-
AppliedPortfolioManagement
Analyst:SamirHailkal,MichaelStephens
Report Date: 5/12/2014Market Cap (mm) $519,129
Annual Dividend $11.80
2‐Yr Beta (S&P 500 Index)
0.90Return on Capital 161.1% Dividend Yield 2.1%
Annualized Alpha 6.2% Compared With:
EPS (ttm) $40.49 Price/Earnings (ttm) 13.9
Institutional Ownership 5.0%
Google Inc.Current Price $561.02
Economic Value‐Added (ttm) $34,254
Short Interest (% of Shares) 2.6%
Oracle Corporation
12‐mo. Target Price $590.00
Free Cash Flow Margin 26.1%
Days to Cover Short 2.0
and the S&P 500 Index
Business Description
Total Revenue 37.9% Free Cash Flow 57.5%EBIT
38.6% Total Invested Capital 25.6%
NOPAT 37.6% Total Assets 40.2%Earnings Per Share
37.5% Economic Value‐Added 38.4%
Dividends Per Share N/A Market Value‐Added
17.2%
2009 2010 2011 2012 2013
27.4% 28.2% 31.2% 35.3% 28.7%20.9% 25.3% 27.8% 26.5% 26.1%4.4%
4.8% 6.9% 8.4% 7.1%0.0% 0.0% 0.0% 0.5% 2.0%
2009 2010 2011 2012 2013
9.22 15.41 28.05 44.64 40.030.00 0.00 0.00 2.65 11.408.97 15.28
27.63 44.23 39.10
15.86 8.86 28.42 36.59 34.01
Datasource: Capital IQ
Margins and Yields
Operating Margin
Per Share Metrics
Earnings
NOPATFree Cash Flow
Dividends
Free Cash Flow MarginEarnings YieldDividend Yield
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
ANNUALIZED 3‐YEAR CAGR
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.
Apple Inc. Sector: Information Technology BUYAAPL
‐15%‐10%‐5%0%5%
10%15%20%25%30%35%
AAPL ^SPX
‐20%‐10%0%
10%20%30%40%50%60%
AAPL GOOG ORCL
0
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25
2008 2009 2010 2011 2012 2013
Price/Earnings Price/Free Cash Flow
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
2008 2009 2010 2011 2012 2013
EBIT Net Operating Profit After Tax
$0$50,000$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000
$0$5,000
$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000
2008 2009 2010 2011 2012 2013
Economic Value‐Added Market Valued‐Added
0%
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300%
2008 2009 2010 2011 2012 2013
ROA ROE ROIC
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
1
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.
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
2
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 Score Weight
Avg. Length Manufacturing Workweek 0 0.2781 ISM New Orders Index
1 0.1651 Consumer Sentiment 1 0.1551 Int. Rate Spread (10-yr minus
Fed Funds) 1 0.1069 Manufacturers’ New Orders-Consumers 1 0.0811
Leading Credit Index 1 0.0794 Stock Prices, S&P 500 1 0.0381
Manufacturers’ New Orders-Capital Goods 0 0.0356 Avg. Weekly
Initial Unemployment Claims 1 0.0334 Building Permits, New Private
Housing 0 0.0272
Leading Indicators Diffusion Index 70% 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.
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
3
Lagging Indicators Score Weight
Avg. Prime Rate 0 0.2815 Consumer Credit to Personal Income 1
0.2101 Consumer Price Index, Services 0 0.1955 Inventory to Sales,
Manufacturing 0 0.1211 Commercial and Industrial Loans 1 0.0970
Unit Labor Cost, Manufacturing 0 0.0587 Avg. Duration of
Unemployment -1 0.0361
Lagging Indicators Diffusion Index 14% 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:
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.
0%
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50%
60%
70%
Lagging Coincident Leading
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
4
Global Positioning
Apple has made moves recently to expand in global markets. In
recent years, Apple has been able to increase 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.
Net Sales by Product Over the last few years, the iPhone has
been Apple’s majority of product revenue. The iPhone doubled in
sales dollars from 2011 to 2013. The iPod has been declining in
sales in recent years due to the fact that most iPod capabilities
are available on iPad and iPhone. There has been a big 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.
2013 AmericasEurope
Greater China
Japan
Rest of Asia Pacific
Retail
2013 iPhone
iPad
Mac
iPod
iTunes, software,and servicesAccessories
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
5
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.
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
bottom-line profits, then to free cash flow that supports Apple’s
intrinsic value, and back to
investors in form of dividends. Although Apple’s margins are
high, the table above shows a drop in all margins from 2012
to
2013. Our research pointed out that the decrease in margins was
driven by the following factors: Introduction of new versions of
existing products with
higher cost structures
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
CAGR’s 3-yr 5-yr
Total Revenue 37.9% 35.5%
EBITDA 42.0% 44.7%
Net Income 38.3% 43.4%
$0
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$40,000
$60,000
$80,000
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$120,000
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$160,000
$180,000
2008 2009 2010 2011 2012 2013
Net Income EBITDA Total Revenue
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2008 2009 2010 2011 2012 2013
Gross Profit Operating Profit Net Profit
(millions)
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
6
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.
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.
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.
0
10
20
30
2008 2009 2010 2011 2012 2013
Price/Earnings Price/Free Cash Flow
0.00%
5.00%
10.00%
2008 2009 2010 2011 2012 2013
Earnings Yield Dividend Yield
0
1
2
3
2008 2009 2010 2011 2012 2013
Quick Ratio Current Ratio
0%
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10%
15%
2008 2009 2010 2011 2012 2013
Long-term Debt to Equity Total Debt to Assets
-
Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
7
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.
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-by-year number, but instead measures value
creation over the entire lifetime of a company. MVA is the ultimate
bottom line measure of value creation for a publicly traded
company. MVA is calculated by subtracting the market value
of all the Apple’s securities by the book value of Apple’s
securities.
0.00%
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150.00%
200.00%
250.00%
2008 2009 2010 2011 2012 2013
ROA ROE ROIC
$0
$10,000
$20,000
$30,000
$40,000
$50,000
2008 2009 2010 2011 2012 2013
NOPAT Total Invested Capital(millions)
500,000
400,000
300,000
200,000
100,000
0
10,000
20,000
30,000
40,000
50,000
2008 2009 2010 2011 2012 2013
EVA MVA
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Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
8
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
2014E 2015E 2016E 2017E 2018E 10% 8% 6% 4% 2.5%*
(millions) $188,001 $203,041 $215,224 $223,832 $229,428 *
Growing perpetuity rate
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 Operating Margin Net Margin 36% 27% 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%
-
Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
9
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 2015E 2016E 2017E 2018E 25% 15% 10% 8%
3%
$14.25 $16.39 $18.03 $19.47 $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% 118% 118% 118%
-
Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
10
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 16,960 3.2% 5.0% 0.1%
Preferred Stock 0 0.0% 0.0%
Value of All Securities 536,089 100.0%
Effective Tax Rate 26.2% Long-term Growth Rate:
Risk-Free Rate 2.68% 2.5%
Beta (5-Yr) 1.01 Alternative Beta:
Market Risk Premium 6.0%
CAPM Cost of Equity 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 2.5%
A cost of equity of 8.7% calculated by highlighted numbers
-
Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
11
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 $744.18 $772.92 $793.82
$814.48
Year-End Stock Price $561.02 $585.54
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.
-
Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
12
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 - Strong brand - Customer experience - Loyal customers
- Financial performance - Multiple patents - Largest market cap. in
the industry
WEAKNESSES - Recent change in leadership - Product recalls
(early generation of
MacBook batteries, and a few cords that connect MacBook to a
TV)
- Patent Infringement (Intertrust 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, blue-tooth
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.
-
Apple Inc. NASDAQ: AAPL
Analysts: Samir Haikal & Michael Stephens
13
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 long-term 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.