[pic] Apple, Inc. Team Industry Analysis TABLE OF CONTENTS 1. Introduction & Mission Statement. a. Description of overall operating activities b. Main resources of company 2. Analysis of Actual General Economic Activities a. Sales growth and Income growth b. Competition, investment opportunities and regulations 3. Analysis and description of main competitor – Microsoft a. Brief analysis and description 4. Annual Reports a. Horizontal Analysis b. Trend Percentages 5.
Benchmarking against Microsoft a. Income Statement Comparison b. Horizontal and Vertical Analysis of Statement of Cash Flow 6. Ratios a. Inventory Turnover Ratio & Analysis b. Current Ratio 7. Analysis of Profitability of Apple a. Earning Per Share (EPS) b. Rate of Return on Total Assets c. Rate of Return on Stock-holders Equity 8. Financial Structure a. Working Capital Analysis b. Acid-Test Ratio c. Debt Ratio d. Price Per Earnings Ratio e. Dividend Yield f. Financial Risks 9. Recommendations
Introduction and Mission Statement Apple was incorporated in the state of California on January 3, 1977. Apple Computer, Inc. designs, manufactures and markets personal computers (PC’s) and related personal-computing solutions for sale primarily to education, creative, consumer and business customers. The Company’s personal-computing products include desktop and notebook PCs, related devices and peripherals, networking and connectivity products, as well as various third-party hardware products.
Apple software products and computer technologies include operating systems; professional application software; consumer-, education- and business-oriented application software; Internet products and technologies, and wireless connectivity and networking products. The Company also has its own retail stores. As of September 28, 2002, Apple opened 51 retail stores in the United States. In addition to its own hardware and software products, its retail stores carry in inventory a variety of third-party hardware and software products. ” Mission Statement:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings. Apple Inc. , together with its subsidiaries, engages in the design, manufacture, and marketing of personal computers and related software, services, peripherals, and networking solutions worldwide.
It also provides a line of portable digital music players, as well as related accessories and services, including online sale of third-party audio and video products. The company’s products and services comprise the Macintosh line of desktop and portable computers; the Mac OS X operating system; the iPod line of portable digital music players; the iTunes Store, a portfolio of peripherals that support and enhance the Macintosh and iPod product lines; a portfolio of consumer and professional software applications; and the Xserve and Xserve RAID server and storage products. In addition, Apple Inc. ffers various third-party Macintosh and iPod compatible products, such as application software, printers, storage devices, speakers, headphones, and other accessories and supplies. The company provides an online service to distribute third-party music, audio books, music videos, short films, television shows, movies, and iPod games. Further, it offers products and services for the educational industry, which include iMac and the MacBook, video creation and editing solutions, wireless networking, professional development solutions, and one-to-one learning solutions. Apple Inc. ells its products to education, consumer, creative professional, business, and government customers through its online stores and retail stores, as well as through its direct sales force, third-party wholesalers, resellers, and value-added resellers. As of March 9, 2007, the company had 173 retail stores in the United States, Canada, Japan, and the United Kingdom. Apple Inc. was founded in 1976. It was formerly known as Apple Computer, Inc. and changed its name to Apple Inc. in January 2007. The company is headquartered in Cupertino, California. Ratios: Inventory Turnover Ratio & Analysis Cost of Goods sold/ Average inventory =13717/105= 130. 681 The evaluation of the rate of inventory turnover ratio indicates that the inventory is rapidly sold as quickly as possible. Due to the fast sales, the company’s income is relevantly high. The company has sold and turned over its average level of inventory during the year 130. 681 times. Current Ratio = Total current assets/Total current liabilities =14509. 00/6471. 00 = 2. 24212573 The company is considered to have good short-term financial strength. Apple’s current ratio of 2. 24 is very high and indicates an extremely strong current position.
Analysis of Profitability of Apple, Inc. Earnings per share (EPS) =(Net income – preferred dividends)/ Number of shares of common stock outstanding = 2. 76 Apple, Inc. earned 0. 64 net income for each share of outstanding common stock. Apple, Inc. has no preferred stock and therefore has no preferred dividends. Rate of Return on Total Assets =(Net income+ interest expense)/Average total assets =(1989+0)/ 17205 =11. 56% Considering 10% is considered strong for most companies, Apple’s rate of return is above average. Apple is a highly successful technology company earning a very high return. Rate of Return on Stockholders Equity (Net income- Preferred Dividends)/ Average common stockholders equity = 24. 77% Preferred dividend is 0 because apple has no preferred dividends with any preferred stock outstanding. Since the return on equity is higher than return on assets then this is evident Apple is a successful company. 15% is considered a good standard ROE, so since Apple’s ROE is 24. 77% then it is very promising. Therefore in analyzing the profit Apple was obtaining throughout the years it is evident that it was facing profitability problems at various points in its history years such as: 1996. 1997. 1998. 1999. 2000.
However Apple is regaining its profits and has high expected future success with the rapid apparent increase in profit. By releasing its operating system more often and at a slightly higher cost, Apple is better able to maximize its profitability by alternative methods such as getting its product to the marketplace much faster and charging slightly more in order to take advantage of its buyer’s eagerness for the company’s products. Working Capital Working Capital = Current assets – Current Liabilities 14,509,000 – 6,471,000 = 8038000 Working capital measure the ability to pay current liabilities with current assets.
Apple Inc. is in a very good position since they have over 2 times the power to pay its liabilities. Acid Test Ratio Acid Test Ratio = (Cash + Short Term Investment + Net Current Receivables) Current Liabilities 6,392,000 + 3,718,000+ 3,452,000 = 2. 095 6,471,000 Also known as quick ratio tells us whether Apple Inc. could pass the acid test of paying all its current liabilities if they came due immediately. Usually in the industry a number between 0. 90 to 1. 00 are acceptable, but Apple Inc. s well pass that with a 2. 095 and very liquid. Debt Ratio Total Liabilities / Total Assets 7,221,000 / 17,205,000 = 0. 419 Debt ratio tells the proportion of assets financed with debt. Apple, Inc. debt ratio of 0. 419 positions it as less risky in the eyes of the creditors and has less pressure to pay interest and principle. Price per Earnings Ratio Market Price per Share of Common Stock / Earnings per share 92. 00 / 2. 76 = 33. 33 The Price per Earnings ratio gives a very clear picture that the company is making profits and is in good standing. $1 of Apple’s earning is worth $33. 33 to the stock market. Dividend Yield
Not applicable, because Apple Inc. does not give out dividends. Financial Risks There are quite a few reasons why investing in Apple, Inc. could turn out to be risky. Following are some of them: • Apple, Inc. new product iPhone is at a risk of being a success. • Also taking a closer look at the stock prices for the past week, it clearly shows the rapid ups and downs in the prices of Apple, Inc. • Apple, Inc. had a very unstable past. Recommendation Considering all the aspects and analyzing Apple, Inc. by looking at the statements and the ratios we would recommend investing in Apple, Inc. for a short term.
Apple's (NASDAQ:AAPL) stock has surged this year, gaining approximately 25% thus far. Even though this has occurred, Apple's forward P/E of 13.72x is still attractive for such a remarkable company and brand. I believe there remains additional upside on the stock given the following 10 reasons:
1. Apple is a Cash Flow Machine
Apple's massive amount of annual revenue translates into an impressive amount of free cash flow. For a little perspective, consider that Apple's $52.3 billion in free cash flow last year is approximately the same as General Motors' (NYSE:GM), Sony's (NYSE:SNE), and Nike's (NYSE:NKE) market capitalization.
2. Mountains of Cash
Apple has more cash than any other company in the world, which has swelled to $256.8 billion as of their most recent quarter. Apple also has a reasonable amount of debt for their size. As I'll discuss later, this gives Apple nearly an unlimited amount of acquisition possibilities.
3. Future Dividend King (Current yield of 1.72%).
One of the ways Apple has been using their free cash flow is to fund a growing dividend payment. Given their low payout ratio, there is plenty of room to grow too. Also, if Apple can't find any suitable acquisitions in the near term, they will likely continue increasing the dividend.
4. Share Repurchases
Apple's free cash flow is a common theme so far. It's what fuels their growing cash war chest and their dividend payment, but it also funds their share repurchase program. With their valuation low, Apple continues to buy back a significant amount of shares, which has amounted to $130.5 billion over the last 4 years. This is a significant amount of capital returned to shareholders and has had a very positive effect on earnings per share.
5. Brand Power
According to Forbes, Apple has the most valuable brand in the world. This is what keeps customers buying the latest Apple products and enables them to sell cell phones that cost upwards of a $1,000.
6. Apple Trades At A Discount Relative To Peers
Relative to other large-cap technology companies, Apple still trades at a discount, which is a bit surprising considering the performance of their stock in the last couple of months. A forward P/E of 13.72x and a long-term growth rate of 11.1% is attractive.
- Market Cap, Trailing P/E, Forward P/E, PEG Ratio, and Yield provided by Yahoo Finance.
- LT Growth Rate provided byReuters.
7. Discounted Cash Flow Analysis Shows 53% Upside Potential
It's no surprise that a discounted cash flow model shows 53% upside in Apple's stock. Keep in mind that this model is highly sensitive to long-term growth rates. I chose 5% because it's significantly less than what Reuters estimates (11.1%) and should be achievable for Apple given their ability to make acquisitions and also their stock repurchase program.
- Risk Free Rate - I used the yield on a30-year treasury bond.
- Equity Risk Premium - this figure is calculated every month byAswath Damodaran, a Stern Business School Professor.
- Beta - I used Google Finance.
- Required Rate of Return - calculated by multiplying the Equity Risk Premium by Beta and then adding the Risk Free Rate.
- Value of Equity = CF1 / (r - g)
- CF1 = next year's free cash flow, which I've estimated at approximately $55 billion.
- 'r' is the required rate of return and 'g' is the long-term growth rate
8. Wall Street Is Bullish
According to MarketWatch, 27 out of 44 analysts recommend Apple as a 'buy' (only 1 recommends as a 'sell'). The average target price is $161.63 per share. Given the current stock price of $145.10, that's 11% upside.
9. Donald Trump's Plan
Apple still keeps most of its cash outside the U.S. for tax reasons, but President Trump and the Republican-controlled Congress might change rules on repatriation of cash stored overseas, which could make it easier for Apple to spend some of the money on acquisitions without taking a major tax hit. Trump's tax plan also calls for corporate taxes to be cut, which will give Apple significant savings and boost their bottom line.
10. The Unknown Potential
With a massive amount of cash that continues to get bigger every year, Apple has nearly unlimited potential, and investors have spent a lot of time pondering what Apple is going to do next. Here are just a few examples of the possibilities:
- Enter the auto industry, which has long been speculated given cars are now just like one giant computer. Apple could do this either from the ground up or by purchasing a company like Tesla (NASDAQ:TSLA).
- Enter the entertainment industry, which Netflix (NASDAQ:NFLX) could be a potential acquisition target for.
- Buy a cell phone service provider.
- Branch out and enter other industries like energy or banking.
The main issue remains doing something big enough that actually has a meaningful impact to Apple's bottom line, so I expect it to be big when they do decide to make a move.
Even after seeing a valuation surge this year, I believe Apple's stock is still attractively valued. Apple is basically valued on their existing computer and cell phone business, but there seems to be no value given to their cash reserves and the potential that provides. Apple has the potential to make a huge acquisition or disrupt other markets from the ground up. At the very worst, Apple will continue to be a cash flow machine and reward shareholders with a growing dividend and share repurchases.
Disclosure:I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.