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Apple Stock to Rise 52%, Morningstar Forecasts


Morningstar(MORN), the safety-first investment-research firm, added tech darling Apple(AAPL) to its exclusive five-star stock list.

Chicago-based Morningstar covers more than 1,700 stocks and only 45 receive five-star rankings. That number has increased, quite a bit, in the past few weeks as the equity market has slid. Morningstar says Apple — which is down to $315 from a 52-week high of $365 — is now at a discount price.

During the second quarter, Apple roughly doubled its operating income and boosted sales 83%. Such growth is remarkable, especially considering the company already has a market value of $290 billion. IPhone revenue surged 126%, Mac revenue climbed 32%, iTunes revenue increased 23%, software sales stretched 17% and peripherals sales advanced 23%. iPod sales declined 14%. The iPad, Apple’ latest disruptive-technology product, has no year-over-year comparison, but it delivered $2.3 billion of quarterly sales. Put simply, business is booming.

Commentators spouting off about the beleaguered American consumer as a should take a gander at Apple. Its recent move to sell the iPhone through Verizon(VZ) is providing a nice tailwind as its release of the iPad 2, which is cannibalizing PC sales from the likes of Hewlett-Packard(HPQ). The one unit receiving little attention, despite outstanding growth, is the Mac business, which is stealing market share at a steady clip. Two other positives: Apple’ stock is extremely cheap, on a peer and historical basis, and it carries nearly $66 billion of net cash (cash minus debt). Morningstar’ thesis is straightforward: Apple is a safe, cheap growth stock, likely to outperform.

Apple has a fair-value target of $475, suggesting a return of 52%. Unlike the sell-side, Morningstar doesn’t link its targets to a specific time frame. Piper Jaffray(PJC) forecasts a 12-month advance to $554 and Credit Suisse(CS) predicts a rise to $500. Apple receives positive reviews, comprising “buy,” “outperform” and “overweight” rankings, from a disproportionate 91% of researchers in coverage. That share renders the stock the fourth-highest-rated in the benchmark S&P 500 Index. With an operating margin, at 29%, in the 99th industry percentile, it’ no wonder why Apple is analysts’ favorite tech stock. A trailing P/E of 15 is 39% below the five-year average.

Morningstar says Apple has a “widening economic moat.” Economic moat, or sustainable competitive advantage, is the key to Morningstar’ rating system. The researcher favors companies that can keep competitors at bay. Still, Morningstar may be underestimating just how wide Apple’ moat is. Although, in theory, other hardware companies could build a better iPhone, so to speak, Apple’ customer base is, arguably, the most loyal in the world, and its record of manufacturing seamless, user-friendly and innovative products has garnered goodwill. Research In Motion(RIMM), maker of the business-friendly BlackBerry, has learned how tough it is to square off with a consumer darling.