2/3/2012 Technology Apple Inc. Ticker: _____AAPL_____ Recommendation: Buy Current Price: $455.12 Implied Price: $522.24 Investment Thesis Key Statistics 52 Week Price Range 50-Day Moving Average $310.50 - $454.45 $XX$XX.XX $411.28 Estimated Beta 1.06 Dividend Yield N/A Market Capitalization 3-Year Revenue CAGR $421.66 billion 49.37% Apple products are in high demand in emerging markets and this could represent a large opportunity for the company to grow its sales even more, particularly in the iPhone segment where carrier expansion should continue in the near future. Management possesses an excellent track record of creating innovative products and has built strong customer loyalty through its previous offerings which should keep demand strong even in uncertain economic conditions. Although the personal computer market is dying, Apple’s has begun diversification into other product segments such as cloud computing, television, and has been a first mover in the tablet PC market which should help it rise to the top in a declining industry. Trading Statistics Apple Price (5- Year) Diluted Shares Outstanding 940 million Average Volume (3-Month) 12.712 million Institutional Ownership $500.00 400,000,000 $450.00 350,000,000 70.20% $400.00 Insider Ownership 300,000,000 0.64% $350.00 EV/EBITDA 6.94x 250,000,000 $300.00 Margins and Ratios $250.00 Gross Margin 42.34% EBITDA Margin 36.09% Net Margin 25.52% 200,000,000 $200.00 Debt to Enterprise Value Leverage Ratio 0.00% 0.00x 150,000,000 $150.00 100,000,000 $100.00 50,000,000 $50.00 $0.00 Jan-07 Jul-07 0 Jan-08 Jul-08 Volume Jan-09 Jul-09 Price Jan-10 Jul-10 50-Day Avg Jan-11 Jul-11 200-Day Avg Covering Analysts: Nitin Agrawal Email: nitin@uoregon.edu 1 University of Oregon Investment Group University of Oregon Investment Group 2/3/2012 Business Overview Corporate Background Apple is a multinational corporation located in Cupertino, California that engages in the design and manufacture of mobile communication devices, personal computers, and digital music players, namely the iPhone, iPad, iPod, and the Macintosh computer product lines. The firm was established on April 1, 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne but was incorporated on January 3rd, 1977 without Wayne. The company was also funded by Mike Markkula who provided $250,000 of funding during its incorporation. In 1984, the company released the Macintosh: Steve Job’s vision of a “people’s computer” targeted toward the demographic with little technical knowledge. Because its previous product, Lisa, failed, Macintosh became the company’s flagship product and was a fast seller in its early years. In spite of this success, infighting within the company between John Sculley and Steve Jobs as well as poor inventory tracking led to overproduction and declining sales causing Steve Jobs to leave the company in 1985. Although originally intended for those with little technical knowledge, corporations soon began to take notice of the platform’s ease of use and by 1988, more than one million Mac computers were sold, with 70% of sales coming from corporations. Software that allowed connectivity to IBM-based systems allowing Apple to grow rapidly. Apple experienced a turbulent 90s with poor management crippling the company’s overall performance, but the firm experienced a renaissance following the return of Steve Jobs in 1996. Jobs began work on the iMac, a CRT-based computer with a distinctive translucent, plastic body. This product was extremely popular and sold approximately one million units each year and reinvigorated Apple’s public image. While Apple was primarily engaged in the computer hardware industry throughout the first couple of decades of its existence, the company began to turn to other devices with the introduction of the digital music software iTunes and the iPod in 2001. The iconic iPod was the company’s first foray into the diversified electronics space and the company has gone on to produce more revolutionary products, such as the iPhone and iPad. Using its first mover advantage, Apple has experienced tremendous growth over the past four years and thanks to its tremendous customer loyalty, the firm looks to have a bright future ahead. Business Segments Currently, Apple operates out of 8 different segments: Desktops, Portables, iPod, iPhone, iPad, “Other music related products and services”, “peripherals and other hardware”, “software, service and other sales”. The Desktop segment in conjunction with Portables together makes up total mac sales, which totaled to $21,783,000,000 in fiscal year 2011. iMac, Mac mini, Mac Pro, and Xserve products make up the desktop segments while the MacBook, MacBook Air, and MacBook Pro make up the Portables segment. UOIG 2 University of Oregon Investment Group 2/3/2012 4,669,000 desktops and 12,066,000 portable units were sold in the last fiscal year. The iPhone is Apple’s smartphone that was first unveiled on January 9 th, 2007 and released on June 29, 2007. The phone has gone through 5 iterations with each generation of phone typically releasing in the summer. 72,293,000 phones were sold last fiscal year generating $47,057,000,000 of revenue for the firm and making the iPhone its largest segment by a large margin. The iPad is a tablet computer, released on April 3 rd , 2010 generated $20,358,000,000 in sales in fiscal year 2011 (making it Apple’s second largest segment by revenues) is the world’s best-selling tablet PC with over 15.4 million units sold and a whopping 75% market share at the end of 2010. The product is designed to be a crossover between smartphones and laptops and offers the advantage of being more portable than a traditional notebook while also having a larger screen than a smartphone. Tablets also potentially have an advantage in terms of image manipulation or digital painting due its touch screen interface, however, it also comes at a higher price and is less ergonomically friendly than traditional PCs due to the lack of an arm rest. The final three segments make up a much smaller portion of Apple’s revenues than the aforementioned products. “other music related products and services” generated $6,314,000,000 in sales and includes the iTunes store, App Store, and iBookstore as well as sales of iPod services and third-party iPhone accessories. “Peripherals and other hardware” included sales of displays, wireless connectivity and networking solutions and brought in $2,330,000,000 of revenue while “Software, service and other sales” consists of sales from the App Store and Apple-branded and third-party Mac software and services. Strategic Positioning Although many are concerned about the death of Steve Jobs, supply chain and logistics, an important driver of growth in the technological industry, is one of Tim Cook’s strengths. Apple maintains control over nearly every component of its supply chain by creating a closed-ecosystem from its design to the retail store. Due to Apple’s large volumes and its strict controls, the company obtains large discounts on parts, manufacturing capacity, and air freight. This enables the company to produce at a lower cost than competitors leading to higher margins and greater profitability. This also allows the company to handle its product launches without maintaining large inventories to meet its demand. Apple’s continued excellence in the logistics area should aid the company as it aims to enter the television market where margins can often be in the low single digits. The other key areas of Apple’s development include its marketing and research and development departments. With an emphasis on design and aesthetics, marketing plays a big role in the company. Apple first became known for its advertising in 1984 with its iconic commercial to introduce the Apple Macintosh computer based on the dystopic novel 1984. It has continued its tradition of memorable campaigns in the early 2000s with the dancing silhouettes adorned with the now famous white headphones and iPod. The ability to market well is crucial as Apple looks to enter new markets and drum up interest in its products among younger users, particularly since management has made a commitment to form-factor in its business strategy. UOIG 3 University of Oregon Investment Group 2/3/2012 Finally, management has made a commitment to making focused investments in R&D in order to improve its growth and competitive position within the marketplace. The company has made significant strides with products such as the iPhone, which introduced the smartphone, a device previously used almost exclusively by businessmen for work-related functions, to the general populace as well as the iPad. As a result, renewed investment in research and development is necessary in order for the company to remain competitive with other firms. Business Growth Strategies Apple’s core business strategy lies in its commitment to bringing “the best user experience to its customers through its innovative hardware, software, peripherals, and services”. It also supports community development of thirdparty software and hardware products as well as digital content that compliment its core offerings and enhance the customer’s satisfaction. The company maintains a philosophy that a high-quality buying experience with staff who can illustrate the value of its products and services enhances its ability to attract and retain customers. As a result, Apple sells a large amount of its products through its high-traffic locations in quality shopping malls and urban shopping districts. The stores are also designed to provide direct contact with its customers. Apple has also made a commitment to creating solutions that aid educators and students in the process of learning. The firm recently announced an initiative that was focused on making digital textbooks more accessible in the classroom. Through its new iBooks 2 iOS application on the iPhone and iPad, the company will offer interactive electronic textbooks that attempt to make studying and note-taking an easier process. Additionally, through iTunes U, a service that allows students download lectures and other materials from iTunes, Apple hopes to help teachers “reinvent the curriculum”. In spite of economic struggles in America and Europe, Apple has experienced success in both of these regions growing by 56% and 49% from 2010 to 2011 respectively. This was primarily driven through an increase in iPhone revenue from strong iPhone 4 demand as well as carrier expansion. Strong demand for the iPad as well as continued demand for Macs also drove revenue in these regions. Asia-Pacific has been Apple’s best performing geographic segment, however, growing by 174% in 2011. This region, which excludes Japan, was boosted by strong year-over-year sales in Greater China due to increased iPhone 4 demand from carrier expansion as well as strong sales for the iPad and Macs. Other countries that experienced strong growth included Korea and Australia. Given the economic state of much of the Western world, the increase in sales from emerging markets, such as China, is particularly important because of the growing middle class and growing prominence of those regions. Establishing a large consumer following early on could pay large dividends in the future as Asian countries continue to become wealthier. Additionally, Apple does not typically engage in acquisitions in order to grow and instead tries to grow organically with its research and development team creating innovative products and solutions. Although the business is fairly cyclical with sales tending to be higher during the holiday season and being a function of consumer spending, by positioning itself as a “luxury brand”, so to UOIG 4 University of Oregon Investment Group 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2/3/2012 speak, among technological companies, through its higher price points and aesthetic appeal, Apple has been able to maintain its brand and sustain its demand even in tougher economic cycles. Revenue in Millions Growth % 24,962.40 29,398.50 29,323.30 28,518.80 30,451.10 33,315.80 35,739.00 34,390.00 37,070.00 38,427.00 40,998.00 44,270.90 47,534.80 48,096.20 51,840.80 54,458.10 57,409.10 56,366.00 57,953.60 N/A 17.8 -0.3 -2.7 6.8 9.4 7.3 -3.8 7.8 3.7 6.7 8 7.4 1.2 7.8 5 5.4 -1.8 2.8 Apple is also establishing greater networking effects and offering new products that seek to expand its capabilities even further. Through its Messages app, iPhone and iPad users are able to send text messages and photos free of charge to one another, which will aid in customer retention as the company introduces new products and makes new technological breakthroughs. Additionally, the company launched its iCloud service, which stores music, photos, applications, etc. on a cloud and wirelessly pushes them to iOS devices. Apple TV allows users to watch movies and television on their high definition televisions and allows streaming content from iTunes, Netflix, YouTube, as well as other popular channels. Industry Overview Apple operates primarily in the technology industry, which provides chip production, communication systems, and computer systems for consumption. Through its technological innovations, the industry allows greater efficiency in communicating and receiving information for its users. Technology stocks often trade at higher multiples due to high expectations from investors and is marked by high competition. The main trends that appear to be driving the industry include the need for greater portability as well as faster, more power efficient products. Hardware manufacturers, such as Apple, also need to keep up with software producers who seek to up the ante in terms of graphical performance and more efficient computing. Failure to keep up with software demands will consequently lead to lower customer demand as customers will have access to fewer software applications on less powerful hardware. There also appears to be a move toward all-in-one devices as opposed to independent devices. For example, as opposed to having an independent ereading device such as the Amazon Kindle, the iPad allows the user to communicate with other iPad users through its messaging capabilities, acts as a gaming platform through its App Store, while also possessing reading capacity. International expansion is also a common theme with many firms looking to tap into growing markets such as China. In addition to selling to markets abroad, major hardware manufacturers tend to do a majority of their production overseas in order to take advantage of lower labor costs and to be closer to semiconductor manufacturers. Due to the high level of standardization and price competition, it is likely that the industry’s profit margins will feel downward pressure and IBISWorld projects revenues to fall at an average rate of 6.9% through 2016. Macro factors Key drivers that affect the profitability of the computer hardware manufacturers include the price they are able to sell computers at as well as corporate profit and consumer sentiment. In this section, analysis of the current economic condition and how these drivers are affected will be analyzed. UOIG 5 University of Oregon Investment Group 2/3/2012 Price of Computer Hardware Due to the advent of more efficient manufacturing methods and increasing competition prices from abroad, the price of the retail computer has been in a downtrend. While the hardware industry requires a large amount of initial capital expense, the overall barriers to entry in the industry are fairly low and it is expected that prices will remain low across the industry for the foreseeable future as shown in the chart on the previous page (credit IBISWorld). Firms could also potentially see a decrease in revenues if imports of foreign-made products continue to penetrate the United States market. Finally, due to fact that price competition is prevalent within this industry, it is likely that companies like Apple, who have a relatively smaller share, will need need to drop prices in order to boost market share, which could potentially hurt margins in the long term. Corporate Profit Corporations in addition to consumers comprise the customer base for computer manufacturers. Business enterprises need to periodically update their systems due to the rapid rate of technological innovations, but are more likely to do so during strong economic climates when they possess the requisite funds to update their infrastructure. Market Share HewlettPackard 25.0% Company Dell Inc. 21.5% International Business 15.4% Machines Corporation Apple Inc. 13.3% Oracle 3.7% Corporation While many industry analysts project corporate profits to increase slightly during 2012, many contingencies exist to this assumption. Already, the United States, which is currently in the midst of its earnings seasons has seen a mixed bag of corporate earnings thus far and already the country’s GDP reports have come out as lower than forecasted. As shown in the graph on the left, corporate profit is projected to remain relatively flat, however, the industry may grow even slower if the problems in Europe are not rectified or get worse. Consumer Sentiment Finally, just as corporations are likely to spend during strong economic periods, consumers too are more likely to make discretionary purchases when they possess a favorable outlook on the economy. Therefore, the aforementioned problems mentioned in the Corporate Profit segment can also affect the consumer segment of hardware manufacturer revenue. Competition As indicated by the chart on the left, the primary players in the computer manufacturing industry are Hewlett-Packard, Dell Inc., IBM Corporation, and Apple Inc. Many experts have indicated that this industry is currently in decline due to the decline in technological change and major technological breakthroughs as opposed to earlier years. The high levels of competition has also driven out many manufacturers to a total of 367 as of 2011: a decline of 2.4% annually over five years. This exit has also driven computer prices to fall 6.7% annually in spite of the fact that computers are more technologically sophisticated. Because the computer industry has been on the path of commoditization for multiple years, firms are now starting to diversify operations in order to remain competitive, both organically and through inorganic measures such as acquisitions, consolidations, and sell-offs. IBM, for example, acquired Price UOIG 6 University of Oregon Investment Group 2/3/2012 Waterhouse Coopers’ practice in 2002 in order to boost its Information Technology consulting service, an area that they saw as possessing higher margins than pure hardware manufacturing. Apple has been particularly remarkable in its foresight to diversify into more portable electronics with its iPod and more recently, through its development of the iPad, which has increased the woes of desktop and laptop manufacturers due to the cannibalization of the sales of such products. The company’s commitment to producing aesthetically appealing products may also help it avoid commoditization from the more standardized products offered by its competitors. Management and Employee Relations Tim Cook – CEO “Before being named CEO in August 2011, Time was Apple’s Chief Operating Officer and was responsible for all of the company’s worldwide sales and operations, including end-to-end management of Apple’s supply chain, sales activities, and service and support in all markets and countries. He also headed Apple’s Macintosh division and played a key role in the continued development of strategic reseller and supplier relationships, ensuring flexibility in response to an increasingly demanding marketplace. Tim earned an M.B.A. from Duke University where he was a Fuqua Scholar, and a Bachelor of Science degree in Industrial Engineering from Auburn University”. Peter Oppenheimer – Senior Vice President and CFO “Peter Oppenheimer is Apple’s senior vice president and Chief Financial Officer. In his capacity as CFO, Oppenheimer oversees the controller, treasury, investor relations, tax, information systems, internal audit and facilities functions. Oppenheimer started with Apple in 1996 as controller for the Americas, and in 1997 was promoted to vice president and Worldwide Sales controller and then to corporate controller. Oppenheimer received a bachelors degree from California Polytechnic University, San Luis Obispo and an M.B.A. from the University of Santa Clara, both with honors.” Philip Q. Schiller – Senior Vice President, Woldwide Marketing “Philip Schiller is Apple’s senior vice president of Worldwide Marketing and reports to Apple’s CEO. Schiller is a member of Apple’s Executive Team. Since rejoining Apple in April 1997 Schiller has helped the company create the best coputers in the world with the Mac, lead the digital music revolution with iPod and iTunes, reinvent mobile phones with iPhone and the App Store, and define the future of mobile computing with iPad. Schiller graduated with a Bachelor of Science degree in Biology from Boston College in 1982.” Management Guidance During the fiscal year of 2011, Apple had one of the best quarters in the company’s history. A new all-time quarterly high was recorded for the Mac and iPad in terms of sales, and a September quarter record was set for iPhone sales. UOIG 7 University of Oregon Investment Group 2/3/2012 The company also attained revenues of $28.3 billion, which translated to yearover-year growth of 39%. In spite of the solid earnings, the company had missed on analyst expectations and had sold off following the announcement. Retail 13% Management stated that the key to Apple’s success was primarily through the strong growth in iPad, Mac, and iPhone sales. The company’s Asia-Pacific segment was a particularly hot market with Mac sales increasing by 61% through the MacBook Air and MacBook Pro lines. Additionally, the company rolled out the Mac OS X Lion on July 20th and have received tremendous feedback from customers with 6 million downloads during Apple’s September quarter. Americas 38% Asia-Pacific 17% On January 24th, 2012, the company reported its highest quarterly revenue and earnings ever with all-time record iPhone, iPad, and Mac Sales. Apple posted quarterly revenue of $46.33 billion and net profit of $13.06 billion, more than double the profit from quarter one 2011. Gross margins were also up to 44.7% from 38.5% and the company now derives 58% of its revenue from overseas. Japan 8% Europe 24% Other 8% The Company’s CEO stated that “Apple’s momentum is incredibly strong, and we have some amazing new products in the pipeline” indicating that management is extremely optimistic and bullish about the future of the company. Peter Oppenheimer also indicated a fairly solid second quarter for 2012 expecting revenue of $32.5 billion. These claims seem fairly plausible since the company has consistently delivered excellent results over the past few years, however, the stock price may not always reflect the strong earnings power of the company. Due to the high expectation of growth, Wall Street consensus estimates may come in too high and if the company misses, it will pay a price with a plummeting stock price the day after. However, this may only be a short-term affect and should not hamper the stock in the long run as long as the company’s fundamental business is not hampered from its operations. Mac Desktops 4% Mac Portables 10% iPod 5% iPad 20% Recent News Apple Inc. to Open Retail Stores in India? –TouchReviews.Net iPhone 53% This article describes how Apple may open its own shops in India after the Indian Government allowed full ownership of single-brand retail stores by foreign companies. The company first attempted to do so in 2006 and is keen on re-entering the market again. Previously, the Indian government required retail stores to have 49% domestic investment, but having lifted this requirement, Apple went ahead with plans to make stores in India. A problem still potentially exists with Apple being forced to source 30% of its product value from small businesses in India but regulators are willing to address the requirement based on the guarantee of whether Apple will be moving its retail presence in India. Apple to Give a Lesson About Textbooks – Wall Street Journal This article, taken from the Wall Street Journal, discusses how Apple is initiating plans to sell textbooks optimized for the iPad that feature ways to interact with the content as well as partnerships with publishers. Part of Steve Jobs’ philosophy was for all books to be “digital and interactive, tailored to each student and providing feedback in real time”. It further goes on to mention that the textbook industry is in dire need of innovation and that it is a crowded space. Publishers and education companies have been working on digitizing the content UOIG 8 University of Oregon Investment Group 2/3/2012 and Amazon.com has also been attempting to enter the market. Current estimates indicate that only 6% of education-textbook sales will be digital this year, but by 2020, digital textbooks and learning content could represent more than 50% of the overall textbook market. Apple Investors Await a Dividend Gusher – Bloomberg The article from Bloomberg written on the 25th of January discusses how the company has been actively discussing potential uses for its cash, which could range from dividends, share buybacks, acquisitions, or supply-chain investments according to Peter Oppenheimer. One analyst said that a dividend of 3% could send Apple to $550 a share, a potential upside of nearly 25% from where the stock currently trades at. However, other analysts state that Apple’s declaration of a dividend would be an indication that “it’s time to get out of the stock” due to the fact that their refusal thus far indicates their intent to chase potential growth opportunities. Although they did not indicate for sure whether or not a dividend will occur, analysts suggested that it would be surprising for Apple to make a large acquisition as the firm tends to acquire smaller or medium-sized companies that possess strong engineering talent. Catalysts Upside Company reported one of the best quarters in corporate history and has strong, positive momentum in its stock price. Strong demand in emerging markets and continued carrier expansion has led to strong iPhone revenue growth, which could also lead to adoption of other company products. Proven track record of producing innovative goods that cannibalize market share from competitors. Extremely strong customer loyalty which can be strengthened by increasing connectivity among Apple’s core offerings. One of the strongest balance sheets of any corporations with no longterm debt and lots of cash. Potential of a dividend within the near future may boost share price even more. Downside Concerns about whether or not the company can still continue to innovate now that Steve Jobs is dead will persist. Lofty growth expectations set by Wall Street analysts can negatively drive down stock prices if the company fails to meet consensus estimates. The computer hardware industry is in decline and the company may face lower margins as they try and increase their market share. Comparable Analysis For the comparable company analysis, the firms chosen were Google, Microsoft, Hewlett Packard, Dell, and Amazon in order of most heavily weighted to least heavily weighted. UOIG 9 University of Oregon Investment Group 2/3/2012 Google Google Inc. is a multinational internet and software company that is best known for its internet search engine through which it generates revenue. Although the title of Apple’s biggest rival historically belonged to Microsoft, it is arguable that Google is fast becoming Apple’s top competitor and both companies have a similar market cap and large growth expectations from their investors. Although Google has usually been more in the internet advertising and operating system business through both its search engine and the Google Android system, an operating system that has now gained a large portion of the smartphone market, the company also appears to be making headwinds in the hardware industry through its acquisition of Motorola. This acquisition opens up a new distribution channel for its Android operating system as well as a potential competitor for the Apple iPhone from a hardware standpoint. Google has also began production of its Google TV product; a direct competitor to Apple TV in the television industry. Due to the similarities in growth rate, market capitalization, and product offerings, Google was given the highest weighting in the comparable analysis with a weighting of 45%. Microsoft The two companies are historically rivals in the operating system market for personal computers with Microsoft Windows directly competing for market share with the Macintosh system. However, Microsoft, through its partnership with Nokia, has now potentially become a competitor to Apple in the smartphone industry through Windows Phone. This operating system is targeted more toward the consumer market as opposed to business enterprises like its previous systems. The company also acquired Skype in hopes of boosting its telecom business. However, Microsoft’s lack of exposure to the hardware side of business and lower expected growth rates has led it to holding a much smaller weighting in the analysis than Google with the company only receiving a 15% weight. If the Windows phone ends up taking off, Microsoft may emerge as a bigger threat later on, but for the moment, it is less of a concern than Google. Hewlett-Packard and Dell Because personal computing still makes up a large portion of Apple’s business, Hewlett-Packard and Dell were also included in the comparable analysis. Hewlett-Packard has also recently developed the HP TouchPad tablet in order to enter the tablet market due to the decline of the PC market, but saw limited success when matched against the iPhone. Dell too is attempting to enter the tablet market and has also began making its way into the smartphone market and is running the Windows operating system. Due to their exposure to hardware, it was important to include both companies in the analysis, but were also given lower weightings of 15% due to the fact that the expected growth rates of the companies are much lower than that of Apple or Google. Amazon Amazon is an internet retailer with headquarters in Seattle, Washington. Although the company first began as a bookstore, it eventually diversified its operations and began selling DVDs, CDs, MP3s, etc. Because online retailing is a big part of Apple’s business, including Amazon helps expose the analysis to some of the risks of that business. Additionally, Amazon too has high expected UOIG 10 University of Oregon Investment Group 2/3/2012 growth rates and, through its Amazon Kindle E-Reader, has some exposure to the hardware industry as well. In spite of the high growth rates and retail exposure, Amazon is still principally a retail company and thus has different margins and multiples than Apple. It competes with Apple’s iTunes and Bookstore, but unless the company enters the smartphone or tablet market, it is less similar to Apple operationally than the other firms listed. As a result, Amazon only received a 10% weighting in the comparable analysis. Multiple Weightings Selection The weightings chosen included EV/Gross Profit, EV/EBIT, and EV/EBITDA. EV/EBITDA was weighted higher than EV/EBIT because Amazon has less depreciation due to its lack of retail locations and this measure was skewing the valuation unreasonably high due to the fact that it was trading at a much higher EV/EBIT multiple relative to the other firms. EV/Gross Profit was chosen solely because it had to least amount of variation among the selected firms and made more sense than EV/Revenue or EV/Net Income due to the fact that the later two could differ based on how the firms operations are set up. Discounted Cash Flow Analysis Revenue model For the revenue model, the method used to project revenues was percent growth across Apple’s product segments. The basic thesis was that the iPhone, iPad, and Portables would be the principle sources of revenue for the company with iPod and Desktops showing slow to negative growth due to cannibalization of market share from Apple’s own products, namely the iPhone and Portables segments respectively. While the market for desktops is expected to decline due to the decreasing disparity in performance between laptops and desktops, the segment does show positive growth initially due to the fact that it will still be in demand from businesses and educational institutions. If Apple also continues to expand its market share, the desktop market could also see growth in spite of a declining market, but due to the bearish nature of the segment as a whole, the segment grows negatively into perpetuity. Beta SD Weighting 1 Year Weekly 0.92 12.00% 5 Year Monthly 1.21 20.00% 1 Year Weekly Vasicek Beta 1.00 14.00% 5 Year Monthly Vasicek Beta 1.15 24.00% 1 Year Weekly Hamada Beta 0.98 12.00% 5 Year Monthly Hamada Beta 0.99 18.00% AAPL Beta 1.0648547 A big point of contention could be how fast the iPad segment grows relative to Portables as many analysts also expect tablets to eat into the netbook market. However, the hypothesis here is that the two are relatively different markets with tablets occupying a more niche segment. While tablets are good for personal computing and convenience, it is not as practical for traditional computing tasks such as word processing due to the inconvenience of the virtual keypad. While these preferences may change over time, the two segments are expected to grow at relatively similar rates into perpetuity. Beta Calculation In order to calculate Apple’s beta, 1 year weekly and 5 year monthly betas were regressed versus the S&P 500 in order to come up with betas. Additionally, Hamada and Vasicek were calculated for the same time periods. The 5 Year Vasicek received the highest weight along with the 5 year monthly. This was due to the fact that a 5 year period is more likely to take into account a firm’s progress over time than the 1 year betas, particularly because the 1 years may be skewed due to Apple’s astounding performance in recent years. Vasicek was weighted higher because of the fact that it takes into account variances UOIG 11 University of Oregon Investment Group 2/3/2012 within the industry as opposed to the simple beta and Hamada was weighted the lesser due to the fact that Apple has no debt and leverage is relatively inconsequential to the firm. Major Line Items The most difficult line item to project for the working capital model was the cash and cash equivalents. Due to the fact that Apple is sitting on an enormous cash levels (close to 97 billion when including cash on hand, short-term and long-term investments), it was reasonable to assume that the overall cash levels would decrease as a percent of revenue. This could be done through the form of dividends, share repurchases, or the firm has also discussed potentially increasing its acquisitions or optimizing its supply chain. The assumption essentially was that the firm would begin dropping its cash reserves almost immediately and would normalize to levels slightly below that of other firms in the industry. Short-term investments were also given a dramatic haircut initially to account for the decrease in cash reserves and were kept level afterward. Inventories were also projected to rise due to the fact that increasing competition could make it difficult for the firm to make sales as quickly, but they were still kept fairly level with the historical levels due to the fact that the firm will also adjust as the business environment changes. SG&A and R&D expenses could also be potential uses for the cash and were increased as a percent of revenue throughout the projection period. In order to stay relevant in a competitive environment, the firm would have to increase its marketing and research capabilities and this was reflected as such when modeling out the revenues. Although Apple’s management has indicated that acquisitions could be another source for the cash, it is unlikely for Apple to make large acquisitions and the firm is likely to continue its lack of a pattern in terms of when such actions occur. Thus, it was assumed that taking a historical average across the board would account for the increase in acquisitions while being conservative enough to take into consideration that management is not likely to make acquisitions every year of its existence. Current Price $455.12 Implied Price DCF $541.00 Impled Price Comparables $503.47 Weight of DCF 50% Weight of Comparables 50% Target Price Undervalued $522.24 14.75% Recommendation Based on the discounted cash flow and comparable analysis, Apple appears to be a buy based on the valuation as it is currently undervalued on both a relative and absolute basis. The firm has a lot of potential for growth within emerging markets and due to strong customer loyalty, the Apple could also become the must have product for the younger generation which can also lead to higher sales for the company. Furthermore, Apple has had a proven track record of creating innovative products and its large cash reserves and lack of debt make it a fairly safe company to invest in as well. Given its blend of growth and value that is yet to be unlocked, Apple is a definite buy for the DADCO portfolio due to its growth tilt but is also a strong candidate as a buy for Svigal’s portfolio due to the blend of value and growth that the valuations suggest. Since the company relies on growth expectations to increase its stock price, it is only a hold for the Tall Firs value portfolio as any change in the growth fundamentals could negatively impact both the stock and portfolio’s performance. UOIG 12 University of Oregon Investment Group 2/3/2012 Appendix 1 – Comparables Analysis Comparables Analysis ($ in millions) Stock Characteristics Current Price 50 Day Moving Average 200 Day Moving Average Beta Size Short-Term Debt Long-Term Debt Cash and Cash Equivalent Non-Controlling Interest Preferred Stock Diluted Basic Shares Market Capitalization Enterprise Value Profitability Margins Gross Margin EBIT Margin EBITDA Margin Net Margin Credit Metrics Interest Expense Debt/EV Leverage Ratio Interest Coverage Ratio Expected Operating Results 2012 Revenue Gross Profit EBIT EBITDA Net Income Valuation EV/Revenue EV/Gross Profit EV/EBIT EV/EBITDA EV/Net Income Analysis Ticker AAPL Max $579.98 623.97 580.10 1.36 Min Weight Avg. $16.08 $291.62 15.57 309.42 15.39 291.97 0.38 0.96 Ticker 1 Ticker 2 Ticker 3 Ticker 4 Ticker 5 HPQ 15.00% $28.13 26.68 27.45 1.36 DELL 15.00% $16.08 15.57 15.39 1.26 AMZN 10.00% $195.37 182.10 205.40 0.38 GOOG 45.00% $579.98 623.97 580.10 0.85 Median $29.71 27.22 27.45 0.98 $447.28 411.28 392.62 0.82 MSFT 15.00% $29.71 27.22 26.36 0.98 1,831.00 22,551.00 57,403.00 379.00 0.00 8,504.18 419,501.93 389,345.93 0.00 0.00 6,326.00 0.00 0.00 267.77 28,887.87 23,855.87 822.75 7,498.30 32,525.15 56.85 0.00 2,008.30 127,912.53 103,765.28 0.00 6,430.00 13,293.00 0.00 0.00 1,796.51 88,112.60 81,970.60 0.00 0.00 30,156.00 0.00 0.00 940.50 419,501.93 389,345.93 0.00 11,927.00 57,403.00 0.00 0.00 8,504.18 252,659.26 207,183.26 0.00 22,551.00 8,043.00 379.00 0.00 1,984.03 55,810.86 70,697.86 1,831.00 6,430.00 13,293.00 `0 0.00 1,796.51 28,887.87 23,855.87 0.00 184.00 6,326.00 0.00 0.00 451.00 88,112.60 81,970.60 1,218.00 2,986.00 44,626.00 0.00 0.00 267.77 152,216.82 111,794.82 75.93% 37.38% 41.93% 30.70% 21.97% 2.51% 4.51% 1.45% 50.08% 24.07% 28.86% 18.85% 23.25% 9.24% 13.16% 6.32% 42.34% 33.82% 36.09% 25.52% 75.93% 37.38% 41.73% 30.70% 23.25% 9.24% 13.16% 6.32% 22.37% 7.57% 8.74% 5.57% 21.97% 2.51% 4.51% 1.45% 65.89% 34.86% 41.93% 27.37% $295.00 34.63% 1.50 #DIV/0! $0.00 0.00% 0.00 #DIV/0! $78.09 12.56% 0.60 #DIV/0! $39.00 5.76% 0.39 #DIV/0! $0.00 0.00% 0.00 #DIV/0! $295.00 5.76% 0.39 104.5698305 $0.60 31.90% 1.38 27263.33333 $199.00 34.63% 1.50 27.65075377 $39.00 .22% 0.06 75.65128205 $0.00 3.76% 0.22 #DIV/0! $155,475.10 65,825.80 52,575.40 56,108.70 39,678.60 $45,449.70 14,080.00 1,638.10 2,950.40 950.50 $66,168.60 29,780.98 13,876.44 16,775.99 10,800.22 $65,374.90 28,906.90 11,491.70 16,358.00 7,852.30 $155,475.10 65,825.80 52,575.40 56,108.70 39,678.60 $73,926.90 56,135.50 27,631.70 30,848.10 22,695.50 $124,322.70 28,906.90 11,491.70 16,358.00 7,852.30 $62,942.00 14,080.00 4,763.60 5,502.50 3,506.60 $65,374.90 14,362.00 1,638.10 2,950.40 950.50 $45,449.70 29,947.60 15,843.50 19,054.80 12,437.80 2.80x 5.91x 50.04x 27.78x 86.24x 0.38x 1.69x 5.01x 4.32x 6.80x 1.79x 3.43x 10.98x 7.72x 16.41x 1.25x 3.69x 7.06x 5.87x 9.00x 2.50x 5.91x 7.41x 6.94x 9.81x 2.80x 3.69x 7.50x 6.72x 9.13x 0.57x 2.45x 6.15x 4.32x 9.00x 0.38x 1.69x 5.01x 4.34x 6.80x 1.25x 5.71x 50.04x 27.78x 86.24x 2.46x 3.73x 7.06x 5.87x 8.99x Multiple EV/Revenue EV/Gross Profit EV/EBIT EV/EBITDA EV/Net Income Price Target Current Price Undervalued Implied Price Weight 328.77 0.00% 271.80 15.00% 645.75 30.00% 492.90 55.00% 724.34 0.00% $505.59 447.28 13.04% UOIG 13 University of Oregon Investment Group 2/3/2012 Appendix 2 – Discounted Cash Flows Analysis Discounted Cash Flow Analysis ($ in millions) Q1 2008A 2009A 2010A 2011A Total Revenue $32,479.00 $36,537.00 $65,225.00 $108,249.00 % YoY Growth - 12.49% 78.52% 65.96% 20861.00 22694.00 38514.00 62617.00 Cost of Goods Sold Q2 Q3 Q4 01/31/2012A 04/30/2012E 07/31/2012E 10/31/2012E 46333.00 24909.00 32772.51 17369.43 28762.98 15244.38 32711.56 17337.13 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E $140,580.05 $165,734.33 $185,148.76 $203,423.75 $219,735.30 $234,606.61 $247,551.05 $258,302.83 $265,813.43 29.87% 17.89% 11.71% 9.87% 8.02% 6.77% 5.52% 4.34% 2.91% $271,980.73 2.32% 74,859.94 91,153.88 103,683.31 116,968.66 128,545.15 138,417.90 148,530.63 156,273.21 162,146.19 165,908.25 % Revenue 64.23% 62.11% 59.05% 57.85% 53.76% 53.00% 53.00% 53.00% 53.25% 55.00% 56.00% 57.50% 58.50% 59.00% 60.00% 60.50% 61.00% 61.00% Gross Profit $11,618.00 $13,843.00 $26,711.00 $45,632.00 $21,424.00 $15,403.08 $13,518.60 $15,374.43 $65,720.11 $74,580.45 $81,465.45 $86,455.09 $91,190.15 $96,188.71 $99,020.42 $102,029.62 $103,667.24 $106,072.48 Gross Margin 0.357708058 37.89% 40.95% 42.15% 46.24% 47.00% 47.00% 47.00% 46.75% 45.00% 44.00% 42.50% 41.50% 41.00% 40.00% 39.50% 39.00% 39.00% Selling General and Administrative Expense 3761.00 3761.00 4149.00 5517.00 2605.00 2000.00 1500.00 2400.00 8,505.00 11,601.40 14,811.90 16,273.90 19,776.18 22,287.63 22,279.59 21,955.74 22,594.14 22,438.41 % Revenue 11.58% 10.29% 6.36% 5.10% 5.62% 6.10% 5.22% 7.34% 6.05% 7.00% 8.00% 8.00% 9.00% 9.50% 9.00% 8.50% 8.50% 8.25% Depreciation and Amortization 473.00 703.00 1027.00 1814.00 721.00 104.77 91.95 104.58 449.43 529.84 591.91 650.33 702.48 750.02 791.41 825.78 849.79 869.51 % Revenue Research and Development % Revenue Earnings Before Interest & Taxes % Revenue 1.46% 1.92% 1.57% 1.68% 1.56% .32% .32% .32% .32% .32% .32% .32% .32% .32% .32% .32% .32% .32% 1109.00 1333.00 1782.00 2429.00 758.00 409.66 431.44 490.67 2,089.77 4,972.03 7,405.95 10,171.19 10,986.77 12,316.85 9,902.04 9,040.60 10,632.54 10,879.23 3.41% 3.65% 2.73% 2.24% 1.64% 1.25% 1.50% 1.50% 1.49% 3.00% 4.00% 5.00% 5.00% 5.25% 4.00% 3.50% 4.00% 4.00% $6,275.00 $8,046.00 $19,753.00 $35,872.00 $17,340.00 $12,888.65 $11,495.20 $12,379.18 $54,675.91 $57,477.17 $58,655.69 $59,359.67 $59,724.73 $60,834.21 $66,047.38 $70,207.50 $69,590.77 $71,885.34 0.193201761 22.02% 30.28% 33.14% 2.00% 39.33% 39.97% 37.84% 38.89% 34.68% 31.68% 29.18% 27.18% 25.93% 26.68% 27.18% 26.18% 26.43% Other Income and Expense 620.00 326.00 155.00 415.00 137.00 98.32 86.29 98.13 415.00 134.34 171.52 188.45 229.01 258.09 258.00 254.25 261.64 259.84 % Revenue 1.91% .89% .24% .38% .30% .30% .30% .30% .30% 1.16% 1.16% 1.16% 1.16% 1.16% 1.16% 1.16% 1.16% 1.16% 6,895.00 8,372.00 19,908.00 36,287.00 17,477.00 12,986.97 11,581.49 12,477.32 55,090.91 57,611.52 58,827.22 59,548.12 59,953.74 61,092.30 66,305.37 70,461.75 69,852.41 72,145.18 Earnings Before Taxes % Revenue 21.23% 22.91% 30.52% 33.52% 37.72% 39.63% 40.27% 38.14% 39.19% 34.76% 31.77% 29.27% 27.28% 26.04% 26.78% 27.28% 26.28% 26.53% Less Taxes (Benefits) 2061.00 3831.00 4527.00 8283.00 4413.00 3116.87 2779.56 2994.56 13,221.82 13826.76397 14,118.53 14,291.55 14,388.90 14,662.15 15,913.29 16,910.82 16,764.58 17,314.84 Tax Rate 29.89% 45.76% 22.74% 22.83% 25.25% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% 24.00% Net Income $4,834.00 $4,541.00 $15,381.00 $28,004.00 $13,064.00 $9,870.10 $8,801.93 $9,482.76 $41,869.09 $43,784.75 $44,708.68 $45,256.57 $45,564.84 $46,430.15 $50,392.08 $53,550.93 $53,087.83 $54,830.33 Net Margin 14.88% 12.43% 23.58% 25.87% 28.20% 30.12% 30.60% 28.99% 29.78% 26.42% 24.15% 22.25% 20.74% 19.79% 20.36% 20.73% 19.97% 20.16% Add Back: Depreciation and Amortization 473.00 703.00 1,027.00 1,814.00 721.00 104.77 91.95 104.58 449.43 529.84 591.91 650.33 702.48 750.02 791.41 825.78 849.79 869.51 Add Back: Interest Expense*(1-Tax Rate) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5307.00 5244.00 16408.00 29818.00 13785.00 9974.87 8893.89 9587.34 42318.52 44314.59 45300.59 45906.91 46267.32 47180.17 51183.49 54376.71 53937.62 55699.84 Operating Cash Flow % Revenue Current Assets 16.34% 14.35% 25.16% 27.55% 29.75% 30.44% 30.92% 29.31% 30.10% 26.74% 24.47% 22.57% 21.06% 20.11% 20.68% 21.05% 20.29% 20.48% 34,690.00 36,265.00 41,678.00 44,988.00 54,771.00 42,766.40 40,036.40 44,776.40 44,776.40 52,412.62 57,957.50 61,899.54 66,192.52 70,219.99 73,126.17 76,002.64 77,457.61 79,054.80 % Revenue 106.81% 99.26% 63.90% 41.56% 118.21% 130.49% 139.19% 136.88% 31.85% 31.62% 31.30% 30.43% 30.12% 29.93% 29.54% 29.42% 29.14% 29.07% Current Liabilities 14,092.00 19,282.00 20,722.00 27,970.00 31,886.00 31,000.00 30,800.00 31,940.00 31,940.00 38,084.97 40,415.36 42,669.74 44,348.35 46,560.07 48,406.25 50,036.53 51,322.67 52,468.20 % Revenue 43.39% 52.77% 31.77% 25.84% 68.82% 94.59% 107.08% 97.64% 22.72% 22.98% 21.83% 20.98% 20.18% 19.85% 19.55% 19.37% 19.31% 19.29% $20,598.00 $16,983.00 $20,956.00 $17,018.00 $22,885.00 $11,766.40 $9,236.40 $12,836.40 $12,836.40 $14,327.65 $17,542.14 $19,229.81 $21,844.17 $23,659.91 $24,719.92 $25,966.11 $26,134.94 $26,586.60 63.42% 46.48% 32.13% 15.72% 49.39% 35.90% 32.11% 39.24% 9.13% 8.64% 9.47% 9.45% 9.94% 10.08% 9.99% 10.05% 9.83% 9.78% -3615 3973 -3938 5867 -11119 -2530 3600 -4182 1491 3214 1688 2614 1816 1060 1246 169 452 1091.00 1144.00 2005.00 4260.00 1429.00 1106.03 970.72 1103.98 4,744.41 5,593.33 6,248.54 6,865.30 7,415.80 7,917.69 8,354.55 8,717.41 8,970.88 9,179.02 % Revenue 3.36% 3.13% 3.07% 3.94% 3.08% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% Acquisitions 220.00 0.00 638.00 244.00 0.00 154.11 135.25 153.82 443.18 779.33 870.62 956.56 1,033.26 1,103.19 1,164.06 1,214.62 1,249.93 1,278.93 Net Working Capital % Revenue Change in Working Capital Capital Expenditures % Revenue Unlevered Free Cash Flow Discounted Free Cash Flow .68% 0.00% .98% .23% 0.00% .47% .47% .47% .32% .47% .47% .47% .47% .47% .47% .47% .47% .47% 3996.00 7715.00 9792.00 29252.00 6489.00 19833.33 10317.92 4729.54 41,312.53 36,450.68 34,966.93 36,397.38 35,203.89 36,343.56 40,604.88 43,198.49 43,547.98 44,790.23 38584.90231 31080.54904 27219.99166 25867.11768 22841.04921 21527.82815 21958.2868 21327.31747 19628.31954 18430.86899 UOIG 14 University of Oregon Investment Group 2/3/2012 Appendix 3 – Revenue Model Revenue Model Q1 ($ in millions) Desktops 2008A 2009A (23.11%) Q4 01/31/2012A 04/30/2012E 07/31/2012E 10/31/2012E 2012E 2013E 2014E 2015E 2016E 43.94% 3.84% (10.00%) (8.00%) (5.00%) 5.67% 4.00% 4.00% 2.00% 2017E 2018E 2019E 2020E 2021E 7,656.82 $ 7,733.39 $ 7,810.72 $ 7,732.61 $ 7,577.96 $ 7,350.62 2.00% 1.00% 1.00% (1.00%) (2.00%) (3.00%) $ 8,673.00 $ 9,472.00 $ 11,278.00 $ 15,344.00 $ 4,662.00 $ 4,755.24 $ 4,897.90 $ 5,142.79 $ 19,457.93 $ 23,349.52 $ 27,552.43 $ 30,858.72 $ 33,944.59 $ 36,660.16 $ 39,592.97 $ 41,968.55 $ 44,486.66 $ 45,821.26 % Growth iPod 2011A Q3 $ 5,603.00 $ 4,308.00 $ 6,201.00 $ 6,439.00 $ 1,936.00 $ 1,742.40 $ 1,603.01 $ 1,522.86 $ 6,804.27 $ 7,076.44 $ 7,359.49 $ 7,506.68 $ % Growth Portables 2010A Q2 9.21% 19.07% 36.05% 2.00% 3.00% 5.00% 26.81% 20.00% 18.00% 12.00% $ 9,153.00 $ 8,091.00 $ 8,274.00 $ 7,453.00 $ 2,528.00 $ 1,516.80 $ 1,183.10 $ 970.15 $ 6,198.05 $ 5,454.28 $ 4,799.77 $ 4,127.80 $ % Growth (11.60%) 2.26% (9.92%) (40.00%) (22.00%) (18.00%) (16.84%) (12.00%) (12.00%) (14.00%) 10.00% 8.00% 8.00% 6.00% 6.00% 3.00% 3,549.91 $ 2,981.92 $ 2,445.18 $ 1,956.14 $ 1,564.91 $ 1,251.93 (14.00%) (16.00%) (18.00%) (20.00%) (20.00%) (20.00%) Other Music Related Products and Services $ 3,340.00 $ 4,036.00 $ 4,948.00 $ 6,314.00 $ 2,027.00 $ 1,966.19 $ 2,044.84 $ 2,147.08 $ 8,185.11 $ 9,412.87 $ 10,636.55 $ 11,700.20 $ 12,753.22 $ 13,901.01 $ 15,013.09 $ 15,913.88 $ 16,868.71 $ 17,543.46 % Growth iPhone 20.84% 266.27% $ - $ 272.80% % Growth Software, Service, and other Sales % Growth Total Revenue % Growth (3.00%) 4.00% 5.00% 29.63% 15.00% 13.00% 10.00% 9.00% 9.00% 8.00% 6.00% 6.00% 4.00% 86.89% (45.00%) (40.00%) 30.00% 19.81% 15.00% 12.00% 10.00% 9.00% 8.00% 5.00% 4.00% 2.00% 2.00% - $ 4,958.00 $ 20,358.00 $ 9,153.00 $ 7,780.05 $ 9,336.06 $ 10,736.47 $ 37,005.58 $ 48,107.25 $ 53,880.12 $ 60,345.74 $ 65,173.40 $ 69,083.80 $ 73,228.83 $ 76,890.27 $ 79,196.98 $ 81,572.89 % Growth Peripherals and other Hardware 27.61% $ 1,844.00 $ 6,754.00 $ 25,179.00 $ 47,057.00 $ 24,417.00 $ 13,429.35 $ 8,057.61 $ 10,474.89 $ 56,378.85 $ 64,835.68 $ 72,615.96 $ 79,877.56 $ 87,066.54 $ 94,031.86 $ 98,733.46 $ 102,682.79 $ 104,736.45 $ 106,831.18 % Growth iPad 22.60% 310.61% (15.00%) 20.00% 15.00% 81.77% 30.00% 12.00% 12.00% $ 1,659.00 $ 1,470.00 $ 1,814.00 $ 2,330.00 $ 766.00 $ 704.72 $ 718.81 $ 740.38 $ 2,929.91 $ 3,515.90 $ 4,043.28 $ 4,447.61 $ (11.39%) 23.40% 28.45% (8.00%) 2.00% 3.00% 25.75% 20.00% 15.00% 10.00% $ 2,207.00 $ 2,406.00 $ 2,573.00 $ 2,954.00 $ 844.00 $ 877.76 $ 921.65 $ 976.95 $ 3,620.35 $ 3,982.39 $ 4,261.16 $ 4,559.44 $ 9.02% 6.94% 14.81% 4.00% 5.00% 6.00% 22.56% 10.00% 7.00% 7.00% 8.00% 6.00% 6.00% 5.00% 3.00% 3.00% 4,803.42 $ 5,187.69 $ 5,498.95 $ 5,773.90 $ 5,889.38 $ 6,007.16 8.00% 8.00% 6.00% 5.00% 2.00% 2.00% 4,787.41 $ 5,026.78 $ 5,227.85 $ 5,384.69 $ 5,492.38 $ 5,602.23 5.00% 5.00% 4.00% 3.00% 2.00% 2.00% $ 32,479.00 $ 36,537.00 $ 65,225.00 $ 108,249.00 $ 46,333.00 $ 32,772.51 $ 28,762.98 $ 32,711.56 $ 140,580.05 $ 165,734.33 $ 185,148.76 $ 203,423.75 $ 219,735.30 $ 234,606.61 $ 247,551.05 $ 258,302.83 $ 265,813.43 $ 271,980.73 12.49% 78.52% 65.96% 29.87% 17.89% 11.71% 9.87% 8.02% UOIG 15 6.77% 5.52% 4.34% 2.91% 2.32% University of Oregon Investment Group 2/3/2012 Appendix 4 – Working Capital Model Working Capital Model ($ in millions) Total Revenue Current Assets Cash & Cash Equivalents % of Revenue Accounts Receivable Days Sales Outstanding A/R % of Revenue Inventory Days Inventory Outstanding % of Revenue Short-Term Investments % of Revenue Deferred Tax Assets % of Revenue Other Assets % of Revenue Total Current Assets % of Revenue Long Term Assets Net PP&E Beginning Capital Expenditures Depreciation and Amortization Net PP&E Ending Total Current Assets & Net PP&E % of Revenue Current Liabilities Accounts Payable % of Revenue Accrued Charges % of Revenue Deferred Revenue % of Revenue Total Current Liabilities % of Revenue Q1 2008A 2009A 2010A 2011A Q2 Q3 Q4 01/31/2012A 04/30/2012E 07/31/2012E 10/31/2012E $32,479.00 $36,537.00 $65,225.00 11875.00 36.56% 2422.00 27.29 0.08% 509.00 8.93 0.03% 12615.00 38.84% 5263.00 14.40% 3361.00 33.67 9.20% 455.00 7.32 1.25% 18201.00 49.82% 2101.00 5.75% 6884.00 18.84% 36265 99.26% 11261.00 17.26% 5510.00 30.92 8.45% 1051.00 9.96 1.61% 14359.00 22.01% 1636.00 2.51% 7861.00 12.05% 41678 63.90% 9815.00 9.07% 5369.00 18.15 4.96% 776.00 4.52 0.72% 16137.00 14.91% 2014.00 1.86% 10877.00 10.05% 44988 41.56% 10310.00 7.33% 8930.00 70.54 11246.40 8.00% 5500.00 61.42 11246.40 8.00% 6000.00 76.35 11246.40 8.00% 7200.00 80.56 1236.00 4.57 1500.00 7.77 1250.00 7.54 1050.00 5.57 19846.00 14000.00 12300.00 14500.00 1937.00 1420.00 1240.00 1480.00 12512.00 9100.00 8000.00 9300.00 1091 473.00 2455.0 37145.00 114.37% 2455 1144 703 2954.0 39219 107.34% 2954.0 2005 1027 4768.0 46446 71.21% 4768 4260 1814 7777.0 52765 48.74% 7777 7816.0 8817.260546 9696.0 1429 1106.03 970.7154651 1103.975323 1429 104.77 91.95 105 7816.0 8817.3 9696.0 10695.42102 62587 51583.66465 49732.42665 55471.82512 135.08% 157.40% 172.90% 169.58% 5,520.00 17.00% 3719.00 11.45% 4853.00 14.94% 14092.00 43.39% 5,601.00 15.33% 3376.00 10.39% 10305.00 28.20% 19282.00 52.77% 12,015.00 18.42% 5723.00 17.62% 2984.00 4.57% 20722.00 31.77% 14,632.00 13.52% 9247.00 28.47% 4091.00 3.78% 27970.00 25.84% 1447 4.46% 5822.00 17.93% 34690.00 106.81% 1832 $108,249.00 $46,333.00 $32,772.51 $28,762.98 $32,711.56 54771 42766.40411 40036.40411 44776.40411 15,500.00 15,900.00 16,400.00 16,740.00 11500.00 10500.00 10000.00 11200.00 4886.00 4600.00 4400.00 4000.00 31886.00 31000.00 30800.00 31940.00 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E $140,580.05 $165,734.33 $185,148.76 $203,423.75 $219,735.30 $234,606.61 $247,551.05 $258,302.83 $265,813.43 $271,980.73 11246.40 8.00% 7200.00 18.75 5.12% 1050 5.57 0.75% 14500 10.31% 1480 0.00% 9300 6.62% 44776.40411 31.85% 9115.388026 5.50% 7600 16.78 4.59% 1600 6.41 0.97% $17,094.51 10.31% $6,038.65 3.64% $10,964.07 6.62% 52412.62018 31.62% 10646.05377 5.75% 7400 14.63 4.00% 1820 6.41 0.98% 19096.99855 10.31% 6746.028272 3.64% 12248.41976 6.62% 57957.50035 31.30% 11188.30622 5.50% 6800 12.23 3.34% 2060 6.45 1.01% 20981.9554 10.31% 7411.890613 3.64% 13457.39208 6.62% 61899.54431 30.43% 12085.44155 5.50% 6500 10.83 2.96% 2400 6.81 1.09% 22664.39535 10.31% 8006.213719 3.64% 14536.47426 6.62% 66192.52488 30.12% 12903.36362 5.50% 6450 10.06 2.75% 2600 6.86 1.11% 24198.28299 10.31% 8548.060614 3.64% 15520.27805 6.62% 70219.98528 29.93% 12996.42992 5.25% 6300 9.31 2.54% 2900 7.13 1.17% 25533.4248 10.31% 9019.700405 3.64% 16376.61039 6.62% 73126.16552 29.54% 13560.89857 5.25% 6200 8.79 2.40% 3100 7.26 1.20% 26642.40764 10.31% 9411.449379 3.64% 17087.88904 6.62% 76002.64462 29.42% 13290.67152 5.00% 6200 8.54 2.33% 3280 7.38 1.23% 27417.08162 10.31% 9685.103511 3.64% 17584.7489 6.62% 77457.60555 29.14% 13599.03653 5.00% 6000 8.07 2.21% 3500 7.70 1.29% 28053.20212 10.31% 9909.813529 3.64% 17992.74343 6.62% 79054.7956 29.07% 10695.42102 4744.405263 449 14990.40053 59766.80464 42.51% 14990.40053 5593.331411 530 20053.88952 72466.5097 43.72% 20053.88952 6248.544859 592 25710.52521 83668.02556 45.19% 25710.52521 6865.303422 650 31925.49545 93825.03976 46.12% 31925.49545 7415.798386 702 38638.81364 104831.3385 47.71% 38638.81364 7917.686978 750 45806.47775 116026.463 49.46% 45806.47775 8354.545863 791 53369.61819 126495.7837 51.10% 53369.61819 8717.40545 826 61261.24543 137263.8901 53.14% 61261.24543 8970.879058 850 69382.33535 146839.9409 55.24% 69382.3 9179.017916 870 77691.8 156746.6433 57.63% 16,740.00 11.91% 11200 7.97% 4000 3.50% 31940.00 22.72% 18,450.00 11.13% $14,000.00 8.45% $5,634.97 3.40% 38084.97 22.98% 19,250.00 10.40% 14500 7.83% 6665.355402 3.60% 40415.36 21.83% 19,750.00 9.71% 16206.75175 7.97% 6712.983731 3.30% 42669.74 20.98% 20,250.00 9.22% 17506.29158 7.97% 6592.059025 3.00% 44348.35 20.18% 21,300.00 9.08% 18691.08755 7.97% 6568.985118 2.80% 46560.07 19.85% 22,000.00 8.89% 19722.3695 7.97% 6683.878246 2.70% 48406.25 19.55% 23,000.00 8.90% 20578.96314 7.97% 6457.570747 2.50% 50036.53 19.37% 23,500.00 8.84% 21177.33201 7.97% 6645.335761 2.50% 51322.67 19.31% 24,000.00 8.82% 21668.68026 7.97% 6799.518265 2.50% 52468.20 19.29% UOIG 16 University of Oregon Investment Group 2/3/2012 Appendix 5 – Discounted Cash Flows Analysis Assumptions Discounted Free Cash Flow Assumptions Tax Rate 22.83% Terminal Growth Rate Risk Free Rate 2.08% Terminal Value Beta 1.06 PV of Terminal Value Market Risk Premium % Equity 7.00% Sum of PV Free Cash Flows 100.00% Firm Value 3.00% 705,961 290,498 248,466 508,808 % Debt 0.00% Total Debt Cost of Debt 0.00% Cash & Cash Equivalents 0 CAPM 9.53% Market Capitalization WACC 9.53% Fully Diluted Shares 940 Implied Price 541 Current Price 455 Undervalued 18.87% 30,156 426,875 Considerations Avg. Industry Debt / Equity 15.34% Avg. Industry Tax Rate 26.02% Current Reinvestment Rate 0.58% Reinvestment Rate in Perpetuity 15.84% Implied Return on Capital in Perpetuity 18.94% Terminal Value as a % of Total Implied 2013E EBITDA Multiple Implied Terminal Year Multiple Terminal Free Cash Flow Growth Rate 51.4% 10.0x 4.1x 5% UOIG 17 University of Oregon Investment Group 2/3/2012 Appendix 6 – Sources SEC Filings Factset IBISworld Businessweek Wall Street Journal Yahoo Finance Google Finance Earnings Call Transcripts Bloomberg UOIG 18