Shares of Apple Inc. (NASDAQ: AAPL, Stock Forum) have been under pressure this week after the head of a U.S. equity research firm said the stock should be trading at around $240.
That’s well below the Wednesday close of $428.85, which leaves the company with a market cap of $402.5 billion, based on 938.6 billion shares outstanding. The 52-week range is $705.07 and $385.10.
David Trainer, the CEO of Brentwood, TN.,-based New Constructs LLC said his bearish view is based on a rarely discussed metric known as return on invested capital.
During an interview with CNBC, Trainer said the current stock price implies an ROIC of 124%.
“I think that is an unsustainably high level of return on capital for any business, much less one that is competing in a cut throat business like consumer electronics,’’ he said.
He was referring to the fact that formerly innovative gadgets, such as the iPad and the iPhone have sparked a tidal wave of competition, from the likes of Samsung Electronics Co. (GREY: SSNLF, Stock Forum) and Google Inc. (NASDAQ: GOOG, Stock Forum), companies that are aiming to boost their own ROIC.
“A lot of people would even argue that the Samsung Galaxy is a better phone,” said Trainer.
The New Constructs CEO says his target price is based on a 50% return on invested capital, an analysis that takes into account net operating profit after taxes, cash per share, minus debt, options liabilities, and deferred tax liabilities, bringing him to an equity value of $240 equity value.
By comparison, the ROIC for Microsoft Corp. (NASDAQ: MSFT, Stock Forum), which traded at $34 this week, is 75%.
“If that were Apple’s long term return on invested capital, you are looking at around $295 per share,’’ he said.
Trainer said it’s quite possible that Apple will produce another revolutionary gadget in the future. But he prefers not to have to bet on the consumer electronics equivalent of a home run.
“I’m the kind of person who would rather not bet on them being able to revolutionize an industry again,’’ he said.
“They have already done it once. They will always be an American icon for what they have brought to us. But the competition is stiff.’’
Meanwhile, Trainer says it’s important for investors not to underestimate the impact of Steve Jobs, the former Apple CEO who died on October 2011, after a losing battle with cancer.
“He is like the Bo Jackson of CEOs. He did amazing things that we may never see again. I wish we could have had him around for longer. But the fact of the matter is he is not there,’’ he said.
“I mean no slight against Apple CEO Tim Cook or all of the other Apple senior executives. They are all fantastic people. But Steve Jobs was a singular personality who took Apple to new heights”.
The price of Apple shares dropped on Wednesday after it was revealed that Appaloosa Management LP, the hedge-fund manager run by David Tepper cut its stake in Apple by 41% during the last quarter.
Appaloosa held 540,000 shares of Apple at the end of March 2013, down from 912,662 at the end of 2012, according to a regulatory filing that was first reported by Bloomberg News.
Tepper said he sold the shares because Apple has been neither “evolutionary” or “revolutionary” in recent months.