Technology

Top Citigroup Analyst Sees Apple Finally Cheap Enough to Buy

Jon C. Ogg

Published: September 21, 2020 1:05 pm

Investors may have gotten used to Apple Inc. (NASDAQ: AAPL) rising day in and day out ahead of and immediately after its stock split. That came with a stark realization that nothing, even the mighty Apple, can see its price rise forever. It probably felt extreme that Apple’s stock had sold off almost 25% as of Monday’s open from its peak this month, but one analyst believes that the selling has gone too far too fast.

Citigroup’s Jim Suva, who had a street-high target back in June before the stock split, has reiterated his Buy rating and raised his price target to $125 from $112.50. That might not seem much of an upgrade, but Apple opened at $104.54 on Monday, during the big drop that has been seen. Apple shares were down about 24.2% from the all-time high of $137.98 seen shortly after the split.

Investors should know that Apple tends to fall after meteoric rises with stock splits, and it also happened on what is historically a very bad month for average stock performance. The drop in the stock price has allowed Citi’s Suva to become more objective, now that the price has adjusted back to somewhat normal levels.

One thing that Citi has been consistently positive about is that gains against Huawei and others could result in additional sales amounting into the billions of dollars. Apple’s upcoming iPhone 12 is expected finally to unlock that ecosystem and iPhone super-cycle that has been touted by many Wall Street analysts.

Citi still expects strong incremental sales out of Apple’s wearables and from its services that make up its ecosystem. The firm has seen a continued praise of revenue diversification and unique products. All this and the services boost that come into play are expected to generate a continued level of strong cash flows from Tim Cook and the team. The firm also expects high levels of capital to be deployed back to shareholders via stock buybacks and dividend hikes in the years ahead.

The difference between Citi’s $125 target and the rest of the pack of analysts is that the firm no longer is anywhere close to the most ambitious in the price target. While the consensus analyst target is at $118.39, other firms have been much more aggressive. These are just some of the price targets elsewhere that are handily above consensus and above Citi heading into or after the stock split:

• JPMorgan ($150)
• Wedbush Securities ($150)
• Argus ($150)
• Monness Crespi & Hardt ($144)
• Needham ($140)
• Bank of America ($140)
• Jefferies ($135)
• Cowen ($132.50)
• Morgan Stanley ($130)

Apple is expected to post earnings of $3.24 per share, according to Refinitiv’s sell-side consensus estimate for fiscal year 2020. The consensus for 2021 is $3.87 per share. Apple has been more of a repurchaser of its own shares, but the current $0.82 per share annualized dividend payout ratio is only about 25% of its expected earnings this year, leaving far greater room for dividend hikes, even if earnings do not grow materially over time.

Apple still has the status of the world’s most valuable company at $1.8 trillion. One thing that is not as impressive these days is that its dividend, despite many annual payout hikes, still only generates a 0.77% dividend yield.

While investors would include Apple in almost all “forever portfolios,” this of course always depends on what price has to be paid to own it. Even the great Warren Buffett is a big owner of Apple these days.

Apple has been praised consistently for its mountain of cash and capital. The iPhone maker counted about $93 billion in cash and short-term investments as of June 30, 2020, and it also listed about $100.6 billion in long-term marketable securities. This means Apple has ample room to fund dividend growth for years, even with no material earnings growth. For the record, almost every analyst on Wall Street keeps modeling for earnings growth in Apple.

Apple’s stock was last seen up almost 0.3% at $107.15 a share. While that is a very modest gain, it is on a day when the Dow Jones industrial average was down over 2% and the S&P 500 was down right at 2%. It’s also about 2.4% higher than its $104.54 opening bell price on Monday.

Apple has a long history of selling off after stock splits, but a sell-off of nearly 25% is beyond the norm that we have tracked.

If Citi’s call is proven right, Apple could be among the stocks that could get the Dow above 30,000 heading into 2021.

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