Chapter 7: P/E Compression – The Historical Analysis

Thursday, November 17, 2011 — After Apple fully recovered from the depths of the financial crisis to make fresh all-time highs in early 2010, the stock began its very long period of P/E compression. All maturing growth stocks undergo the painful process of P/E compression. In some cases, this process will happen way before the company actually begins to slow down from a growth perspective.

In some rare tragic cases, some growth companies will go through a period of premature P/E compression as a result of Wall Street failing to adequately understand the company or the market in which the company operates. Unfortunately, Apple does fall within this subset of tragic cases.

Even thought the company recorded accelerated revenue growth in 2010 and much of 2011 as well as very explosive earnings growth, Wall Street has felt the company’s growth topped out sometime in 2007. Since 2007, Apple has struggled to maintain a P/E or PEG ratio that is anywhere close to commensurate with its growth rate or reasonable forward expectations.

Year after year Apple has reported an earnings and revenue that is on average about 50-70% above Wall Street initial expectations heading into the year. And every year, Apple trades at a depressed valuation. For example, heading into fiscal 2011, Wall Street analysts were expecting Apple to report $17.34 in earnings per share on $75 billion in revenue on the year. Apple reported $27.68 in earnings per share on $108.25 billion in revenue. That represents a 59.64% earnings beat and a 44.33% revenue beat on Wall Street’s earnings expectations heading into the year. This was Wall Street’s expectation on the first day of fiscal 2011. This after Apple reported an 80% earnings beat on Wall Street’s earnings expectations for 2010.
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One Response to Chapter 7: P/E Compression – The Historical Analysis

  1. Just got a chance to read it…my heart is beating faster now than at any capitulation…can’t wait to one-up Wall Street on this one! Great article!!