AAPL is still my largest holding, even after substantially trimming it. While trying to decide how agressive to be with further trimming, I decided to look at earnings growth, P/E and TTM PEG (1YRPEG) so I could compare it to other possible investments.
The first time I tried this exercise, I forgot to adjust the older earnings for the 7:1 stock split. This led to some seriously wonky values, and apparent massive earnings shrinkage, which I knew couldn’t be true. After making the adjustments, I think the numbers are right, and they tell an interesting story.
Here are the last three and a half years of EPS:
Q1 Q2 Q3 Q4 2015 $2.33 2014 $1.66 $1.28 $1.42 $3.06 2013 $1.44 $1.07 $1.18 $2.07 2012 $0.91 $1.11 $1.24 $1.97 2011 $0.92
Apple is a cyclical business, with typically strong sales in the holiday quarter (calendar Q4), so it doesn’t seem to make sense to look at quarter-over-quarter earnings growth. But year-over-year does make sense:
Q1 Q2 Q3 Q4 2015 40.36% 2014 15.16% 19.95% 20.34% 47.72% 2013 57.66% -4.11% -4.73% 5.00% 2012 114.77%
Note how earnings were flat for most of 2013, then start to pick up steam in 2014, with significantly better growth in Q4 2014 and Q1 2015.
Here is the TTM earnings growth (trailing twelve months, compared to previous twelve months):
Q1 Q2 Q3 Q4 2015 35.32% 2014 3.69% 8.24% 13.60% 28.82% 2013 35.30% 9.95%
Below is the P/E, using the closing price on the day following the earnings release.
Q1 Q2 Q3 Q4 2015 16.40 2014 14.15 15.70 15.93 15.54 2013 10.05 11.00 13.04 12.56 2012 20.62 12.29
The P/E has been pretty steady for the last year, at around 16. It was depressed in 2013 while earnings growth was flat.
Finally, the TTM PEG (1YRPEG):
Q1 Q2 Q3 Q4 2015 0.46 2014 3.83 1.90 1.17 0.54 2013 0.37 1.26
Note that the stock price for Q1 2015 was $132.65, just a couple of dollars shy of the all-time high. With the price at close on Thursday ($125.26), the P/E would be 15.48, and the TTM PEG would be slightly lower at 0.44.
Back to my original question: how aggressive should I be at continuing to trim my position? Earnings growth (year over year) has picked up recently, above 40% the last two quarters. But the P/E has barely budged. If the earnings growth can continue in the 40% range (or even the 30% range), the stock seems attractively valued.
My marginal tax rate (federal plus state) for long-term capital gains is 35-36%. Given that I have a little better than a 3-bagger with my remaining shares, that means the taxes would be about 25% of the sales proceeds. If I sell and reinvest in something else, that something else has to grow its stock price about 33% plus whatever AAPL grows, just to break even. If the market doesn’t assign a higher P/E to AAPL, then I’d need 60-80% growth in the “something else” to break even (after taxes) in one year. If the market were to finally assign a higher P/E because of the increased earnings growth, then the replacement would need even better growth to break even in one year.
I think for now, I’m going to sit tight with my AAPL shares, and see if the earnings growth momentum continues. I’ve got some other positions that aren’t doing nearly as well, and I think I’ll sell them and redistribute to some of my good performers (SKX, SWKS, BOFI, CRTO).