The big reversal in Apple (AAPL) in the last few months which resulted in a 35% correction demands some analysis.

In classic fashion as the momentum slipped away from AAPL, the correction came swift and violent; leveraged and momentum players abandon sinking ships just as quickly as they board them and a vacuum usually follows until a new kind of investors find interest: value players.  So the question is whether AAPL is now a value play and possibly an income play.

Admittedly the company has a few problems: lack of new catalysts (no interesting new products), more credible competition (Samsung, Amazon, Google), cannibalization (mini Ipad), saturation in developed markets, difficulty in expanding emerging markets which are more price sensitive, and compressing operating margins.  However, this is still a world class company, a leader in the personal technology revolution, a company that in the last quarter of 2012 sold 47 million Iphones.  This is not a company that is disappearing into oblivion; ultimately all that matters is paying a fair price for what may be slower growth until the next catalyst.

I looked at some value based models and it would seem that at these levels AAPL is indeed a value play.  First up is the reverse discounted cash flow model; I am generally not a great fan of DCF models but the reverse version has a better intrinsic logic. James Montier of GMO has often discussed how instead of using DCF models to generate some future (and usually bogus) price targets, it may be more interesting to reverse engineer the model and see what future rate of growth today’s price implies and then make a call whether such implied rate of growth is too low or too high.  Jae Jun at oldschoolvalue.com ran a reverse DCF model on AAPL using the following assumptions: 9% discount rate, forecasted $40 billion in Free Cash Flow and a terminal rate set at 2% (these are all reasonable assumptions).  At today’s price and using these assumptions, the market implies a future rate of growth of just 0.7%.

AAPL P/E ratio is also way below its 5 year average: 10.2 versus 15.6; Price to Cash Flow is also below the 5 year average at 7.5 versus 10.5.  AAPL is also offering a 2.36% dividend yield approximately 40 basis points above the yield on the 10 year Treasury.  This dividend should be safe and will probably be increased due to the huge cash position the company has accumulated in its balance sheet at (depending on how you calculate it) above $100 billion.

All we need now is announcement of the Apple TV!