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Without Jobs, Are Apple Shares Worth Keeping?

Apple (AAPL) shares lost 5% in after-hours trading Wednesday following an announcement that Steve Jobs will resign as chief executive. Jobs will stay on as chairman, but in a letter wrote that he was no longer able to complete his duties as CEO, raising questions about his health and continued contribution.

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That leaves shareholders wondering whether to sell. Jobs wasn’t alone in creating Apple’s remarkable success, but he has long been the face of it. He founded Apple with friend Steve Wozniak in 1976, left in 1985 and returned in 1997. Not long after his return, the company ranked among the bottom half of S&P 500 companies by stock market value. Today it is No. 2, behind Exxon Mobil (XOM); it briefly hit No. 1 earlier this month.

As investors adjust to the news in coming days, Apple’s outsized market value could be a drag on stock indexes like the S&P 500, in which giant companies hold disproportional sway, and on the many mutual funds that are based on such indexes. Jobs’ departure has also started to ripple through other tech companies. Shares of Apple rival Research in Motion (RIMM), maker of the Blackberry smart phone, rose more than 1% late Wednesday.

Apple’s rise is well-chronicled: the launch of the iPod and iTunes in 2001; the 2006 switch to Intel (INTC) computer chips, which lured users to Mac computers; the 2007 debut of the iPhone, which has sold 100 million units worldwide; and last year’s introduction of the iPad, which already dominates the market for tablet computers. To the company’s admiring fans and shareholders–its stock has multiplied more than 35 times in price over the past decade–Jobs was the visionary who understood that customers value style and simple functionality over tech specifications and complex customization options.

The company Jobs leaves is anything but struggling. Sales last quarter jumped 82% from a year earlier, growth that would be impressive even for a much smaller company. Operating profit was nearly 33 cents per dollar of sales, more than double the margin of most computer and cell phone companies. Apple sits on cash and securities worth one-fifth of its stock market value.

Shares, however, sell for just 14 times earnings, close to the price of the broad stock market. That’s owed to challenges even Jobs might have struggled with–ones that come with extreme success. No. 1 companies in their sector tend to hold that perch for only about a decade before losing it to competitors, studies show. Above-average profit margins tend to revert to industry averages over long time periods. Success invites mimickers, and Apple has plenty, especially in smart phones, which have become its top seller.

On the other hand, Apple has long made naysayers look foolish. And its modest stock valuation now gives shareholders plenty of reason to hang on, and others–including Apple itself, with all that cash–reason to buy if shares dive.

Two numbers to keep in mind are $81 and $32. The first is Apple’s cash and securities per share. That means if the stock falls to $350, as it might Thursday, it’s really falling to $269, net of what’s sitting in the till (albeit much of it overseas). The second is Apple’s expected profit per share during its next fiscal year, which begins in late September. Divide the first number by the second and the result is a price-to-earnings ratio of eight. That’s the sort of valuation usually reserved for a company that’s badly in need of turning around, not one that has completed the most striking corporate comeback in history.


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