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.
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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.
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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
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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.
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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
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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.
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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
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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.
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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
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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