Behind the Money

Forget the iPad, Apple’s ‘PEG’ Has Investors Excited

Apple, universally seen as the definitive “growth” stock and the second largest holding in the S&P 500 Growth Index , may actually be a value play when looking at this metric, which compares its potential earnings growth rate to its current stock price.

The PEG, or price-earnings to growth ratio, is calculated by taking a stock’s PE and dividing by the company’s long-term estimated annual growth rate. Apple currently trades at 37 times 2010’s earnings and analysts expect the Cupertino, California-based company’s profits to grow by at least that much annually for the next 5 years.

This PEG ratio of ‘1’ makes Apple a “fundamentally cheap stock”, according to a report from Birinyi Associates today. Especially considering that Apple’s earnings may increase by 73 percent this year alone, according to the research firm started by legendary trader Laszlo Birninyi.

Essentially the growth prospects reflected in the stock price is not keeping pace with the innovation of Steve Jobs, making it technically a value.

“The iPad may create a whole new market, just like the iPhone,” said Karen Finerman, President of hedge fund Metropolitan Capital Advisors and follower of the value-style approach to investing. “That could create tremendous growth for some time” as new revenue streams are created again from book, music, movie, newspaper and other applications.

Apple shares traded higher today as media reviews suggested the iPad tablet device would satisfy the millions of early adopters that will line up to buy the gadget on Saturday. The shares are up 13 percent this year.

“The piece investors are missing about Apple is that any growth in a new product like the iPod, iPhone or iPad will continue to grow the primary source of existing growth for the company, the Mac,” said Pete Najarian, the co-founder of OptionsMonster.com and TradeMonster.com. Apple shipped 3.4 million portable and desktop Macs last quarter, surprising the 3.1 million units expected by analysts.

What’s more, when you subtract the cash Apple has on hand from its $200-plus share price, the P/E looks even cheaper. Apple has 25 billion in cash or $27 per share.

“The Street is essentially valuing them without considering that cash,” said Finerman. In the long-term, Apple will eventually deploy that in the form of a buyback or dividend, she said. Not unlike a classic value stock.

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