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Exceptional Value in Apple

The market isn't giving Apple credit for growth to come, says Morningstar’s Brian Colello.


Brian Colello: Apple (AAPL) reported solid fourth-quarter results and a very-good-but-not-exceptional forecast for the holiday season this upcoming December. Fourth-quarter revenue and EPS were ahead of expectations.

IPhone unit sales were solid, but the pricing on iPhones was stellar, quite frankly. People continue to buy the higher-storage iPhones and trade up to the "Plus"-size models, and that's been a positive for pricing and for revenue. IPad sales were a little bit weak, and Mac sales were a little bit strong--those were the trade-offs. We're continuing to see Mac still gaining share in the PC space.

IPad customers are either going with the larger-screen iPhones are just holding on to their current iPads for a longer period of time. Watch sales, again, are off to a slow start--probably 3.5 million or 4 million units sold. That's what we're guessing from the numbers at this point. It's not experiencing exceptional growth at this point, but it's still moving along nicely. We still think there is a chance that the Watch becomes a stellar product category over time.

As far as the forecast for the first quarter--the all-important December holiday season--revenue was a little bit below expectations, but they are facing some currency headwinds from a strong U.S. dollar. It's going to knock about 700 basis points of growth off the top line. That's about $5 billion, so that's a pretty substantial amount. That implies that Apple would be growing at an 8% to 11% year-over-year rate on a constant-currency basis. We're seeing this a lot in tech where a strong U.S. dollar is weighing on the top line, and Apple is no exception.

The competitive position for Apple, we think, is still quite strong. Looking at last quarter and this quarter, they are earning more switchers over from Android than ever before; they are still doing particularly well in China--they didn't see exceptional weakness there. So, Apple kind of alleviated a lot of these concerns going into the December quarter.

Overall, we think Apple is still going to grow. We think it's a growth year for fiscal 2016, and we like how the company is positioned. Most importantly, I think growth is not baked into the stock at this point. They are not going to grow at the same pace as they did this past year, but I think that's well expected by the market. As we look at the stock, it's trading at just over 10 times earnings when you back out the cash on hand. So, we think there's exceptional value in Apple at this point.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.