Nicolae Mihalache Ciurdea

Is Apple undervalued at $260?

July 26, 2010: 11:21 AM ET

Yes, says a Romanian mathematician. But not as much as Microsoft.

Click to enlarge: Source: Nicolae Mihalache Ciurdea

Having run-up an even $100 (62%) over the past year, it's hard to think of Apple  as a bargain at $259.10 a share. But that's how you should look at the stock, according to a historical analysis of Apple's share price sent to us over the weekend by Nicolae Mihalache Ciurdea, a Romanian mathematician who teaches at the University of Paris and was one of the blogger-analysts who participated in last week's earnings smackdown.

He charts Apple's (AAPL) performance over the past 12 quarters using a series of criteria, the most familiar being its trailing price-to-earnings ratio, which fell during the financial crisis from a high of 51.5 in Q4 2007 to a low of 12.8 in Q1 2009 before recovering to just under 19.6 today.

But he quickly moves beyond P/E to more sophisticated measures, namely

  • P - $/E = The ratio of share price minus cash holdings to earnings
  • PEG = Price over earnings divided by annual growth rate
  • P - $EG = PEG after Apple's cash holdings are taken out of the share price

The last two criteria, he argues, are the best way to measure the value of a stock, because a company that is growing rapidly and has a huge cash hoard should be more valuable to investors than one that isn't growing and carries a lot of debt. Historically, a PEG (or P - $EG) less than 1 is considered undervalued.

That sounded reasonable to us. So we took Ciurdea's analysis one step further and applied it not just to Apple, but also to Google (GOOG), Amazon (AMZN), Hewlett-Packard (HPQ) and Microsoft (MSFT). We used Friday's closing price and the most recent quarterly earnings to measure growth year over year.

Can you guess which of the five stocks, by this measure, is the most valuable, and which the least? Answers below the fold.

More

Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.