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Monday, December 22, 2014

Apple Pay is Catching On – Catalyst for P/E Expansion

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Apple (Nasdaq: AAPL) announced last Tuesday that the list of companies working with Apple Pay has expanded to now cover a significant portion of the nation’s transaction volume. While it still has a ways to go to completely reach every possible transaction at every store, reports indicate that it is being adopted at a fast pace. In my opinion, Apple Pay is the main reason why Apple’s shares have recently run higher, and for good reason. I expect the business to make an important contribution to the company’s growing operational results. I also believe it is allowing the previously stale P/E ratio some room to grow, which means Apple shareholders are in for some special gains in the next few years.

Markos Kaminis New York
Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Apple Pay just added several more financial institutions to its list of payments partners, including SunTrust Banks (NYSE: STI) and others, according to one of my resources for this report. From the consumer perspective, Apple Pay now supports 90% of all potential credit card transactions in the United States. The company is also seeking arrangements with providers of debit cards, prepaid cards, co-branded cards, small business credit and debit cards and corporate cards.

Apple (Nasdaq: AAPL) must also win the support of retailers and all companies that accept payments for goods and services. Early signees include McDonald’s (NYSE: MCD) and Whole Foods Market (Nasdaq: WFM) and recent signees include Staples (Nasdaq: SPLS) and others. Given the degree of Apple iPhone penetration, it behooves retailers and restaurants to accept Apple Pay in order to best serve customers. So this is something retailers are likely asking Apple about in many instances before Apple even approaches them.

Not only is the service becoming available though; it is being used by Americans. McDonalds indicated that 50% of its tap-to-pay transactions were through Apple Pay in November. It is being adopted because it simplifies the transaction process for customers and is a value-add for Apple’s partners. According to the New York Times, the NBA’s Orlando Magic basketball franchise expects it to speed service at its concession stands. Since lines at ballparks and stadiums are limiting to sales, as many fans hate missing the action, if Apple Pay can speed transactions it will help these partners sell more food and beverages and other goods. That is a value-add to sales and earnings, and all the more reason for companies to partner with Apple on this.

In the past, similar services provided by Google (Nasdaq: GOOGL) and others have failed where Apple seems to be succeeding. I think that is because of Apple’s broad iPhone penetration; big PR voice that got the message across clearly to a broad swath of America when it introduced the service; and because of today’s tech savvy population, which has gotten much better at picking up new technology. People want to try it out and are willing to spend some time to learn how to use it.

Some retailers are making their own app, including a consortium headed up by Wal-Mart (NYSE: WMT), but I’m not sure people are going to want to join up for more than one payment app. I suppose the consortium may be able to better compete with Google’s Android platform, but Google (Nasdaq: GOOGL) is likely stepping up its game to help support its platform partners.

While Apple has not offered much information on how successful Apple Pay has been, its partners have been talking. On CNBC Tuesday, I watched a SunTrust representative as he said the service was showing good progress. Obviously, as a newly won business partner, this SunTrust representative was supplied with the figures we have not yet seen. We do know that over 1 million cards were registered with Apple Pay within the first 72 hours of operation, according to Tim Cook.

But there is also circumstantial evidence. This weekend (12-20-14), I saw evidence that banks are using Apple Pay as a draw for their businesses, with commercials for Bank of America (NYSE: BAC) and J.P. Morgan Chase (NYSE: JPM) both flashing partnerships with Apple Pay. They would not be doing this if they did not see strong penetration and consumer interest in the application. Basically, the banks are riding the coattails of the highly popular Apple brand and its newest and greatest thing.

Over the last few years, I’ve often proposed that Apple’s low PEG ratio was reflecting investor concern that Apple could not keep growing and might even see some erosion of market share. We have been looking for the company to expand its efforts into television sets and other gear, and it has entered the wearables market with its Apple Watch. But I think it is Apple Pay that is most exciting investors today, and the reason for the stock’s gains since its introduction.

Apple’s P/E ratio is now 13.8X the analysts’ consensus EPS estimate for FY 15 (Sep). The company’s valuation metrics have been expanding, but the forward P/E ratio here still shows room for further expansion in my opinion. I expect that as the data is reported and investors begin to better see the potential for Apple Pay and Apple Watch, the P/E and PEG ratios will expand further. Given analysts’ expectations for 20% growth in FY 15, the current PEG on these figures is 0.7x. That’s cheap. Looking at the long-term growth estimate, I expect it will be revised upward from the current 11.5% estimate once data for Apple Pay and Apple Watch start rolling in. But even so, the company’s PEG ratio using this figure is a still modest 1.2X, and fails to incorporate the dividend yield Apple offers of 1.7% today. Reiterating and concluding, as data comes in and estimates are revised, I expect we’ll also see P/E expansion, so shareholders of AAPL will get extra lift to their investment return. Thus, I still love AAPL here. I cover AAPL semi-regularly, so readers may want to follow my blog and my column at SA.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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Wednesday, December 17, 2014

Gold is About to Collapse but Also Mark Bottom

I see the price of gold dropping sharply this week, but then marking a bottom within a matter of days. The dollar strength which has impacted gold’s decline most over the last several years should be refueled this week by two important central bank events. But within days of these events, I expect gold to mark an important bottom and to drive higher on a new concern I expect will be raised about the dollar’s safe haven status. See more about this gold report here.

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Tuesday, December 09, 2014

Apple (Nasdaq: AAPL) - December Seasonal Swing Offers Opportunity

Apple store
Apple (Nasdaq: AAPL) shares have sold off in concert with the market to start December, but don’t throw your Apple shares out with the bathwater now. Apple shares have exaggerated the market’s decline, and I find it ironic considering the value proposition Apple’s shares still offer versus the market. I believe the selloff is due to seasonal factors that are about to shift in our favor. So, I suggest investors not rush to sell in panic, but rather consider the decline a new opportunity to add Apple shares to holdings.

Apple blogger
Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Apple (Nasdaq: AAPL)


As I showed in my report about December seasonality, the month has historically outperformed all others. Since 1950, stocks have averaged a 1.6% gain in December; that is the best monthly performance. Yet, the first half of the month has produced less predictable and somewhat conflicted results. Over the last 10 years, the S&P 500 Index has only risen 0.2% on average from December 1st through the 15th of the month. It seems much of its gains come in the second half of the period. The traditional Santa Claus Rally does not run until the week between Christmas and New Year’s.

A few months back, I said Apple (Nasdaq: AAPL) shares would prove to be a good flight to quality destination. In the months that followed and through October when the market swooned, Apple remained a stalwart stock. However, the same reliability is not reflected in this month’s price action. The S&P 500 Index was off about 1.4% month-to-date through early AM trading on December 9th, yet Apple shares were down 6.5% for the month at that point. Interestingly enough, both Apple and the market on the whole seemed to be already turning around into the late afternoon trade. At some point before long this month, I expect Apple should resume its impressive trend line higher with conviction.

The S&P 500 Index (NYSE: SPY) trades at 19.9X trailing twelve month earnings, versus Apple’s relative P/E discount of 17.5X. Apple today is still a value at just 14.6X the analysts’ EPS consensus estimate of $7.76 for fiscal 2015 (Sept.). Apple pays a dividend yield of 1.6% here, and analysts estimate earnings growth of 20% this year. The five-year estimate for EPS growth is likely understated, as analysts are still unable to make sense of the company’s opportunity with Apple Pay and other efforts. Analysts see long-term growth at 11.5%, giving the company a PEG ratio of approximately 1.26X. When incorporating the dividend yield, I come up with a KPEG of 1.1X. That’s a value opportunity for the growth and dividend being offered, especially considering I think growth is understated.

The December seasonal selloff will soon turn to rally in my view, so I would use this opportunity to buy Apple shares on sale. Apple’s shares are up 44% year-to-date after adjusting for dividends and splits. That is significant appreciation since I recommended the shares at the start of the year. On January 2nd, I said Apple could unlock 68% upside value nearly overnight if it were to present new innovation, which it clearly has this year. The stock trades a little higher now than the average low point of its historical P/E range, but it has a long way to go to get to its recent history’s average high P/E ratio in the mid-20s. I talk about this in this 2012 report answering the question, Should I Buy Apple. Apple has clearly been a buy idea for me for years, and it is ever more appealing now that it is on sale. As I follow Apple somewhat regularly, readers may have interest in following my column.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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