Time to think about Apple again!

by Wayne Ferbert on October 26th, 2012

Apple dipped in to the low $590s today - on the back of "disappointing" earnings. I wouldn't call it disappointing earnings. I think they delivered exactly what was expected.

A bear might point to the lower than expected iPad sales. But I think that the iPad mini will fill the demand back in - and the collective iPad and iPad mini will combine to create great sales.

A bull would point to the blow-away iPhone sales. A bull would also point to the iPhone 5 demand. They can't keep up with the production demand so far. In addition, the new line of Macs look terrific to me - and the early benchmarks on the performance of these machines is impressive. I expect these to sell very well in the holiday season - along with iPhone5 and iPad/iPad mini.

But my biggest reason to like Apple down at these levels is just plain old valuation. They have $120B in cash on their balance sheet and they generated $50 billion in pre-tax cash from operating income in the last 12 months. At a market cap minus cash of roughly $440 billion, they are trading at less than 9X the pre-tax cash flow.

I think this is a fair value for a company that sells great products and will sell more of them in the next 12 months than they sold in the last 12 months.

At these levels, it is time to re-think Apple. I dipped my toe in to it today. I sold the $565 puts that expire in January. I collected $18 in premium. If I get exercised, my effective price would be $547. At that valuation, I would be paying 7.5X the trailing 12 month cash flow. I will take that every day.

If I don't get exercised, I made roughly 3% return for 3 months investment ($18/$600 stock price).  I like the fact that if Apple keeps to the estimate for their January earnings release, it will be after these options expire by a few days. So, I won't likely carry the risk related to an earnings pop. 

I like this as my disciplined way to enter in to the Apple trade!

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