Tuesday, March 20, 2012

Lets look at APPLE today.
This posting is open for discussion and to determine the entry and exit price points by using 3 different methods. These three methods use the historical P/E, CF/S and the dividend (D/S) ratios. Please note that there is a ton of ratios out there.
Definitions of the following terms used:
P/E. Price divided by its earnings, which shows what multiple that a investor is willing to pay for $1 dollar of earnings.

CF/S is the same as earnings except that its referring to the company’s ability to generate cash.
D/S or Dividend per share. For this ratio you would use the dividend yield formula.
Using these historical ratios a person can estimate what the stock price range should be.

By comparing the 3 year average vs a longer term (10 year average or more) can also help to determine where the market believes the company is in its life cycle, which includes: start up (venture), growth or mature company.
Apple trades on the Nasdaq under the symbol (AAPL). AAPL has been a publicly traded company for more than 10 years and its products are known world wide.
By estimating future earnings you can determine its share price. AAPL has an "over active" average annual earnings growth of 62.33% (past 14 years). For the purposes of this analysis I am capping it at a 20% increase to determine what AAPL should be valued at. In this case AAPL should earn about $33.22 in 2012.
For the past 3 years AAPL has had an average P/E trading range of 18.53 (high) and 10.17 (low). Over a longer term AAPL had a average P/E ratio of 36.18(high) and 17.08(low) over the past 14 years. AAPL has also had some wild swings in the past, for example P/E values in 2002 AAPL had a high P/E ratio of 93.50 and a few years of zero for its P/E ratio.
Using the average 3 year P/E and the capped earnings it is estimated that the trading range should be $615.60 (high) and $337.70 (low).
If you are a strong believer that AAPL is going to get another year of 60% earning growth then AAPL could earn as much as 44.29 per share. In that case AAPL share price range would be
$820.80(high) and $450.26(low)
AAPL has begun to issue dividends starting this next quarter.
AAPL has increased its CF/S by 218% over the past 14 years and slowed down a little in the past 3 years, where it managed to maintain an average growth of 71.2%. I am going to cap the rate at 20% in 2012 to 35.82 per share. AAPL’s 14 year P/CF ratio is 27.23(high) and 12.64(low) however the three year average gives a better picture with 17.05(high) and 9.36(low) which offers a better platform to determine the future price.
The price per cash flow ratio (P/CF) ratio and multiplying it to the CF/S this gives me a share price range of $610.41(high) and $335.33(low) with a current P/CF of 17% implies that AAPL is nearly fairly priced at this point.
Sum up
Current price, $606.94
EPS range $615.60 to 337.70
D/S range not available
CF/S range $610.41 to 335.33
Now on to how to trade, if I am looking to purchase shares of AAPL I would be writing a put at my price estimates. In this case, I would write a Put Option at $340 on the www.cboe.com and the contract would look like, sell 1 October 2012 Put contract for the 340 strike price and collect the premium of $2.75 /share.
If your wondering on what the return would be? 34000 /275 = .80% at an annual rate of 1.06% it would be better to leave it in a GIC as it’ll payout a better rate of return.

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