Apple (AAPL) Is A Long-Term Buy

Apple reports earnings after the close today and just about everyone is expecting blowout numbers.  An onslaught of positive developments from Apple has served as a major catalyst for the stock price over the past few months: from iPad mania to a revamped Macbook Pro line to recent announcements around iPhone OS 4.0 and coming hardware updates to the iPhone 3GS.  That being said, when compared to a basket of “peers,” Apple’s stock price still looks very reasonably valued (see analysis below).

Apple (AAPL)currently has a PE of 20x expected 2010 earnings (based on an average of 40 analysts).  That’s a PEG Ratio (PE to Growth) of 1.1x, compared to the average PEG Ratio of 1.4x on a basket of Apple peers consisting of Google (GOOG), Amazon (AMZN), Cisco (CSCO), HP (HPQ), and Microsoft (MSFT). Among these peers, only Google has a lower (very slightly) PEG Ratio at 1.0x.

We also think there is a very strong halo effect occurring in which long-term Windows supporters are (will be) switching to Macs based on their extremely positive relationship with other Apple products (iPods, iPhones, and now, iPads). This, coupled with the fact that Apple is currently armed with $25 billion of cash (no debt) and delivers a superb 32% Return on Equity (17% Return on Assets), makes the stock a compelling long-term investment at its current valuation.