Using the method of comparables, perform a valuation of Apple Inc. (AAPL). Based
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Question
Using the method of comparables, perform a valuation of Apple Inc. (AAPL). Based on your valuation, what trading strategy would you recommend? Justify your decision.
1) PIE Ratio APPLE Ioc (AAPL) 2014 2015 2017 Price - Earnings Ratio 2013 Market Price per share 476.75 Earnings per share P/E ratio 2016 100.75 110.30 113.05 1.19 6.74 9.57 14.96 11.52 13.20 16.34 IBM (IBM 2016 165.99 2017 153.42 2014 2015 Price - Earnings Ratio 2013 Market Price per share 187.57160.44137.62 Earnings per share P/E ratio 15.63 12.14 13.66 12.00 13.22 10.08 24.59 Microsoft Corp (MSFT 2017 68.93 2015 2016 Price - Earnings Ratio 20132014 Market Price per share 34.55 41.70 44.15 Earnings per share P/E ratio 13.16 15.56 29.07 23.78 P/S Ratio APPLE Inc (AAPL 2014 100.75 182795 233715 2016 113.05 215091 2017 154.12 229234 44.72 2015 110.30 2013 Price Sales Ratio Market Price per share476.75 Net Sales Sales per share P/S ratio 170910 190.07 IBM (IBM 2014 160.44 92793 93.68 2015 137.62 81741 84.64 2016 165.99 79920 2017 153.42 79139 85.82 2013 Price - Sales Ratio Market Price per share187.57 Net Sales Sales per share PIS ratio 99751 Microsoft Corp (MSFT 2017 68.93 89950 2013 2016 Price -Sales Ratio Market Price per share 34.55 Net Sales Sales per share PIS ratio 2014 2015 77849 86451 93580 85320Explanation / Answer
We have to value Apple in this question using method of comparables. In this method, we will find the average ratio for the comparable for the respective company and will use that to find the price of Apple.
P/E
Average P/E for IBM : 14.62
EPS for Apple for 2017 : 9.43
Price of Apple in 2017 : 14.62*9.43 = 137.88
Average P/E for Microsoft: 15.58
EPS for Apple for 2017 : 9.43
Price of Apple in 2017 : 15.58*9.43 = 146.93
Average price of Apple : (137.88+146.93)/2 = 142.4
P/B
Average P/B for IBM : 9.60
Book value for Apple for 2017 : 26.15
Price of Apple in 2017 : 14.62*9.43 = 251.04
Average P/B for Microsoft: 4.96
Book value for Apple for 2017 : 26.15
Price of Apple in 2017 : 15.58*9.43 = 129.70
Average price of Apple : 190.37
P/S
Average P/S for IBM : 1.81
Sales per share for Apple for 2017 : 44.72
Price of Apple in 2017 : 1.81*44.72 = 80.94
Average P/S for Microsoft: 4.41
Sales per share for Apple for 2017 : 44.72
Price of Apple in 2017 : 4.41*44.72 = 197.21
Average price of Apple : 139.07
Now actual price of Apple share is 154.12. According to P/E multiple, price should close to 142. So it is already over valued.
Similarly for P/S multiple, price should be close to 139 which also states that it is over valued
But as per P/B multiple, price should be close to 190 which states that it is undervalued.
In my openion, we should not invest in this stock as of now because it seems overvalued ( 2 of the 3 multiple says that)
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