It looks like someone linked you here to our printer friendly page. Please make sure you go Back to Safehaven.com for more great articles just like this one!

Growth: In the Context of Share Price

By: Ian Campbell | Thursday, February 7, 2013

If you trade or invest in shares in companies - or have others do that on your behalf - you ought to focus on what has happened to Apple's share price in the past few months, and relate that to perceptions of Apple's prospective growth. More importantly, you ought to use what you learn in the context of Apple to seriously reflect on the importance of economic growth generally as an underlying principal driver of:

You may have observed that in the past few months the price of Apple shares has fallen about 35% from a high of +/-$700 in September to a close yesterday of $457. As discussed in this commentary, where Apple's share price goes from here will be to some large degree a function of what the financial markets and their participants continually (read 'daily') re-assess Apple's prospective earnings growth to be.

When reading this commentary, you might also want to read Should Apple be a $200 stock? written by Bethany McLean. Ms. McLean is a contributing editor to Vanity Fair magazine. She is known for her work on Enron, and on the 2008 financial crisis. While her article discusses Apple's stock price, along with such things as Apple's competition and gross margins, from my perspective the 'heart' of what she says is found in her following statement that centers on 'earning power':

"But while the (Apple) stock is cheap based on the profits of the past few years, value investors generally look to what they call normalized earnings, or true earnings power. To put this in a different way, price-to-earnings ratios don't matter that much when you don't know what real earnings are. We won't know for a few more years, but there's an argument that Apple's last few years of blowout earnings have been well above normal. If that's true, then Apple's real p-e ratio might be much higher than it appears."

From my perspective Ms. McLean's statement is a good starting point, but needs to be expanded on:

Accordingly, the question as to whether in the long term Apple's share price will increase, stay at current levels, or drop in price from here will be largely dependent on the current and future ever changing 'point in time' earnings growth perceptions of the financial markets (read financial market participants) with respect to Apple's prospective earnings growth rate or decline.

I have not done a detailed analysis of Apple's business, and have no opinion with respect to the 'prospective growth or decline rate' of either Apple's after-tax earnings, or of its after-tax discretionary cash flows. Hence I have no opinion on Apple's current stock price, or the future direction of that stock price.

Importantly, the theory and importance of growth assumptions set out in this commentary is not particular to Apple, but generally applicable to the world economy, country-specific economies, and all businesses - be they public or private.

You might want to read Global stock markets boom, but where's the growth?. That brief article questions whether the recent rapidly rising world financial markets are getting ahead of themselves where "The U.S. is growing just at only two percent a year, Europe is not growing at all, Japan is also stagnant".

Topical Reference: Should Apple be a $200 stock?, from Reuters, Bethany McLean, February 6, 2013 - reading time 4 minutes. Also read:

 

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Economic Straight Talk

Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
* Canadian Institute of Chartered Business Valuators
** through The Ian R. Campbell Research Initiative

The full version of The Economic Straight Talk Newsletter is published each trading day. To get your Free 14-day trial subscription, visit economicstraighttalk.com. No obligation or credit card required.

Informed Investors are Successful Investors

Comments and opinions expressed in these commentaries are those of the authors. They do not constitute individualized investment advice, are provided "as is", may change without prior notice, and are used at your own risk. The information and content provided or referenced may be incomplete, inexact, or incorrect. Your use of these commentaries is subject to the Economic Straight Talk Terms of Use and Legal Disclaimer

Copyright © 2011-2013, Stock Research DD Inc., all rights reserved