By Jack Hough
Apple (AAPL) stock sank 5% in after-hours trading Tuesday when the company reported a quarterly earnings “miss.” But whether it truly missed depends on whose forecasts we use.
It reported earnings of $9.32 a share excluding one-time items for its third fiscal quarter ended June 30. That’s a 20% increase from a year earlier. It’s also well more than the $8.68 cents a share the company predicted it would earn for the quarter back in April.
It was well short of Wall Street’s consensus estimate of $10.22 a share, however. Likewise, Apple’s revenues of $35 billion, up 23%, beat its own estimate of $34 billion, but not Wall Street’s $38 billion.
That seems more like a case of Wall Street missing, not Apple.
Of course, the important question for shareholders isn’t whether a given forecast proved accurate, but rather, whether Apple shares remain fairly priced relative to the money the company makes.
To determine that, consider that Apple has now reported earnings excluding items of $42.54 a share over the past four quarters. With the stock at $570 in after-hours trading, that makes for a price-to-earnings ratio of 13.4.
General Mills (GIS), meanwhile, trades at 14.9 times trailing earnings. The packaged food maker is a good example of the popularity of consumer staples shares at the moment. Investors are willing to pay a premium for steady earners–companies that rarely miss forecasts by much.
Among S&P 500 firms, consumer staples companies trade at a 30% premium to technology firms relative to 2012 earnings estimates.
That’s a big price to pay for earnings stability. Consider: While Apple grew revenues at 23% in its latest quarter, General Mills says it expects mid-single-digit sales growth this year. That’s fine for a food maker, but it speaks to the high price investors are paying for unexciting growth. Also, Apple holds more than 20% of its market value in cash. General Mills has debt equal to about 30% of its market value.
For Apple stockholders, Tuesday’s earning-report turbulence isn’t a reason to sell. It’s simply the price they pay for owning shares of an attractively priced company with fast-growing but lumpy profits.