Apple’s new iPhone gambit could lift shares by 50% – Barron’s

Apple likes to keep customers guessing about its latest products, but investors are rarely surprised by what they hear, except for last week, that is, when Apple went off script.

The company announced that its latest iPhone would soon be available through monthly payments, starting at $32, with customers getting free upgrades every 12 months. The leasing and upgrade news overwhelmed the company's long list of new products, including a 12.9-inch iPad Pro, a sophisticated stylus, a revised Apple TV, and the refreshed iPhone.

Those devices were never likely to move Apple's stock (ticker: AAPL). That's why the iPhone upgrade announcement makes things interesting for investors, especially as iPhone sales accounted for 56 percent of Apple's revenue last year.

"It takes what could have been negative sentiment – a sell-on-thenews event – and potentially turns it positive," says Peter Karazeris, a senior equity analyst for Thrivent Asset Management, which owns $400 million worth of Apple's shares.

That, it did. Apple's shares finished the week up 4.5 percent to $114.21, although the stock is still down 14 percent from its summer peak, making a cheap stock even more compelling. If the leasing program proves to be popular, Apple could soar 50 percent in the coming year.

At its current price, Apple trades for 11.8 times earnings projections for the next 12 months. Back out the company's $150 billion in net cash, and the forward multiple drops to just 9.1.

That multiple is roughly in line with future profit-growth estimates. Wall Street expects Apple's earnings to jump 34 percent in the fiscal year that ends this month, to $53 billion, or $9.12 a share, on sales of $233 billion. But analysts are forecasting a gain of only 6.5 percent in fiscal 2016, to $9.71 a share. Apple has a habit of beating estimates, however.

To be fair, Apple's shares consistently have been cheap. "Apple has been undervalued for six years," says Mark Mulholland, portfolio manager of the $609 million Matthew 25 fund (MXXVX). (Dow Jones)