AppliedPortfolioManagement
AAPL
Apple Inc.
Analyst:SamirHailkal,MichaelStephens
BUY
Information Technology
Sector:
Report Date:
Market Cap (mm)
Return on Capital
EPS (ttm)
Current Price
12‐mo. Target Price
$519,129
Annual Dividend
161.1%
Dividend Yield
$40.49
Price/Earnings (ttm)
$561.02 Economic Value‐Added (ttm)
$590.00
Free Cash Flow Margin
$11.80
2.1%
13.9
$34,254
26.1%
Business Description
Apple Inc. and its wholly‐owned subsidiaries design, manufacture, and market mobile communication and media devices, personal computers, and portable digital music players. It also sells software, services, peripherals, networking solutions, and third‐party digital content and applications related to its products. The company offers iPhone, a line of smartphones that comprise a phone, music player, and Internet device; iPad, a line of multi‐purpose tablets based on Apple’s iOS Multi‐Touch operating system; Mac, a line of desktop and portable personal computers; and iPod, a line of portable digital Investment Thesis
After much research, we concluded that the U.S. economy is headed toward a bull phase. This led us to dig deep into the information technology sector, which is underweight in the student portfolio, and find a company with a strong competitive advantage. Apple, with its innovative culture, has shown in our analysis to be an excellent fit. Apple is able to grow EBITDA at a faster rate than total revenue, indicating improving efficiency. With a strong cash position, low leverage, and commitment to dividend growth, Apple is able to create and return value to investors. After conservative forecast assumptions, Apple’s intrinsic value modeled to be greater than the current market price based on the PV of future FCF. 2‐Yr Beta (S&P 500 Index)
Annualized Alpha
Institutional Ownership
Short Interest (% of Shares)
Days to Cover Short
0.90
6.2%
5.0%
2.6%
2.0
AAPL
5/12/2014
Compared With:
Google Inc.
Oracle Corporation
and the S&P 500 Index
GOOG
ORCL
60%
50%
40%
30%
20%
10%
0%
‐10%
‐20%
AAPL
^SPX
35%
30%
25%
20%
15%
10%
5%
0%
‐5%
‐10%
‐15%
ROA
ROE
ROIC
300%
250%
ANNUALIZED 3‐YEAR CAGR
200%
Total Revenue
EBIT
NOPAT
Earnings Per Share
Dividends Per Share
37.9%
38.6%
37.6%
37.5%
N/A
Margins and Yields
2009
27.4%
20.9%
4.4%
0.0%
Operating Margin
Free Cash Flow Margin
Earnings Yield
Dividend Yield
Free Cash Flow
Total Invested Capital
Total Assets
Economic Value‐Added
Market Value‐Added
2010
28.2%
25.3%
4.8%
0.0%
2011
31.2%
27.8%
6.9%
0.0%
57.5%
25.6%
40.2%
38.4%
17.2%
2012
150%
100%
50%
0%
2008
2013
35.3%
26.5%
8.4%
0.5%
28.7%
26.1%
7.1%
2.0%
2009
2010
EBIT
2011
2012
2013
Net Operating Profit After Tax
$60,000
$50,000
$40,000
$30,000
Per Share Metrics
Earnings
Dividends
NOPAT
Free Cash Flow
2009
2010
2011
2012
2013
$20,000
9.22
0.00
8.97
15.86
15.41
0.00
15.28
8.86
28.05
0.00
27.63
28.42
44.64
2.65
44.23
36.59
40.03
11.40
39.10
34.01
$10,000
Economic Value‐Added
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
Datasource: Capital IQ
2009
2010
2008
Market Valued‐Added
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
2008
$0
2011
2012
2013
2009
2010
Price/Earnings
2011
2012
2013
Price/Free Cash Flow
25
20
15
10
5
0
2008
2009
2010
2011
2012
2013
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Investment Thesis
•
•
Apple shows excellent total revenue growth the past 5 years.
Apple’s EBITDA has grown at a faster rate than total revenue indicating improving
efficiency in the company.
•
Apple’s profit margins are a substantial percentage of total revenue. Their high gross
and operating margins indicate that a greater percentage of revenue is available to
flow towards bottom-line profits.
Apple’s average ROIC for the past 5 years is far greater than the WACC.
•
•
As one driver of ROIC, Apple plans to continue growing net PPE.
•
Based on our forecast assumptions, Apple’s stock is undervalued.
1
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Economic Outlook
The decision to invest into the information technology sector came from research
we conducted about the current strength of the U.S economic activity. We analyzed each of
The Conference Board’s leading, coincidental, and lagging indicators and summarized our
findings into a diffusion index for each of the three indicators.
The ten leading indicators are expected to change prior to economic conditions. By
looking at these indicators, it helped us forecast the future strength and directions of
business cycles. The leading indicators diffusion index is shown below:
Leading Indicators
Avg. Length Manufacturing Workweek
ISM New Orders Index
Consumer Sentiment
Int. Rate Spread (10-yr minus Fed Funds)
Manufacturers’ New Orders-Consumers
Leading Credit Index
Stock Prices, S&P 500
Manufacturers’ New Orders-Capital Goods
Avg. Weekly Initial Unemployment Claims
Building Permits, New Private Housing
Leading Indicators Diffusion Index
Score
70%
0
1
1
1
1
1
1
0
1
0
Weight
0.2781
0.1651
0.1551
0.1069
0.0811
0.0794
0.0381
0.0356
0.0334
0.0272
66%
Next, we analyzed the coincident indicators. These four indicators are expected to
change in sync with economic conditions. We used these indicators to interpret current
economic strength and weakness. The coincident indicators diffusion index is shown
below:
Coincident Indicators
Score
Weight
Manufacturing and Trade Sales
0
0.5318
Total Nonfarm Payrolls
1
0.2597
Personal Income Less Transfer Payments
0
0.1357
Industrial Production
0
0.0728
Coincident Indicators Diffusion Index
25%
26%
The last seven are lagging indicators. They are expected to change after changes in
economic conditions. These indicators were used to support our previous analysis about
economic conditions. The lagging indicators diffusion index is shown in the next page.
2
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Lagging Indicators
Avg. Prime Rate
Consumer Credit to Personal Income
Consumer Price Index, Services
Inventory to Sales, Manufacturing
Commercial and Industrial Loans
Unit Labor Cost, Manufacturing
Avg. Duration of Unemployment
Lagging Indicators Diffusion Index
Score
14%
0
1
0
0
1
0
-1
Weight
0.2815
0.2101
0.1955
0.1211
0.0970
0.0587
0.0361
27%
After analyzing the result of all three diffusion indexes, we concluded that past and
current economic activity has been tepid, as demonstrated by coincident (25% index score)
and lagging (14% index score) indicators, but future economic activity is expected to
accelerate, as demonstrated by leading indicators (70% index score). The graph below
show these results:
70%
60%
50%
40%
30%
20%
10%
0%
Lagging
Coincident
Leading
We concluded that the U.S economy will experience expansion in the next six to nine
months, and the financial market will initiate a bull phase. This economic analysis leaded us
to look into cyclical sectors. The next section of this paper performs an in-depth historical
analysis of one of the leading stocks in the information technology sector, Apple Inc.
3
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Global Positioning
Apple has made moves recently
to expand in global markets. In recent
years, Apple has been able to increase
2013
sales dollars from the Americas, but
decrease the Americas as a percentage
of their global revenue. In 2011, Apple
entered the Greater China market which
is now nearly 15% of their revenue.
The Japan market has been on a great
incline over the last few years going
from 5% ($5 billion) of Apple’s revenue
in 2011 to now 8% ($13 billion). Apple
currently has retail stores in 18
countries worldwide and plans to continue to expand globally.
Americas
Europe
Greater China
Japan
Rest of Asia Pacific
Retail
Net Sales by Product
Over the last few years, the
iPhone
2013
iPhone has been Apple’s majority of
iPad
product revenue. The iPhone
doubled in sales dollars from 2011
Mac
to 2013. The iPod has been
iPod
declining in sales in recent years due
to the fact that most iPod
iTunes, software,
capabilities are available on iPad
and services
and iPhone. There has been a big
Accessories
increase in iTunes in the past few
years driven by the success of the
iTunes Store and App Store. The iPad growth in sales has slowed down mainly due to the
competition in the tablet computer market. Apple shows plans to continue releasing and
updating the iPhone product while entering new product markets.
4
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Historical Performance
Revenue Growth:
Historically, Apple has been able to have top of line growth in revenue and net
income. Apple is actually able to grow its earnings before interest, taxes, depreciation and
amortization (EBITDA) faster than total revenue, which indicates operating efficiency that
will lead to expansion of either gross and/or operating margins. The table below shows the
compounded annual growth rates (CAGR) of revenue, net income, and EBIT.
Net Income
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
(millions)
2008
2009
EBITDA
2010
Total Revenue
2011
2012
CAGR’s
3-yr
5-yr
Total Revenue
37.9%
35.5%
EBITDA
42.0%
44.7%
Net Income
38.3%
43.4%
2013
Profit Margins:
Profit margins are expressed as a percentage of total revenue. The graph below
compares Apple’s historical margins side by side. Apple’s high gross and operating
margins indicate that a greater percentage of revenue is available to flow toward bottomline profits, then to free cash flow that supports Apple’s intrinsic value, and back to
investors in form of dividends.
Gross Profit
Operating Profit
Net Profit
Although Apple’s margins are
50.0%
high, the table above shows a
drop
in all margins from 2012 to
40.0%
2013. Our research pointed out
30.0%
that the decrease in margins was
20.0%
driven by the following factors:

Introduction of new
10.0%
versions of existing products with
0.0%
higher cost structures
2008
2009
2010
2011
2012
2013





Shift in sales mix to products with lower margins
Introduction of iPad Mini, with gross margin below Apple’s product margin
Higher expenses associated with products warranty
Price reduction of iPad 2 and iPhone 4
Unfavorable impact from foreign exchange fluctuations
5
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Relative Valuation:
Apple’s relative valuation metrics are calculated in two ways. First, the multiples
take the stock’s price and divide it by fundamental measures, such as earnings, sales, and
free cash flow. Second, the yields, are inverse to the multiples, in this case we divide
fundamental measures such as dividend and earnings, to the stock price.
Historically, Apple has kept its price to earnings (P/E) ratio within the desired range
between 12 and 18. The P/E ratio was high in 2009-2010 due to low earnings and an
increasing stock price. Price to free cash flow (P/FCF) ratio is correspondent with P/E
ratio, meaning that Apple’s earnings are backed up by tangible free cash flow. The graph
below shows yields moving inversely with multiples.
Price/Earnings
Price/Free Cash Flow
30
Earnings Yield
Dividend Yield
10.00%
20
5.00%
10
0
0.00%
2008 2009 2010 2011 2012 2013
2008 2009 2010 2011 2012 2013
Liquidity & Debt:
In this section, we look at Apple’s ability to meet its short and long-term obligations.
Liquidity and debt play a major role in a company’s financial structure and future success.
Apple’s quick and current ratios, shown below, have stayed well above 1 over the years,
showing that Apple meets its short term financial obligations. Prior to 2013, Apple had no
outstanding debt. In the third quarter of 2013, Apple issued $17 billion of long-term debt
due to the fact that most of Apple’s cash is held overseas, and the cost of debt is lower than
Apple’s corporate taxes.
Quick Ratio
Long-term Debt to Equity
Current Ratio
3
Total Debt to Assets
15%
2
10%
1
5%
0
0%
2008
2009
2010
2011
2012
2008 2009 2010 2011 2012 2013
2013
Another reason for Apple’s debt issuance is to manage the risk of adverse
fluctuations in interest rates associated with the floating rate notes. Apple entered into
interest rates swaps for $3 billion, which, in effect, fixed the interest rate of the floating-rate
notes. Part of this debt issuance is also to support the accelerated repurchase program, to
retire outstanding shares up to 2015, in the value of $60 billion.
6
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Profitability:
The metrics in this section can be measured by the accounting profits generated by
Apple relative to capital contributed toward financing the firm by investors. Apple’s return
on asset (ROA), return on equity (ROE), and return on invested capital (ROIC) as shown
below have a positive 5-year CAGR’s. However these metrics decreased from 2012 to 2013
due to:
 Decrease in net income over the same period;
 Increase in total assets, over the same period due to investments into property,
plant & equipment (net PPE);
 Decrease in net operating profit after taxes (NOPAT).
It is relevant to mention Apple’s ROIC is over 150%, which plays an important role
in value creation which will be presented in the next section.
ROA
ROE
NOPAT
ROIC
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
(millions)
Total Invested Capital
$50,000
$40,000
$30,000
$20,000
$10,000
$0
2008 2009 2010 2011 2012 2013
2008 2009 2010 2011 2012 2013
Value Creation:
EVA is a year-by-year measure of how much economic profit a company has created.
EVA is measured as the annual NOPAT Apple has generated minus the cost of capital (in
dollars) it has to earn to satisfy the providers of capital.
The graph below shows that Apple has grown its EVA each year from 2008 to 2012.
The decrease from 2012 to 2013 was driven by the decrease in NOPAT (primarily driven
by EBIT), and an increase in total invested capital (primarily driven by an increase in net
operating working capital and net property plant and equipment).
MVA is not a year-byEVA
MVA
500,000
year number, but instead
50,000
measures value creation over
40,000
400,000
the entire lifetime of a
300,000
30,000
company. MVA is the
200,000
20,000
ultimate bottom line measure
of value creation for a
100,000
10,000
publicly traded company.
0
MVA is calculated by
2008 2009 2010 2011 2012 2013
subtracting the market value
of all the Apple’s securities by the book value of Apple’s securities.
7
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
As of fiscal year end of 2013, Apple had total equity on the balance sheet of
$123,549 million. This is all the capital shareholders have contributed to financing Apple’s
assets over the lifetime of the company, unadjusted for the time value of money. As of end
of 2013, Apple had an equity market capitalization of $519,129 million. This means that
the stock market valued Apple’s shareholders’ $123,549 million of contributed capital at
$519,129 million. Apple therefore has a 2013 MVA of $395,580 million. This is pure value
creation.
Forecast Assumptions
INCOME STATEMENT:
Total Revenue:
Based on this history, in fiscal year 2014, a growth rate of 10% was chosen for a few
reasons; to remain conservative in the modeling, to reflect the news of Apple opening 30
new retail stores worldwide, and to express Apple’s commitment to releasing a new
product in 2014. Revenue growth from 2014 on is then tapered down to a conservative
long-term growth of 2.5%, as shown below.
Forecasted
Revenue Growth
(millions)
2014E
10%
$188,001
* Growing perpetuity rate
2015E
8%
$203,041
2016E
6%
$215,224
2017E
4%
$223,832
2018E
2.5%*
$229,428
Profit Margins:
Apple has had a recent history of producing excellent profit margins. As discussed
in the historical performance, Apple’s margins recently declined a bit from 2012 to 2013
due to multiple factors. Due to these multiple factors and to stress Apple’s valuation model,
we dropped each of these margins down another 1.7%. Our research has determined that
Apple will have a some difficulty in the future, with competitive pricing, keeping their
margins at such high levels like 2012.
Forecasted
Profit Margins
Gross Margin
36%
Operating Margin
27%
Net Margin
20%
Common Shares Growth:
In 2012, the Board of Directors announced a program to repurchase up to $60
billion in shares until 2015. This usually happens when management believes that shares
are undervalued, thus, by reducing the number of shares outstanding, Apple increases EPS
and market value. Apple’s common shares growth is forecasted below.
Forecasted
Common Shares
Growth
2014E
2015E
2016E
2017E
2018E
-1.2%
-1.4%
-.8%
0%
0%
8
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Dividend Growth:
Apple started paying dividends in 2012 after Apple’s CEO announced a significant
increase to its program to return capital back to shareholders. Apple paid a total of $2.5
billion in dividends in 2012, and $10.5 billion in 2013. Apple expects to pay quarterly
dividends of $3.05 per common share each quarter in 2014, subject to the declaration by
the Board of Directors. Apple is forecasted to continue to grow the dividend with a 2014
forecast of 25% growth then tapering down to a long-term growth rate of 3%.
Forecasted
Dividend Growth
2014E
25%
$14.25
2015E
15%
$16.39
2016E
10%
$18.03
2017E
8%
$19.47
2018E
3%
$20.05
BALANCE SHEET:
Cash, Receivables, & Inventory:
Cash, receivables, and inventory are all drivers of total invested capital. With this in
mind, our forecasts for these balance sheet metrics were stressed on our model. Cash is
forecasted to increase from 2013 as a percentage of sales to 8.7% in 2015. From then on,
cash is to remain at a constant 9% of sales. For receivables and inventory, our forecasts
have these metrics staying consistent with the past two years for two reasons. First, we
forecasted very little dollar growth in order to stress the valuation on Apple. Second, after
extensive research, we felt that there was no new information available to forecast these
metrics increasing or decreasing.
2014E
2015E
2016E
2017E
2018E
Cash
8.3%
8.7%
9.0%
9.0%
9.0%
Receivables
12%
12%
12%
12%
12%
Inventory
1%
1%
1%
1%
1%
Other Asset Forecasts:
Total current assets, net PPE, and total assets are forecasted in this section. For
total current assets, we forecasted a 45% constant percentage of sales. Total current assets
has been increasing the past two years to nearly 43% in 2013. Our analysis determined
that growth would slow down and remain around 45% in the future. Net PPE has been
growing the past few years to 9.7% in 2013. Due to Apple’s plan to open 30 new stores
worldwide, we forecasted net PPE to continue growing to 12% in 2018. Based on these
assumptions and on recent years, we forecasted total assets to stay at a constant 118% in
the future, decreasing slightly from 121% in 2013.
2014E
2015E
2016E
2017E
2018E
Total Current Assets
45%
45%
45%
45%
45%
Net PPE
10%
10.5%
11%
11.5%
12%
Total Assets
118%
118%
9
118%
118%
118%
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Debt & Equity:
Payables & accruals and total current liabilities were forecasted to remain
consistent with the past few years’ percentages. Our research did not show any major
signs that these numbers would change much from recent years. As mentioned in the
historical performance section, Apple first issued debt in 2013 worth $17 billion. Very
recently, Apple issued another $12 billion in long-term debt, bringing there total debt to
$29 billion. Total debt is forecasted below to decline as a percentage of sales, while
keeping the dollar amount at $29 billion.
2014E
2015E
2016E
2017E
2018E
Payables & Accruals
18%
18%
18%
18%
18%
Total Current Liabilities
26%
26%
26%
26%
26%
Total Debt
14.9%
13.8%
13.1%
12.6%
12.2%
Total Equity
68%
68%
68%
68%
68%
Total Equity is forecasted to decline a little from 2013 and remain constant at 68%
in the future. This was due to the accelerated share repurchase program and Apple’s plan
to not issue any more common shares in the near future.
VALUATION:
WACC Assumptions:
Cost of Capital
2013
Weight
% Cost
Wgt Cost
Equity Capitalization
519,129
96.8%
8.7%
8.5%
Total Debt
Preferred Stock
Value of All Securities
16,960
0
536,089
3.2%
0.0%
100.0%
5.0%
0.0%
0.1%
Effective Tax Rate
Risk-Free Rate
Beta (5-Yr)
Market Risk Premium
CAPM Cost of Equity
26.2% Long-term Growth Rate:
2.5%
2.68%
1.01
Alternative Beta:
6.0%
8.7%
Weighted Average Cost of Capital:
8.6%
An 8.6% weighted average cost of capital (WACC) was calculated based on these
assumptions:
 A long-term growth rate of
 A cost of equity of 8.7% calculated
2.5%
by highlighted numbers
10
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Intrinsic Valuation:
Based on our model assumptions, Apple’s intrinsic value as of 2013 is $689.78
compared with a year-end stock price of $561.02. Apple’s intrinsic value grows each year
for the next five years with a 2018 intrinsic value of $814.48. This undervaluation is driven
by multiple factors including competitive margins, growing PPE, and very little long-term
debt. After careful, conservative modeling assumptions, this stock is currently undervalued
by $123.96.
Intrinsic Value of FCF’s Valuation
2013
2014E
2015E
2016E
2017E
2018E
Intrinsic Value
$689.78
$709.50
Year-End Stock
Price
$561.02
$585.54
$744.18
$772.92
$793.82
$814.48
Porters 5 Forces
Threat of New Competitors:
The information technology industry has very high barries to entry. Smaller
companies have a hard time entering the market and competiting with bigger companies
because of their resources, capital, production, and innovation. History has shown that if a
smaller company has special technology that could treaten the market, a bigger company,
like Apple or Google, comes in and buys them out. Apple has had a great history of
threatening a market rather than being threatened (i.e. Macintosh, iPod, iTunes, & iPhone).
We gave this threat a rating of LOW.
Threat of Substitute Products:
Apple faces great threat in each of their product’s markets. For the iPhone market,
competition like the Samsung Galaxy, Google Android, etc. is the biggest threat in the
smartphone market. In recent years, the Samsung Galaxy has lead in unit sales worldwide,
while the iPhone has lead in sales dollars. The iPad market competition is pretty heavy
with products like Windows Surface, Kindle Fire, and Samsung Tab. The biggest thing for
technology companies is innovation. The first company to bring something exciting and
new to the market, wins. We gave this threat a rating of HIGH.
Power of Suppliers:
Apple has a history of being over-dependent in offshore supplies. The main reason
for this is to save money on cost. Their main supplies are two Taiwan companies, Foxconn
and Pegatron, that are both dependent on Apple for sales. Samsung is a big supplier of
Apple smart chips but Apple has been making moves recently to become less dependent on
their competitor. Apple has been in the process of trying to buy a Japanese company for
chip manufacturing. We gave this threat a rating of LOW.
11
Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Power of Buyers:
More and more consumers worldwide are paying for high priced iPhones and iPads
every year. Apple will most likely need to lower prices in the future to remain competitive
but consumers have shown that they are still willing to pay high prices for Apple products.
Apple has had trouble, specifically with the iPhone, of keeping up with demand for their
products. We gave this threat a rating of MEDIUM.
Extent of Rivalry Among Existing Firms
Information technology is a very competitive industry. Apple has been leading the
race for the past few years with total revenue having a 38% 3 year CAGR. In terms of
innovation, Google is Apple’s main competitor in the future. Recently, Apple has beaten
Google in market share, revenue per share, and nearly every other value creation metric.
We gave this treat a rating of MEDIUM.
SWOT Analysis
The purpose of a SWOT analysis is to analyze the opportunities and threats that
exist in Apple’s external environment and the strengths and weaknesses of their internal
operations.
STRENGTHS
WEAKNESSES
- Strong brand
- Recent change in leadership
- Customer experience
- Product recalls (early generation of
- Loyal customers
MacBook batteries, and a few cords
- Financial performance
that connect MacBook to a TV)
- Patent Infringement (Intertrust
- Multiple patents
- Largest market cap. in the industry
Technologies suing Apple)
-
-
OPPORTUNITIES
New Apple TV with video streaming
(to compete with Google and
Samsung “smart” TVs, and Netflix,
Amazon Prime, and Hulu’s video
streaming)
iPhone 6
(longer battery life, bigger display)
Home Automation
(voice controlled thermostat, bluetooth unlocking/locking doors, lights
on self-learning timers, etc.)
-
THREATS
Intense competition
(The Great Tech War)
Declining PC and iPod sales
High product substitution effect
(hard to predict future of technology)
Apple’s products being leaked before
announced.
Summarizing our analysis of Apple into the grid, the company faces high external
threats, mainly because of the high competition in the industry, but we see great future
opportunities for Apple to remain a leader in the market. Moreover, Apple’s strengths out
weights its internal weaknesses.
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Apple Inc.
NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
Conclusion
The Conference Board’s leading indicators showed us that the market is bullish
about the future strength of the U.S. economic activity. Cyclical stocks like Apple tend to
perform better in such circumstances. A majority of Apple’s revenue comes from the
Americas and Europe. Apple has been expanding its global presence by increasing revenue
in Japan and Greater China. Apple’s primary product, the iPhone, has been growing
substantially the past few years. Now accounting for over $90 billion of Apple’s total
revenue.
Apple’s financial history has shown us excellent growth in revenue (5 year CAGR of
35.5%), net income (5 year CAGR of 43.3%), and EBITDA (5 year CAGR of 44.7%). Gross,
operating, and net profit margins are a substantial percentage of total revenue. This allows
Apple’s revenue to flow down towards bottom line profits enabling management to return
capital to investors. The P/E has stayed between the 12-18 range the past 3 years, with a
current P/E of 13.9. Apple’s strong cash position over time has given them the opportunity
to choose between the cost of taxes of revenue earned abroad and the cost of issuing longterm debt to satisfy current commitments of dividends and share repurchase. This is
backed up with a 12.6% total debt to assets ratio. Apple’s average ROIC for the past 5 years
has been greater than 150% with this being a main driver to creating value.
In order to stress our model, we gave Apple a conservative long-term perpetual
growth rate of 2.5%. In response to competitive pricing, we have forecasted Apple’s
margins to decrease a little, with a net profit margin of 20%. Apple has indicated that
dividends will increase or stay at current levels for the future. Our forcasts grow net PPE
as a percentage of sales while decreasing debt as a percentage of sales. In our pro-forma
valuation, Apple’s beta is consistent with the market at just 1.01. Our weighted average
cost of capital (WACC) of 8.6% is proven to be insignificant with such a large historical and
forecasted ROIC. Apple’s intrinsic value per share concluded to be $709.50, which is over
$100 undervalued compared to today’s market price.
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