A physician asked me, this past Monday, if Apple Computer stock (Symbol: AAPL) is too expensive. This is a question that I have encountered numerous times over the years. Perhaps a stock, like Apple, that closed today (May 23) at $570.56 per share is more expensive than, let’s say, Proctor & Gambel (PG) which closed at $62.39 per share–or IS IT?. Another post on this Blog, “What is a Stock Split?”, might shed some additional light on this subject.
It is important to realize that, when you are investing, you are buying anticipated earnings and the growth potential of the investment. The more effective way of analyzing whether a stock is expensive or not is to look at the P/E (Price-to-Earnings) Ratio, which is also referred to as the multiple. The P/E for Apple, based on recent earnings is 12.9X (times earnings), while that of P & G is 19.4X. So, when you look at the earnings per share of the two stocks, is AAPL still more expensive?
Digging a little bit deeper, let’s look at the FPE (Forward P/E), which is based on the projected earnings per share for 2012: AAPL has an FPE of 10.9X as compared to PG’s 16.9X. Now, the question is which stock is the cheaper one?