Sep 222013

A few months ago I wrote that I expected AAPL to complete its bottoming pattern and breakout from its low valuation and begin trading in a higher valuation range as part of its recovery from negative earnings growth.  I expected that valuation breakout at the end of the last quarter.  Instead we got it this quarter.  However price has recently collapsed back down to the breakout valuation level.  I have changed my view regarding the bottoming process.  I think price has more work to do to complete the valuation bottoming, and there will be price swing overlap.  I have come to that conclusion after developing and publishing my new Valuation Model (see my previous post for the introduction to it).

Let’s consider where earnings and earnings growth are at this time.  After next month’s earnings release AAPL’s TTM earnings will be in the low to mid 39 range.  That will be roughly 11% below the TTM earnings from a year prior, and in line with the earnings from almost two years ago.  As of January 2012 TTM earnings was 35.11 and as of April 2012 it was 41.01, amid earnings growth of 95%.  AAPL went into those two earnings releases at a price of 420 and 560, respectively.  Now we will be in the middle of those earnings values at 39 and change.  The middle of the price range from early 2012 would be 490.  Do we really believe AAPL belongs at 490 now, with -11% TTM growth, when back then it had 95% TTM growth?

On the plus side, this next earnings release should be the nadir of the TTM earnings decline.  Earnings growth will be on the rise again after this and through 2014.  The new Valuation Model takes that into account, and is worth watching.  I’m not putting a ton of confidence in the valuation model yet.  I’m watching it and evaluating its usefulness.  It does hint, however, that we shouldn’t expect AAPL to continue a strong rise in price just yet, and should instead expect backing and filling, testing the lows, producing higher lows as part of a continued valuation basing pattern with typical CPE Trading Ranges.