Applied Portfolio Management Analysts: Alexander Anguiano, Bryan Lunzmann and Sam Olberding Report Date: 4/4/2015 Market Cap (mm) $671,725 Annual Dividend $1.85 2-Yr Beta (S&P 500 Index) 0.77 Return on Capital 179.8% Dividend Yield 1.7% Annualized Alpha 40.0% Compared With: EPS (ttm) $7.44 Price/Earnings (ttm) 14.8 Institutional Ownership 5.7% Google Inc. Current Price $110.38 Economic Value-Added (ttm) $37,161 Short Interest (% of Shares) 1.0% Hewlett-Packard Company 12-mo. Target Price $140.00 Free Cash Flow Margin 27.3% Days to Cover Short 1.1 and the S&P 500 Index Business Description Total Revenue 19.1% Free Cash Flow 14.6% EBIT 15.8% Total Invested Capital 26.6% NOPAT 14.8% Total Assets 25.8% Earnings Per Share 17.5% Economic Value-Added 14.4% Dividends Per Share N/A Market Value-Added 23.5% 2010 2011 2012 2013 2014 28.2% 31.2% 35.3% 28.7% 28.7% 25.3% 27.8% 26.5% 26.1% 27.3% 4.8% 6.9% 8.4% 7.1% 5.9% 0.0% 0.0% 0.5% 2.0% 1.6% 2010 2011 2012 2013 2014 2.20 4.01 6.38 5.72 6.49 0.00 0.00 0.38 1.64 1.82 2.18 3.96 6.32 5.59 6.37 1.27 4.07 5.23 4.86 6.52 Datasource: Capital IQ Margins and Yields Operating Margin Per Share Metrics Earnings NOPAT Free Cash Flow Dividends Free Cash Flow Margin Earnings Yield Dividend Yield Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players 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 that comprise a phone, music player, and Internet device; iPad, a line of multi-purpose tablets; Mac, a line of desktop and portable personal computers; and iPod, a line of portable digital music and media players, such as iPod touch, iPod nano, and iPod shuffle. The company also provides iTunes Investment Thesis ANNUALIZED 3-YEAR CAGR After examining the macro-environment we conclude that the economy is in full expansion. When the original investment thesis was formed the technology sector was underweighted in the portfolio, whereas it is now the most overweighted sector in our portfolio. The inital thesis was correct regarding Apple's strong competitive advantage shown by their large ROIC-WACC spread. Metrics such as EBIT & NOPAT growing at slower rates than Revenues give us cause for concern, although they are still able to flow revenue dollars to the bottom line as evidenced by their continued growth in FCF. After a conservative forecast, we have concluded that Apple is slighty under- valued. We recommend a hold. Apple Inc. Sector: Information Technology HOLD AAPL -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% AAPL ^SPX -40% -20% 0% 20% 40% 60% 80% AAPL GOOGL HPQ 0 5 10 15 20 25 2009 2010 2011 2012 2013 2014 Price/Earnings Price/Free Cash Flow $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 2009 2010 2011 2012 2013 2014 EBIT Net Operating Profit After Tax $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 2009 2010 2011 2012 2013 2014 Economic Value-Added Market Valued-Added 0% 50% 100% 150% 200% 250% 300% 2009 2010 2011 2012 2013 2014 ROA ROE ROIC
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Applied Portfolio ManagementAnalysts: Alexander Anguiano,
Bryan Lunzmann and Sam Olberding
Report Date: 4/4/2015
Market Cap (mm) $671,725 Annual Dividend $1.85 2-Yr Beta (S&P 500 Index) 0.77Return on Capital 179.8% Dividend Yield 1.7% Annualized Alpha 40.0% Compared With:
EPS (ttm) $7.44 Price/Earnings (ttm) 14.8 Institutional Ownership 5.7% Google Inc.Current Price $110.38 Economic Value-Added (ttm) $37,161 Short Interest (% of Shares) 1.0% Hewlett-Packard Company
12-mo. Target Price $140.00 Free Cash Flow Margin 27.3% Days to Cover Short 1.1 and the S&P 500 Index
Business Description
Total Revenue 19.1% Free Cash Flow 14.6%EBIT 15.8% Total Invested Capital 26.6%
NOPAT 14.8% Total Assets 25.8%Earnings Per Share 17.5% Economic Value-Added 14.4%
Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players 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 that comprise a phone, music player, and Internet device; iPad, a line of multi-purpose tablets; Mac, a line of desktop and portable personal computers; and iPod, a line of portable digital music and media players, such as iPod touch, iPod nano, and iPod shuffle. The company also provides iTunes
Investment Thesis
ANNUALIZED 3-YEAR CAGR
After examining the macro-environment we conclude that the economy is in full expansion. When the original investment thesis was formed the technology sector was underweighted in the portfolio, whereas it is now the most overweighted sector in our portfolio. The inital thesis was correct regarding Apple's strong competitive advantage shown by their large ROIC-WACC spread. Metrics such as EBIT & NOPAT growing at slower rates than Revenues give us cause for concern, although they are still able to flow revenue dollars to the bottom line as evidenced by their continued growth in FCF. After a conservative forecast, we have concluded that Apple is slighty under-valued. We recommend a hold.
Apple Inc. Sector: Information Technology HOLDAAPL
Relative Valuation Pricing Model Adjust 2015E Target Dividend Discount Valuation Model 2015E Ratio Ratio Ratio Metric Price AAPL Apple Inc.
Price to Earnings 19.1 $7.98 $152.12 3.5% 3.5% 3.0% 2.5% 2.0%Price to Free Cash Flow 23.8 $6.39 $152.12 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019EPrice to Sales 4.0 $37.63 $152.12 $0.00 $0.00 $0.00 $0.38 $1.64 $1.82 $1.88 $1.95 $2.01 $2.06 $2.10Price to Book 3.2 $48.16 $152.12
1-Yr Div Growth 11.0% PV Dividends 1-4 $6.71 Dividend Yield 1.5%2015E 3-Yr Div Growth N/A PV Perpetual Div. $34.10
Current Price $126.41 5-Yr Div Growth N/A Intrinsic Value $40.82 If Purchased For: $126.41PV of Free Cash Flows $152.12 Risk-Free Rate 2.12% Current Price $126.41 Expected Return = -19.3% -23.07%Dividend Discount Model $40.82 5-Yr Beta 0.80 ($126.41) $1.88 $1.95 $2.01 $46.33 $44.27Price to Earnings $152.12 Market Premium 6.0% Analyst Notes:Price to Free Cash Flow $152.12 Required Return 6.7% Based on a current dividend of $1.82, expected growth as shown above and an equity requiredPrice to Sales $152.12 Alternative Beta 0.77 return of 6.7%, AAPL is worth $40.82 per share, vs. a current price of $126.41.Price to Book $152.12
Compared With: Compared With:
Google Inc. S&P 500 Index
Hewlett-Packard Company
Expected Dividend Growth Rates
Estimated Target Prices vs.
April 4, 2015Annual Dividend
05
10152025303540
Price to Earnings Price to Free Cash Flow
0.0
1.0
2.0
3.0
4.0
5.0Price to Sales Price to Book
0%1%2%3%4%5%6%7%8%9%
Earnings Yield Dividend Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
Current Price PV of FreeCash Flows
DividendDiscount
Model
Price toEarnings
Price to FreeCash Flow
Price to SalesPrice to Book
Estimated Target Prices vs. Current Price
-40%
-20%
0%
20%
40%
60%
80%AAPL GOOGL HPQ
-10%0%
10%20%30%40%50%60%70%80%
AAPL ^SPX
AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 12 of 14 Copyright Robert A. Weigand, Ph.D., 2013
AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 13 of 14 Copyright Robert A. Weigand, Ph.D., 2013