Why Does Apollo Global Management Inc. (APO) Maintain a Low P/E Ratio Despite Strong Growth Projections
Apollo Global Management Inc. (APO) has been a subject of interest among investors due to its remarkable growth over the past five years and projected growth for the foreseeable future. Despite a 30% growth in earnings per share (EPS) over the last five years and a 25% growth estimate for the next five years, the company's price-to-earnings (P/E) ratio remains somewhat low. This article aims to dissect the reasons behind this phenomenon and provide insights into why the market perceives APO differently than those initial growth figures suggest.
Cherry Picking and Annualized EPS Growth Rates
The 30% growth figure cited often in discussions about APO compares the most recent quarter's EPS of $0.71 to a value of $0.20 five years prior, yielding an annualized growth rate of 28.8%. However, this comparison is based on a single quarter, which can be misleading when evaluating long-term trends. A more accurate method is to compare total EPS from Q2 2016 to the trailing four quarters ending in Q1 2023, which shows an annualized growth rate of only 2.4%. This highlights the volatility in APO's quarterly EPS and challenges the notion of consistent, rapid growth.
The chart below provides a clearer picture of APO's quarterly EPS over the past five years, demonstrating significant volatility. This data does not support the narrative of steady growth but rather portrays a company with performance subject to considerable fluctuations.
Analyst Forecasts and Market Reality
Analysts estimate a 24.3% annual total return over the next five years for APO. However, most of this return projection is attributed to the stock's high beta (1.7) and optimism about the SP 500. While an analyst's forecast might seem attractive, it is essential to consider the market's actual performance. If one believes that APO will deliver this level of return, it would be tempting to purchase the stock at current levels. Nevertheless, based on the market's current valuation and performance, this seems to be an optimistic expectation.
Belief in the philosophy that a stock's price tells everything is a powerful lens through which to view the market. Just as a long line outside a restaurant can indicate the quality of its food and service, a low P/E ratio can reflect market sentiment about a company's prospects. In APO's case, the P/E ratio suggests that investors and traders do not have high confidence in its future performance, leading to a lower stock price.
Market Perception and Shareholder Value
The low P/E ratio of APO could be attributed to several factors. Investors and traders might perceive the company to have issues such as poor management, lack of focus, or indifference towards shareholder value. These perceptions can significantly impact the stock's market valuation. The historical performance of the stock, as evidenced by its chart, provides further support for this interpretation. Historical underperformance indicates that despite growth projections, the market is not willing to pay a premium for APO's shares.
The concept of "bottom fishing" or "buying fallen angels" is deeply ingrained in investment lore. While the idea of rescuing companies in underperforming states and profiting from their revival might seem appealing, it is statistically less likely to succeed in practice. The market's collective decision to value APO's shares at a discount suggests that it is already accounting for potential risks and issues. Attempting to outsmart the market by identifying undervalued stocks often leads to disappointment.
It is often more advantageous to focus on companies where the share price is already improving. By choosing to climb aboard these rising tides, investors can benefit from collective market sentiment and the resulting share price appreciation, rather than trying to change the world's perception of a company's value.
Conclusion: Bottom fishing and attempting to identify and profit from "fallen angels" are challenging endeavors. Market sentiment and valuation should not be underestimated. A more productive and profitable approach is to focus on companies with growing share prices, capitalizing on the collective wisdom that investors bring to the market.