No. of Recommendations: 15
Apple's moat is not unbreachable. Also, trees, skyI think that for the next decade Apple can maintain their moat, and keep earnings per share rising in double digits, and keep a premium multiple!
I just don't think we will see extremes of any of those things : )
Analysts generally think EPS will rise at (nominal) 10.5%/year in the next couple/few years, give or take.
At current inflation rates, that might mean inflation + 6.5%.
Let's be optimistic and double that:
Let's say I pencil in a very optimistic inflation + 13% to start (over 17% nominal), but with a gradual slowdown to (say) inflation + 7% ten years out.
As you say: trees, sky. Plus they may not get high rates of return on their buybacks. Even inflation + 7% is very good.
They're trading at 33 times trailing earnings at the moment.
Per my usual rule, I don't want to assume too much optimism in the distant future, so let's say that gradually goes down to very high teens.
That's still definitely a premium multiple, just not an exuberant one any more. You might see more, but it's best not to count on it, especially as growth inevitably slows.
What would that suggest for future returns after inflation? A bit ho-hum.
Years Real EPS EPS P/E Real Price
0 $5.89 33.0 $194
1 +13.0% 6.66 29.6 197
2 12.1% 7.46 27.0 201
3 11.3% 8.31 24.8 206
4 10.6% 9.19 23.1 212
5 9.9% 10.10 21.7 219
6 9.2% 11.03 20.6 227
7 8.6% 11.99 19.7 236
8 8.1% 12.95 19.0 246
9 7.5% 13.93 18.5 257
10 7.0% 14.91 18.0 268
This particular trajectory is pretty optimistic on real EPS growth but more conservative on ending multiples.
It implies the average EPS growth rate in the stretch 5-10 years from now might be inflation + 8.4%, and the average P/E multiple 19.6.
The average price 5-10 years from now would then give a return of inflation + 3.0%/year.
Add maybe half a percent for dividends, so let's say around inflation + 3.5%/year real total return for holds in the 5-10 year range from here.
That's NOT a prediction, just the result of a particular "what if".
Modify your assumptions to suit your temperament, but your expectation for returns should be consistent with your assumptions.
I think the firm will do very nicely, but I don't really expect any exciting market returns for the next few years.
Jim
