh on the stock.

        It’s almost like the reality TV show Storage Wars. People who don’t know that is inside Apple discount the stock price based on fear, not of the unknown, but of what they do not know.

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        December 29, 2018
  2. Dan Scropos said:

    This would sure help eps:

    AirPods Sales will go crazy

    Kuo is predicting very strong growth. He says that Apple sold between 14 and 16 million in 2017, and will have sold almost twice that by the end of this year (26-28 million). But things double again next year, he says, selling 50-55 million units, then 70-80 million sales in 2019 and more than 100 million, perhaps as many as 110 million, in 2021.

    0
    December 30, 2018

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