Analysts: Spencer Elkinton, Jake Gregg and Adam Smith Washburn University Applied Portfolio Management Report Date: 4/18/2016 Market Cap (mm) $614,005 Annual Dividend $2.03 2‐Yr Beta (S&P 500 Index) 1.19 Apple Inc. Return on Capital 139.9% Dividend Yield 1.9% Annualized Alpha ‐13.0% Compared With: EPS (ttm) $9.46 Price/Earnings (ttm) 11.3 Institutional Ownership 5.8% Alphabet Inc. Current Price $106.72 Economic Value‐Added (ttm) $49,438 Short Interest (% of Shares) 0.9% Samsung Electronics Co. Ltd. 12‐mo. Target Price $130.00 Free Cash Flow Margin 17.8% Days to Cover Short 1.0 and the S&P 500 Index Business Description Total Revenue 14.3% Free Cash Flow 9.1% EBIT 8.8% Total Invested Capital 1.2% NOPAT 8.3% Total Assets 18.2% Earnings Per Share 13.3% Economic Value‐Added 8.7% Dividends Per Share 73.4% Market Value‐Added 2.3% 2011 2012 2013 2014 2015 31.2% 35.3% 28.7% 28.7% 30.5% N/A 20.4% 13.8% 33.4% 17.8% 6.9% 6.7% 8.3% 6.4% 8.1% 0.0% 0.4% 2.4% 1.8% 1.7% 2011 2012 2013 2014 2015 4.01 6.38 5.72 6.49 9.28 0.00 0.38 1.64 1.82 1.98 3.96 6.32 5.59 6.37 9.12 N/A 4.88 3.63 10.03 7.21 Datasource: Capital IQ NOPAT Free Cash Flow Earnings Yield Dividend Yield Per Share Metrics Earnings Dividends Free Cash Flow Margin Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid‐sized businesses, education, and enterprise and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third‐party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi‐ purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer‐oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and Investment Thesis Apple continues to be a strong stock for the SIF, boasting growing revenue, large market share and a dedicated consumer base, and high returns on assets, equity, and invested capital. Apple has steadily increased R&D investment in order to maintain its competitive advantage. The Information Technology sector is currently underweighted in the SIF, and we believe that as macroeconomic recovery slows, this sector will foster strong growth with lower volatility than the currently overweighted Energy and Utilities sectors. Apple operates in a highly competitive and rapidly changing sector while maintaining a low beta, which has led us to the decision to hold with the potential to increase our position. ANNUALIZED 3‐YEAR CAGR Margins and Yields Operating Margin AAPL Apple Inc. Sector: Information Technology HOLD ‐30% ‐25% ‐20% ‐15% ‐10% ‐5% 0% 5% 10% AAPL ^SPX ‐40% ‐30% ‐20% ‐10% 0% 10% 20% 30% 40% 50% AAPL GOOGL KOSE:A005930 0 5 10 15 20 25 2012 2013 2014 2015 Price/Earnings Price/Free Cash Flow $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 2011 2012 2013 2014 2015 EBIT Net Operating Profit After Tax $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 2011 2012 2013 2014 2015 Economic Value‐Added Market Valued‐Added 0% 20% 40% 60% 80% 100% 120% 140% 160% 2011 2012 2013 2014 2015 ROA ROE ROIC
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Analysts: Spencer Elkinton,
Jake Gregg and Adam SmithWashburn University
Applied Portfolio Management
Report Date: 4/18/2016
Market Cap (mm) $614,005 Annual Dividend $2.03 2‐Yr Beta (S&P 500 Index) 1.19 Apple Inc.
Return on Capital 139.9% Dividend Yield 1.9% Annualized Alpha ‐13.0% Compared With:
Analyst Comments: AAPL's margins have been recovering since 2013, though have been in ranging competition with GOOGL. While AAPL's gross profit margin has consistently been 20‐25% below GOOGL, AAPL's operating margin has risen above GOOGL since 2013 and AAPL's net margin has risen above GOOGL since 2014. Though GOOGL significantly outperforms AAPL's gross profit margin, AAPL is able to convert revenues to bottom line profits more efficiently than GOOGL. AAPL's growing operating and net profit margins are a positive sign of revenue‐to‐profit conversion for investors.
= Return on Equity 33.8% 35.3% 30.0% 35.4% 44.7% = Return on Equity 16.7% 15.0% 14.6% 13.6% 13.6%
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Analyst Comments: AAPL's profitability ratios have been in general downtrends, though they have been outperforming GOOGL. AAPL's total asset turnover has consistently outperformed GOOGL by 0.3, while ROA has outperformed GOOGL by 7‐9% and ROE has outperformed GOOGL by 15‐30%. AAPL's ROA has been in consolidation following a 5% drop in 2013, while ROE has risen nearly 15% since 2013. AAPL's outperformance of GOOGL in profitability ratios indicates AAPL's greater return on deployment of assets and equity than its competitor.
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1. Margins and Profitability AAPL, Page 4 of 22 Copyright Robert A. Weigand, Ph.D., 2016
AAPL Apple Inc. GOOGL Alphabet Inc.
Multiples and Yields 2011 2012 2013 2014 2015 Multiples and Yields 2011 2012 2013 2014 2015
NOPAT per Share $3.96 $6.32 $5.59 $6.37 $9.12 NOPAT per Share $14.98 $16.88 $19.15 $19.70 $23.53
Free Cash Flow per Share N/A $4.88 $3.63 $10.03 $7.21 Free Cash Flow per Share N/A $9.04 ($2.86) $0.84 ($1.12)
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Analyst Comments: AAPL has increased NOPAT significantly since 2011 and has consistently recorded 3‐4x as much NOPAT as GOOGL, GOOGL far outperforms AAPL's NOPAT per share. AAPL has recorded positive free cash flow since 2012, with a low of +$9,379 in 2012. GOOGL conversely has recorded negative free cash flow in 2013 and 2015 as invested capital has exceeded NOPAT. AAPL has invested less than GOOGL in 2013 and 2015, which is cause for concern as the Technology Hardware, Storage, and Peripherals is a rapidly‐developing and changing sector. Though AAPL's proportionally and sometimes absolutely lower than GOOGL invested capital is a negative signal for investors, consistently positive free cash flow available to investors is a positive signal.
3. Value Creation and DCF Model AAPL, Page 7 of 22 Copyright Robert A. Weigand, Ph.D., 2016
AAPL Apple Inc. GOOGL Alphabet Inc.
Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted %
Analyst Comments: ROIC has been risen to outstanding levels, far above the WACC and above competitor GOOGL's WACC. Due to this spread, AAPL is able to generate significant EVA and far more than its competitors can generate. Though AAPL's ROIC displays more volatility than GOOGL's ROIC, AAPL's ROIC is a substantially higher range. AAPL's high ROIC, conservative WACC, and growing EVA are a positive sign of value creation for investors.
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3. Value Creation and DCF Model AAPL, Page 8 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Long‐Term Growth Rate: Long‐Term Growth Rate:
AAPL Apple Inc. 2.0% GOOGL Alphabet Inc. 2.0%
Intrinsic Value Model 2011 2012 2013 2014 2015 Intrinsic Value Model 2011 2012 2013 2014 2015
PV of Future FCFs 644,221 663,972 693,747 688,397 702,165 PV of Future FCFs ‐5,520 ‐11,892 ‐10,962 ‐12,430 ‐12,679
+ Value of Non‐Oper. Assets 25,952 29,129 40,546 25,077 41,601 + Value of Non‐Oper. Assets 43,366 47,159 57,447 62,633 71,926
= Total Intrinsic Firm Value 670,173 693,101 734,293 713,474 743,766 = Total Intrinsic Firm Value 37,846 35,267 46,485 50,203 59,247
− Total Debt 0 0 16,960 35,295 61,962 − Total Debt 6,211 7,210 5,364 7,769 6,423
= Intrinsic Value of Equity 670,173 693,101 717,333 678,179 681,804 = Intrinsic Value of Equity 31,635 28,057 41,121 42,434 52,824
÷ Total Weighted Shares 6,470 6,544 6,477 6,086 5,753 ÷ Total Weighted Shares 646 654 666 676 685
= Per Share Intrinsic Value $103.58 $105.92 $110.75 $111.44 $118.50 = Per Share Intrinsic Value $49.00 $42.87 $61.77 $62.78 $77.16
vs. Year‐End Stock Price $57.76 $95.30 $68.96 $100.75 $114.71 vs. Year‐End Stock Price $322.95 $353.69 $560.36 $530.66 $778.01
Over (Under) Valuation/Share ($45.83) ($10.62) ($41.78) ($10.69) ($3.79) Over (Under) Valuation/Share $273.95 $310.82 $498.58 $467.88 $700.85
% Over (Under) Valued ‐44.2% ‐10.0% ‐37.7% ‐9.6% ‐3.2% % Over (Under) Valued 559.0% 725.0% 807.1% 745.3% 908.3%
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MVA per Share AAPL GOOGL
Analyst Comments: AAPL is consistently mildly undervalued, while GOOGL is severly overvalued. AAPL's undervalutation is in a manageable range for investors to take advantage of the undervaluation the market is likely to realize. While AAPL's stock prices have risen steadily, GOOGL's price have risen rapidly, which is a concern when coupled with GOOGL's low intrinsic valuation. AAPL's Piotroski scores significantly outperform GOOGL, reaching an impressive score of 9/10 in 2015 while GOOGL peaked at 8 in 2013 and 2014 then fell to the moderately‐high 7/10 in 2015. Both companies are considered "in the safe zone" with their Altman scores, though GOOGL strongly outperforms AAPL. Per the intrinsic value model and the Piotroski score, AAPL has historically been the better investment of the two companies.
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3. Value Creation and DCF Model AAPL, Page 9 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23
3. Value Creation and DCF Model AAPL, Page 10 of 22 Copyright Robert A. Weigand, Ph.D., 2016
24‐Sep‐11 29‐Sep‐12 28‐Sep‐13 27‐Sep‐14 26‐Sep‐15
Apple Inc. AAPL Information Technology Report Date:
% of sales 0.7% 0.5% 1.0% 1.2% 1.0% 0.9% % of sales 1.0% 1.0% 1.0% 1.0% 1.0%
Net PPE 7,777 15,452 16,597 20,624 22,471 Net PPE 22,670 24,031 24,511 25,737 26,251
% of sales 7.2% 9.9% 9.7% 11.3% 9.6% 9.5% % of sales 10.0% 10.0% 10.0% 10.0% 10.0%
Total Assets 116,371 176,064 207,000 231,839 290,479 Total Assets 292,448 293,173 294,134 295,973 296,642
% of sales 107.5% 112.5% 121.1% 126.8% 124.3% 118.4% % of sales 129.0% 122.0% 120.0% 115.0% 113.0%
Payables and Accruals 19,461 27,924 30,794 48,568 59,659 Payables and Accruals 56,676 58,875 58,827 60,481 60,378
% of sales 18.0% 17.8% 18.0% 26.6% 25.5% 21.2% % of sales 25.0% 24.5% 24.0% 23.5% 23.0%
ST Debt plus LT Debt 0 0 16,960 35,295 61,962 ST Debt plus LT Debt 62,343 63,681 63,729 64,342 65,629
% of sales 0.0% 0.0% 9.9% 19.3% 26.5% 11.1% % of sales 27.5% 26.5% 26.0% 25.0% 25.0%
Total Equity 76,615 118,210 123,549 111,547 119,355 Total Equity 115,619 115,347 115,203 115,815 115,507
% of sales 70.8% 75.5% 72.3% 61.0% 51.1% 66.1% % of sales 51.0% 48.0% 47.0% 45.0% 44.0%
April 18, 2016
Forecasted Income Statement Drivers
Forecasted Balance Sheet Drivers
Historical Income Statement Drivers
Historical Balance Sheet Drivers
Analyst Comments: Revenue is expected to decline slightly in 2016 as the launch of the iPhone 7 and 7 Plus will be released shortly before the fiscal year ends and the majority of revenue growth from the launch will be realized in 2017. IPhone sales have been slowing with each new launch, and AAPL has made efforts to earn positive revenue growth in non‐new iPhone release years. Gross margins are projected to remain at the 39% mark as AAPL has greater influence over suppliers, though AAPL is simultaneously lowing product prices, which results in steady margins. Operating margins are projected to remain low due to high investment in R&D and falling SG&A expenses. AAPL will continue its $140B buyback program, which will require a large capital base and consistently high debt levels to finance. Investors have also demanded dividend growth, which will be fueled by low‐interest debt and high free cash flow.
4. Forecasting and Valuation AAPL, Page 11 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Apple Inc. Apple Inc.
Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2016E 2017E 2018E 2019E 2020E
Cash and ST Investments 25,952 29,129 40,590 25,158 41,995 Cash and ST Investments 44,434 48,061 50,248 54,047 56,441
NOPAT per Share $3.96 $6.32 $5.59 $6.37 $9.12 NOPAT per Share $8.64 $9.59 $10.55 $11.68 $12.49
Free Cash Flow per Share N/A $4.88 $3.63 $10.03 $7.21 Free Cash Flow per Share $7.99 $8.70 $9.88 $10.64 $11.70
Historical Performance Forecasted Performance
Historical Performance Forecasted Performance
Analyst Comments: Invested capital is projected to increase steadily through 2020 as AAPL maintains its commitment to cutting‐edge products, and the increase is driven by the increase in NOWC while net fixed assets are projected to remain at current levels. The slowing in yoy invested capital is not a concern as the R&D to sales ratio is increasing, indicating AAPL's investment in its future. Though invested capital has slowed, it is projected to remain at consistent levels as AAPL has attained and is projected to maintain its current market leader position.
Analyst Comments: AAPL is significantly undervalued, while year end stock prices and intrinsic value have been appreciating. AAPL's undervaluation is in a critical range, which could be realized by the market with the proper catalyst. ROIC is significantly higher than the WACC, resulting in large EVA. Free cash flow is projected to rise, generating more cash available to investors.
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4. Forecasting and Valuation AAPL, Page 13 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Analyst Comments: P/E ratios are forecasted to return to historical levels prior to 2015, while P/FCF and price to book is expected to fall slightly lower than historical averages. Earnings and dividend yields are expected to remain consistent.