May 28, 2014 Apple Inc. NASD: AAPL - Computer Processing Hardware Grade 86.5 Earnings Last Earnings Release Last Qtr. Actual vs. Est. Quick Facts 04/24/2014 Dividend Yield 1.99% $11.62 / $10.18 52 Wk High $614.13 Next Release 07/22/2014 $8.52 52 Wk Low $393.78 Year Ending 09/30/2014 $43.97 Short Interest Year Ending 09/30/2015 $47.54 Market Cap 2% of float $614.1 05/23/2014 $529B Overview Company Scores Remarkable Fundamental Grades MarketGrader currently has a BUY rating on Apple Inc. (AAPL), based on a final overall grade of 86.5 scored by the company's fundamental analysis. Apple Inc. scores at the 100th percentile among all 5962 North American equities currently followed by MarketGrader. Our present rating dates to September 25, 2003, when MarketGrader initiated coverage on the stock. With an overall grade of 86.5, Apple Inc. is the highest graded company in the Computer Processing Hardware subindustry, followed by NCR Corporation (NCR), with an overall grade of 61.5. The stock, up 10.44% in the last six months, has outperformed both the Computer Processing Hardware group, up 0.54% and the S&P 500 Index, which has returned 5.25% in the same period. Please go to pages two and three of this report for a complete breakdown of AAPL's fundamental analysis. Price, Rating and Sentiment History - 2 Years MarketGrader.com ©2010. MarketGrader.com Corp. All Rights Reserved. 1 May 28, 2014 Apple Inc. NASD: AAPL - Computer Processing Hardware Growth B+ The Company's Recent Reports Reflect Solid Top and Bottom Line Growth Apple's very strong long terms sales growth seems to have virtually ground to a halt during its latest quarter. The $45.53 billion in revenue reported by the company last quarter represents just 4.04% growth from the $43.76 billion it sold during the same quarter a year earlier. However, when looking at the longer term picture is is clear the company's sales growth has been remarkable for a while. Apple booked $175.52 billion in 12-month trailing revenue up to--and including--last quarter, 100.36% higher than what it sold in the equivalent period ended three years ago, a very impressive increase. Therefore it seems that the company's business deteriorated very rapidly most recently, stalling its otherwise impressive growth record. The next couple of quarters will be very important in determining if this marks a temporary slowdown as its 12-month trailing sales total calculation will substitute earlier periods of strong growth with more recent lower sales figures. In its latest announcement it also posted healthy profit gains both on a year-to-year basis and over a three year period when comparing full year results, using four rolling quarters of net income for the latter comparison. It posted a First quarter profit increase of 7.08% to $10.22 billion from $9.55 billion (excluding extraordinary items) a year earlier, compared to a 92.85% full year profit increase to $37.71 billion in the 12 months ended last quarter from $19.55 billion three years earlier. The company's margins have been shrinking steadily during the last three quarters, albeit at a slower rate during the latest period. Its EBITDA, operating and net margins fell on average by 7.26% in the latest quarter versus the year ago period. Market Growth LT Market Growth ST EPS Growth Growth Potential Earnings Momentum Earnings Surprise 86.5 AB+ A+ C A B- Revenue Qtrly. 03/31/2014 Revenue Qtrly. Year Ago Revenue 1 Yr. Chg. Revenue 12 Mo. Tr. Latest Revenue 12 Mo. Tr. 3Y Ago Revenue 12 Mo. Tr. 3Y Chg. $45.5B $43.8B 4.04% $175.5B $87.6B 100.36% After reporting earnings on April 24, 2014 that beat analysts' consensus estimates by 14.14%, the company's stock jumped 8.99% as investors welcomed the report. Apple's most recent earnings announcement is consistent with its solid long term earnings surprise record, having exceeded the street's consensus estimate by 4.55%, on average, in its last six announcements. Net Income Qtrly. 03/31/2014 Net Income Qtrly. Year Ago Net Income 1 Yr. Chg. Net Income 12 Mo. Tr. Latest Net Income 12 Mo. Tr. 3Y Ago Net Income 12 Mo. Tr. 3Y Chg. Value A The Stock's Valuation is Attractive Based on the Company's Overall Financial Strength Trading currently at 13.42 times forward 12-month' earnings per share, Apple's stock is priced at a 56.04% discount to the "optimum" P/E ratio of 30.53, calculated by MarketGrader. Our indicator looks at the 12-month period ended in each quarter within the last two years and calculates the company's annualized EPS growth rate, which in turn determines the stock's optimum P/E. Based on this measure, Apple's earnings per share have grown at an annualized rate of 1.02% during this period. This rate of growth could decelerate soon given the company's recent margin contraction, despite such good Profitability grades. This could in turn put pressure on the stock price. The stock also trades at 13.42 times forward earnings estimates for the next four quarters, lower than its trailing P/E and the S&P 500 index's forward P/E of 15.20. By placing a lower multiple on the company's future earnings than it does on the market as a whole, investors may see the company as financially strong but with relatively poor growth prospects. This may offer a valuable opportunity for patient investors willing to wait for future earnings reports. Capital Structure P/E Analysis Price/Book Ratio Price/Cash Flow Ratio Price/Sales Ratio Market Value $10.2B $9.5B 7.08% $37.7B $19.6B 92.85% A+ A+ A+ A BA P/E Ratio 12 Mo. Tr. 03/31/2014 Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio Price-to-Cash Flow Ratio Price/Sales Ratio 14.67 30.53 13.42 15.20 4.50 10.09 3.02 Apple's current market value is 4.73 times its tangible book value, which excludes intangible assets such as goodwill; this valuation seems attractive, especially considering that only 4.98% of the company's total stockholders' equity is based on intangible assets. When the value of those assets is added back into total book value, the price to book ratio is an even lower 4.50. Relative to the $60.84 in cash flow per share generated by the company in the last twelve months, the stock is attractively priced at 10.09 times cash flow per share considering its strengths across our fundamental indicators. Its price to sales ratio of 3.02 is slightly higher than the Computer Processing Hardware's average of 1.67, both based on trailing 12-month sales. Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. From this perspective Apple's market cap of $529.00 billion , which is only 11.70 times larger than its latest quarterly net income (plus depreciation), seems like an attractive valuation. MarketGrader.com ©2010. MarketGrader.com Corp. All Rights Reserved. 2 May 28, 2014 Apple Inc. 86.5 NASD: AAPL - Computer Processing Hardware Profitability A+ Company's Profitability Is Remarkable, Reflective of Excellent Operating Conditions and Strong Management Apple is a very profitable company with strong overall indicators in this section of our analysis. The company's different measures of return to shareholders and margins are typically above those of its peers. In the last four quarters Apple earned a profit of $37.71 billion, equivalent to 21.48% of its sales in the period. The Computer Processing Hardware industry had an average operating margin of 10.99% in the period. The company's operating margin of 28.13% exceeded that average by 145.04%. Apple's return on equity, based on trailing 12-month earnings, is not only outstanding at 31.38%, but it's higher than the 29.28% return on equity from the year earlier period. This is an important metric of management efficiency in our grading system, as it measures the amount earned on an investment in the company's common stock. Asset Utilization Capital Utilization Operating Margins Relative Margins Return on Equity Quality of Revenues A+ AA A+ A+ A+ Given such strong returns the company's capital structure seems to conservative, especially assuming it could raise debt capital to invest into what is a steady and profitable business. Apple's long term debt accounts for only 12.37% of total capital. Apple's core operations, as measured by the company's EBITDA, have generated $58.01 billion in earnings over the last twelve months, a modest -0.70% decline from the $58.42 billion earned in the equivalent period ended a year ago. EBITDA is used as a way of measuring core earnings since it includes money earned in its operations such as interest expense, income taxes paid and depreciation and amortization, both of which are non-cash charges. Cash Flow A Company's Cash Flow Is Very Well Managed as Our Analysis Reflects a Very Healthy Operation Apple showed a small improvement in its quarterly cash flow during the latest period, in which it grew by 7.75% to $13.47 billion from the $12.50 billion reported in the same period last year. This is a marked improvement from the 3.15% decline in cash flow in the last twelve months versus a year before and could represent a turning point for the company's operating profitability and its future earnings growth. Even though the company has $16.96 billion in total debt, its net debt is virtually zero since it has $41.35 billion in cash on hand; and since it generated $15.85 billion in earnings before interest, taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. <b> ** </b> Cash Flow Growth EBIDTA Margin Debt/Cash Flow Ratio Interest Cov. Capacity Economic Value Retention Rate BAA+ A+ A+ A+ An important indicator of management efficiency used by MarketGrader is Economic Value Added, or EVA, which measures each company's true return to shareholders after accounting not only for the cost of running the business (operating costs) but also the cost of the capital it employs. By measuring the real cost of capital, both equity and debt, EVA measures the creation of true economic profit. In this case Apple had $137.14 billion in invested capital in its most recent quarter, a combination of both equity and long term debt. However, the company's weighted cost of equity of 5.70% is much larger than the weighted cost of debt, which is 0.16%. When combined, the two result in a total cost of capital of 5.86%, quite low compared to the company's total return on invested capital of 36.00% based on 12-month trailing operating income. The result is an excellent economic value added of 30.13%, a very high return to investors after all capital costs are covered. The company hiked its quarterly common dividend in its latest quarter, reported on December 31, 2013, to 3.29 cents a share from 3.05 cents, a 7.87% increase. It has now been paying dividends regularly since June 30, 2012 and the stock's current yield is 1.99%. Apple paid out a total of $11.01 billion in common dividends in the 12 months ended last quarter, or 20.57% of the cash flow it generated during the period, and 29.20% of total after-tax earnings. This payout level, which seems sustainable given the company's generally healthy fundamentals, is actually lower than the 29.27% of earnings paid out in the year ended just a quarter ago. No further payout reductions seem necessary if the company's grades remain at least at the current level or higher. MarketGrader.com ©2010. MarketGrader.com Corp. All Rights Reserved. Cash Flow Qtrly. 03/31/2014 Cash Flow Qtrly Year Ago Cash Flow 1 Yr. Chg. Cash Flow 12 Mo. Tr. Latest Cash Flow 12 Mo. Tr. 3Y Ago Cash Flow 12 Mo. Tr. 3Y Chg. Free Cash Flow Last Qtr. $13.5B $12.5B 7.75% $53.5B $26.5B 102.12% $9.4B Economic Value Total Invested Capital Return on Inv. Capital Weighted Cost of Equity Weighted Cost of Debt Total Cost of Capital Economic Value Added $137.1B 36.00% 5.70% 0.16% 5.86% 30.13% 3 May 28, 2014 Apple Inc. 86.5 NASD: AAPL - Computer Processing Hardware Profile Apple, Inc. designs, manufactures and markets personal computers and related personal computing, and mobile communication devices. It is engaged in designing of Mac laptops, along with OS X, iLife, iWork and professional software. Apple provides the digital music revolution with its iPods and iTunes online store. The company's products and services include Macintosh computers, iPhone, iPad, iPod, Apple TV, Xserve, a portfolio of consumer and professional software applications, peripherals and iOS operating systems, third-party digital content and applications through the iTunes Store and a variety of accessory, service and support offerings. It sells its products worldwide through its retail stores, online stores, and direct sales force and third-party cellular network carriers, wholesalers, retailers, and value-added resellers to the consumer, small and mid-sized business, education, enterprise, government and creative markets. In addition, the company also sells a variety of third-party Mac, iPhone, iPad and iPod compatible products, including application software, printers, storage devices, speakers, headphones and various other accessories through its online and retail stores. The company was founded by Steven Paul Jobs, Steve Wozniak and Ronald Gerald Wayne on April 1, 1976 and is headquartered in Cupertino, CA. MarketGrader Dilution Analysis Impact of Change in Shares on EPS - Q2 2014 Dilution Summary *EPS Latest $11.62 *EPS Year Ago $10.09 EPS Change 1 Yr. 880 C. Shares - Yr Ago(M) 946 C. Shares - 1Yr Chg. (7%) Smallest Company in Sub-Industry XRS Corporation (XRSC) Grade 31.6 Market Cap:$30.18 million Income Statement Last Qtr (03/2014) Revenue $45.5B $175.5B Op. Income $13.6B $49.4B Net Income $10.2B $37.7B *EPS $11.62 0 12 Mo. Trailing *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. $10.81 EPS Chg. if Yr. Ago EPS Loss from Dilution Biggest Company in Sub-Industry Apple Inc. (AAPL) Grade 86.5 Market Cap:$529.00 billion 15% C. Shares - Latest(M) EPS if Yr. Ago Shares Key Facts: 1 Infinite Loop Cupertino ,CA 95014-2083 Phone: www.apple.com 7% $0.82 *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Balance Sheet Total Assets Total Debt Stockholders Eq. Latest $206.0B $17.0B $120.2B All numbers in millions except EPS Ratios Price/Earnings (12 mo. trailing) Price/Tangible Book Price/Cash Flow Price/Sales Debt/Cash Flow Total Assets Intangible Assets Long Term Debt Total Debt Book Value Enterprise Value $206.0B $6.0B $17.0B $17.0B $120.2B ($24.4B) MarketGrader.com ©2010. MarketGrader.com Corp. All Rights Reserved. '09 '10 '11 '12 '13 14.67 4.50 10.09 3.02 31.70 Return on Equity 31.38% Gross Margin (12 mo. trailing) 39.47% Operating Margin (12 mo. trailing) 28.13% Net Profit Margin (12 mo. trailing) 21.48% '14 Qtr 1 0.00 0.00 0.00 0.00 3.05 3.29 Qtr 2 0.00 0.00 0.00 2.65 3.05 Qtr 3 0.00 0.00 0.00 2.65 3.05 Qtr 4 0.00 0.00 0.00 2.65 3.05 4 May 28, 2014 Apple Inc. 86.5 NASD: AAPL - Computer Processing Hardware Top Down Analysis Technology Stocks in Sector: 846 Buys: 138 (16.31%) Holds: 118 (13.95%) Sells: 590 (69.74%) No. of stocks at: 52-Wk. High: 35 52-Wk. Low: 22 Above 50 & 200-day MA: 243 Below 50 & 200-day MA: 400 Computer Processing Hardware Stocks in Sub-Industry: 10 Buys: 2 (20.00%) Holds: 1 (10.00%) Sells: 7 (70.00%) No. of stocks at: 52-Wk. High: 2 52-Wk. Low: 0 Above 50 & 200-day MA: 2 Below 50 & 200-day MA: 6 1. Price Trend. # Ticker 1 AAPL 86.48 P Apple Inc. 2 PHO.CA 84.98 N Photon Control Inc. 3 SFUN 84.81 N SouFun Holdings Ltd. 4 MU 83.94 P Micron Technology, Inc. $27.33 06/18/2014 5 WAN.CA 82.68 N WANTED Technologies Corporation $1.11 10/21/2014 6 OLED 81.64 N Universal Display Corporation $24.57 08/11/2014 7 SYNT 81.35 N Syntel, incorporated $80.96 07/17/2014 8 XX.CA 80.68 N Avante Logixx Inc. $0.38 05/28/2014 9 AZPN 80.61 P Aspen Technology, Inc. $44.45 08/19/2014 10 AFOP 80.60 P Alliance Fiber Optic Products, Inc. $20.89 07/22/2014 # Ticker Price Next EPS 1 AAPL 86.48 P Apple Inc. $614.13 07/22/2014 2 NCR 61.47 N NCR Corporation $32.46 07/24/2014 3 CCUR 55.28 N Concurrent Computer Corporation $8.06 04/30/2014 4 HPQ 46.84 P Hewlett-Packard Company $33.72 08/20/2014 5 XPLR 38.22 N Xplore Technologies Corp. 6 CRAY 32.45 P Cray Inc. 7 XRSC 31.62 N 8 PAR 25.38 9 ARUN 10 ADAT A+ 3. Earnings Guidance. A- Grade Grade Sentiment Sentiment Name Name Price Next EPS $614.13 07/22/2014 $0.42 08/27/2014 $12.28 08/14/2014 $5.27 06/25/2014 $28.07 08/05/2014 XRS Corporation $2.71 11/03/2011 N PAR Technology Corporation $4.57 07/30/2014 24.15 N Aruba Networks, Inc. $17.89 08/26/2014 21.50 N Authentidate Holding Corp. $0.79 09/27/2013 2. Price Momentum. A- 4. Short Interest. A+ 9.5 Copyright 2010 MarketGrader.com Corp. All rights reserved. Any unauthorized use or disclosure is prohibited. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. MarketGrader does not make markets in any of the securities mentioned in this report. MarketGrader does not have any investment banking relationships. MarketGrader and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein. Officers or Directors of MarketGrader.com Corp. are not employees of covered companies. MarketGrader or any of its employees do not own shares equal to one percent or more of the company in this report. MarketGrader.com ©2010. MarketGrader.com Corp. All Rights Reserved. 5