By Philip Elmer-DeWitt
August 12, 2009

It’s been a busy week for long second looks at Apple (AAPL).

Some, like Jason Calcanis’ narcissistic The Case Against Apple, were prompted by the controversies swirling around its iPhone marketing strategies and App Store approval procedures.

Others, like Peter Burrows’ Why Apple Is More Valuable than Google (GOOG) in Businessweek, by a long-term shift in market capitalizations that has pushed America’s No. 4 computer maker (market cap $148 billion) ahead of the world’s No. 1 search engine ($145 billion).

But if investors had time to read just one of these pieces, I would point them to Turley Muller’s Apple’s Valuation Is Still Reasonable, posted early Wednesday on Seeking Alpha.

Muller, a former mortgage trading analyst, currently unemployed, tracks Apple’s performance on his blog Financial Alchemist, where his estimates of Apple’s earnings put the Street’s consensus to shame. Over the past four quarters, he has missed reported EPS by 4 cents, 2 cents, 1 cent and 0 cents, respectively. (In those same four quarters, the Street underestimated Apple’s EPS by 15 cents, 40 cents, 24 cents and 18 cents.)

Two weeks ago he took a close look at Apple’s profit margins on the iPhone and concluded that they are now so high — approaching 60% on new iPhone sales — that Apple can use them to subsidize price cuts in the rest of its business lines. (See here.)

His latest report takes a broad look at Apple’s current valuation and concludes that despite the fact that the stock has more than doubled since its 2009 low of $78 a share — it opened Wednesday at $162.49 and was up 1.5% in early trading — its shares are still “attractively valued,” especially as a long-term holding.

The crux of his argument is that the Street is looking at the wrong numbers. Although the stock would appear to be trading at 28.88 times earnings, that’s because Apple is required to spread iPhone revenues out over the life of a 2-year contract. When actual iPhone sales and its rich cash holdings ($24.22 billion) are factored in, Apple’s shares are actually trading at less than 15 times trailing earnings.

Spotlight on Apple’s hidden revenue stream

Even that multiple might seem high in these recessionary times. But Muller makes a convincing case that for Apple, 15x is actually a quite modest. Investors, he argues, are making two fundamental errors:

  1. Attributing the slowdown in Mac and iPod segments to a permanent secular decline, rather than temporary weakness consistent with economic contractions.
  2. Ignoring / under-appreciating the growth potential of the iPhone and products yet to be introduced.

He then runs down Apple’s recent history of innovation — its ability to enter a new market and establish itself as the market leader — from digital music to smartphones.

It’s possible, says Muller, that Apple’s should be valued like Dell (DELL), a company whose best years are behind it. But he wouldn’t bet on it.

This short summary can’t do Muller’s argument justice. You can read it in full at Financial Alchemist, where it was posted on Tuesday, or at Seeking Alpha.

For more on Turley Muller, see:

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