Flickr

Apple Inc. (NSDQ:AAPL) has launched its Apple Watch Series 2 just a few weeks ago, and it has already become certain that the new version is much more attractive than its first smart watch. With the new watch, users get a new water-resistant design, a GPS chip on board for tracking their runs, a swim tracker, and a much faster processor. As fitness takes over the Apple Watch, health insurers are showing interest in the ability of the new Apple Watch to contribute to people's fitness and general health.

As a consequence, Aetna (NYSE:AET), one of the nation's largest providers of health insurance and related benefits, announced on September 27, a new initiative to revolutionize members’ health experience. According to Aetna, the plan combines the power of Apple's iOS applications and the unmatched user experience of Apple products including Apple Watch, iPhone and iPad with Aetna’s analytics-based wellness and care management programs. Aetna said that beginning this fall, it will make Apple Watch available to select large employers and individual customers during open enrollment season. According to Aetna, it will be the first major health care company to subsidize a significant portion of the Apple Watch cost, offering monthly payroll deductions to make covering the remaining cost easier. Furthermore, Aetna said that in addition to the customer program, it will provide Apple Watch at no cost to its own nearly 50,000 employees, who will participate in the company’s wellness reimbursement program, to encourage them to live more productive, healthy lives.

Mark Bertolini, Aetna Chairman and CEO said:

“We are incredibly excited to use iPhone, iPad, and Apple Watch to create simple, intuitive and personalized technology solutions that will transform the health and wellness experience for our members. This is only the beginning - we look forward to using these tools to improve health outcomes and help more people achieve more healthy days.”

According to the Silicon Valley Business Journal, Aetna’s move came a day after British insurer Vitality said it will subsidize Apple Watch purchases for its customers as long as they earn the remainder of the purchase price over a 24-month period by meeting exercise goal. Vitality’s subsidy would allow someone to purchase a $480 Apple Watch for $90.

As I see it, the decision of Aetna and Vitality to promote the use of Apple Watch to improve fitness and general health could increase the sales of the watch significantly, mainly by attracting more companies and people to use the new watch.

A July report from the research company IDC indicated that Apple Watch sales had dropped 55% since the product was launched in early 2015. According to IDC, about 3.6 million units were shipped in its first three months in the market. However, sales plummeted to just 1.6 million in the recent quarter. The first Apple Watch lacked the GPS chip on board for tracking run (ing) data and the swim tracker. As such, the first watch could not satisfy the needs of fitness oriented people. In contrast, the changes that have been made in Apple Watch Series 2 should attract many individuals who like running, swimming and cycling.

Apple Stock Performance

Year to date, the AAPL stock is up 8.3%, while the S&P 500 index has increased 6.2%, and the NASDAQ Composite Index has also increased 6.2%. Since the beginning of 2012, the AAPL stock has gained 96.9%. In this period, the S&P 500 Index has increased 72.7%, and the NASDAQ Composite Index has risen 104.2%. According to TipRanks, the average target price of the top analysts is at $128.60, indicating an upside of 13.7% from its October 6th price. However, in my opinion, shares could go higher than that.

Dividend and Share Repurchase

Apple generates high free cash flow and returns substantial capital to its shareholders through stock buybacks and increasing dividend payments. In April 2016, the company announced a $50 billion increase in its capital return program. According to Apple, it is committed to returning $250 billion to shareholders by the end of March 2018. At the same time, the company raised its quarterly dividend by 10%, to $0.57 per share. Apple started to pay a dividend in April 2012. The present annual dividend yield is at 2.0%, and the payout ratio is only 24.7%. The annual rate of dividend growth over the past three years was very high at 73.6%.

Apple Stock Valuation

Considering its compelling valuation metrics and solid growth prospects, AAPL's stock, in my opinion, is undervalued. AAPL's trailing P/E is low at 13.29, and its forward P/E is even lower at 12.73. The Enterprise Value/EBITDA ratio is very low at 8.60, the price-to-free-cash-flow ratio is low at 16.17 , and the PEG ratio is at 1.56.

In addition, most of AAPL's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.

Source: Portfolio123

Conclusion

The new Apple Watch Series 2 is much more attractive than Apple's first smart watch. As I see it, the decision of two major health insurers to promote the use Apple Watch to improve fitness and general health could increase the sales of the watch significantly, mainly by attracting more companies and people to use the new watch. Considering its compelling valuation metrics and solid growth prospects, AAPL stock, in my opinion, is undervalued. Moreover, the company generates high free cash flow and returns substantial capital to its shareholders through stock buybacks and increasing dividend payments. The average target price of the top analysts is at $128.60, indicating an upside of 12.9% from its September 28 price. However, in my opinion, the shares could go higher than that.