Cramer: New Accounting Rule to Boost Apple Earnings 50%?
Web Editor, "Mad Money"
Forget the $200 price target that Cramer had on Apple – this stock’s going to $264, he said Tuesday.
Apple closed Tuesday at $175 a share, so the 14% jump to $200 would be a healthy return for investors. But the Mad Money host is expecting even more – a 51% move – all thanks to a new accounting rule. The change could have such an impact, he said, that earnings per share could increase 50% in 2011.
Right now regulators demand that smartphone sales be recognized over a two-year time period. So Apple books only about one-eighth of its iPhone revenues and profits in the quarter in which they’re earned. But the Financial Standards Accounting Board could soon change the rule, allowing companies to report everything at once. That would dramatically magnify the iPhone’s impact on Apple earnings, Cramer said, perhaps “as soon as next quarter.”
As a result, Cramer expects Apple’s 2011 earnings per share to climb 50% to $12, up from the present $8 estimate. This seemingly expensive stock, trading at 22 times earnings, would then look “dirt cheap,” he said, “the money will pour in,” and investors will take AAPL right back up to the 22 price-to-earnings multiple. Hence, Cramer’s price target: $12 of EPS in 2011 times 22 equals $264.
Hedge funds and mutual funds are at the heart of this prediction, because they largely set the market’s stock prices. Both use something called a “first call” consensus earnings estimate to decide which names to buy or sell, Cramer said, and it’s “the holy grail of what the big funds are willing to pay up for.” The problem is that, in regards to Apple, the “first call” doesn’t include all of the iPhone sales.
Once those figures are included, we’ll see a huge boost to the earnings number on which the pros are focused, Cramer said. And the higher the expected future earnings, the more these funds will pay for a stock. He seemed confident that this would set off a rash of Apple buying among the hedgies and mutuals.
While it’s true that these big money managers could easily check Apple’s cash-flow statement to gauge the handset’s popularity, Cramer said they often don’t. So there’s a good chance they’ll be “wowed” when the earnings estimates for Apple increase and bid up the stock.
Cramer still believes in Apple’s core story: The company’s at the heart of the mobile Internet trend that’s driving tech. Its 3% cell phone market share will grow to 30% in a few years. Macs, iPods and iTunes are getting more and more popular. All of this is true, he said. But Apple is about to get an earnings-per-share credit that should send it “soaring.”
“How do you like ‘dem apples?” Cramer asked.
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