Apple Computer Incorporated 1
Upcoming SlideShare
Loading in...5
×
 

Apple Computer Incorporated 1

on

  • 577 views

 

Statistics

Views

Total Views
577
Views on SlideShare
577
Embed Views
0

Actions

Likes
0
Downloads
9
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft Word

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Apple Computer Incorporated 1 Apple Computer Incorporated 1 Document Transcript

  • Apple Computer Inc. (AAPL) Michael J. Richards Date: October 25, 2005 Consensus Estimate Sep-05 Sep-06 Sep-07 Sector: Technology EPS $1.57 $1.77 $2.06 Industry: Computer Hardware P/E 35.73 31.69 27.23 Current Price: $56.10 Long Term Growth Rate: 20.91% 52 Wk Price Range: $23.48-$56.98 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 21.72 Mil P/E (TTM) 35.73 22.57 27.81 19.63 Beta: 1.5 P/S (TTM) 3.42 1.78 5.08 2.76 Market Cap ($million): $46,840 P/B (MRQ) 6.23 7.14 5.15 3.76 Shares Out (million): 835.0 ROA (TTM) 13.47 10.05 11.19 7.62 Inst. Hold %: 73.10% EBO Valuation $48.35 Div Yld: 0.00% Recommendation: BUY Total Debt/Equity: 0.00% Stop-loss Price: $44.88 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price $68 52% 64% Investment Thesis Summary Fundamental Valuation: • In the last quarter Apple experienced Negative: The current discount rate of 11.87% quadrupled profits. Largely do to iPod sales, provides an EBO valuation value of $48.35, about 6.5 million units were sold. suggesting the stock is overpriced. • In the past two months Apple has released Relative Valuation: two new iPods to replace the older versions. Neutral/Negative: The P/E ratio and the Value The Nano to replace the mini and a new ratio are both bearish. All other ratios are version of the iPod. neutral. • Apple now controls approximately 75% of Technical Analysis: the market share of MP3 players. Neutral/Positive: The Stochastics and PriceROC are both bullish indicators. The Bollinger Bands are bearish. All other indicators • Apple’s Mac computers units shipped were are neutral. up 48% for the pervious year. Earnings Analysis: • iTunes has about 85% of legal music Positive: There have been positive earnings download market. surprises in the past five quarters. There has been a significant increase in the upwards • In 2006 Apple is planning on transferring revisions for the past four weeks. from Power PC chip to Intel chips. There could be a decline in computers until before Analyst Recommendations: the transition is complete. Positive: The majority of recommendations are buy and outperform. These have been • There is currently a law suit against Apple continuous in the past three months with a slight about defects in the Nano. The protective increase in the past year. covering is said to be too soft and scratches easily under normal use. Institutional Ownership: Positive: The number of institutions and number of shares held by institutions have both increased. 1
  • Company Summary Apple Computer Inc. started in 1977 and in 1984 the first Macintosh PC was introduced.1 The most recent new product introduced is the new generation of iPod. As of last financial year the iPod sales were approximately 33% of Apple’s total revenue.2 Apple can be broken up into five different divisions; hardware, music products and services, peripherals, software and computer technologies, professional application software and connectivity and networking solutions. In hardware there are personal computers, servers, any products that relate to this area and third party hardware.3 The music products and services include the iPod and iTunes. There are three different models of the iPod. The Shuffle which is the smallest model, the Nano is the middle models and the iPod is the high end model. The iPod uses a small hard drive to store music and other information and the Shuffle and the Nano use flash memory. The iTunes Music Store has about 85% of the legal music downloads market in October 2005.4 In the peripheral division there is the iSight digital video camera and flat panel monitors. Software products and computer technologies focus mainly on the Mac OS X version 10.4, the server version and other software packages. The professional application software division mainly focuses in high end audio and video software. The connectivity and networking solutions division is focused in wireless technology, Bluetooth technology and FireWire.5 Net Sales by Product (in millions) Net Sales Net Sales %Change in Net Sale Products 6/25/2005 %Net Sales 6/26/2004 from previous year Mac Desktops $845 24% $567 49% Portables $720 20% $696 3% iPod $1,103 31% $249 343% Other Music Products $241 7% $73 230% Peripherals and other hardware $266 8% $219 21% Software, Service and other Sales $345 10% $210 64% Total $3,520 $2,014 75% Net Sale by Segment (in millions) Net Sales Net Sales %Change in Net Sale Segment 6/25/2005 %Net Sales 6/26/2004 from previous year America $1,739 49% $1,018 71% Europe $742 21% $408 82% Japan $227 6% $172 32% Retail $555 16% $270 106% Other $257 7% $146 76% $3,520 $2,014 75% Information from Apple's Annual Report 2004 Competition and Strategy Apple has three main competitors Microsoft, Hewlett-Packard and Dell. Microsoft competes with Apple in the software area. Hewlett-Packard and Dell compete with Apple in the PC, peripheral and music product area. Unlike its competitors Apple is the only company that has control of the design and development of the entire computer.6 Apple designs and builds the computers, making there systems unique to its competitors. The operating system that is installed is designed and produced by Apple. Dell and Hewlett- Packard use Windows operating system which is a Microsoft product. 1 www.harrisdirect.com 2 www.harrisdirect.com 3 www.investor.reuters.com 4 www.harrisdirect.com 5 From Apple’s 10K-FY2004 from www.apple.com 6 2
  • Apple, Microsoft and Hewlett-Packard sell their products through the internet and stores. Dell only sells it’s product on the internet. Unlike its competitors, Apple has its own retail stores. Currently there are 124 stores. Last year there were 86 stores.1 There are two international stores in Tokyo and Osaka, Japan. The stores are located in high traffic areas to expand its customer base. Store sizes are representative of the market demand in that area. In the store there are experienced employees to provide assistance and the store layout is designed “to simplify and enhance the presentation and marketing of personal computing products”.7 Apple’s focus is in filling unique niches, such as music and video reproduction. Microsoft’s focus is in the home and business section. Microsoft has Office Suite which main focus is the business market. Both companies have overlapping markets in the home, but Microsoft is the dominant player. Apple’s iTunes software competes directly with Windows Media Player. Currently iTunes had 85% of the market share of legal music downloads according to Apple. 8 Both Office and iTunes are compatible with Windows and MAC OS. With iPod sales representing 33% of Apple’s total revenue and iPod currently having “about 75% of the U.S. market for MP3 players”.9 Apple is continuously reinventing the iPod. In mid October, Apple unveiled their new iPod which currently plays video, has a larger color screen, and is slimmer than it’s predecessors. With the new iPod came an updated iTunes. You can now download TV shows, music videos and Pixar videos. Recently Apple unveiled the Nano, which replaced the iPod mini. With its current strategy of reinventing the iPod Apple is able to hold three-quarters of the MP3 market. Historical Revenue and Earnings: Historical Revenue Historical Earnings FY 09/05 FY 09/04 FY 09/03 FY 09/05 FY 09/04 FY 09/03 1st Quarter 3,490.0 2,006.0 1,472.0 $0.35 $0.09 -$0.01 2nd Quarter 3,243.0 1,909.0 1,475.0 $0.34 $0.06 $0.02 3rd Quarter 3,520.0 2,014.0 1,545.0 $0.37 $0.08 $0.03 4th Quarter 3,678.0 2,350.0 1,715.0 $0.50 $0.13 $0.06 Total 13,931.0 8,279.0 6,207.0 $1.56 $0.36 $0.10 Apple’s revenue has increase in the past three years. Between 2004 and 2005 there was more than a 50% increase. The earnings have seen significant increase; 200% increase in 2004 and 300% increase in 2005. The popularity of iPods and iTunes increasing in the past few years is a significant factor to the increase revenue and earnings. 1 71 www.harrisdirect.com 83 www.investor.reuters.com 95 From Apple’s 10K-FY2004 from www.apple.com 3
  • I. Fundamental Valuation Apple Computer Inc. PARAMETERS FY1 FY2 Ltg as of 10/25/05 EPS Forecasts 1.77 2.06 20.91% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 8.94 and a 7-year growth period. Discount Rate 11.87% Dividend Payout Ratio 0.00% Next Fsc Year end 2005 Current Fsc Mth (1 to 12) 1 Target ROE (industry avg.) 26.60% Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Long-term EPS Growth Rate (Ltg) 0.2091 0.2091 0.2091 0.2091 0.2091 Forecasted EPS 1.77 2.06 2.49 3.01 3.64 4.40 5.32 Beg. of year BV/Shr 8.940 10.710 12.770 15.261 18.272 21.914 26.316 Implied ROE 0.192 0.195 0.197 0.199 0.201 0.202 ROE (Beg. ROE, from EPS forecasts) 0.198 0.192 0.195 0.197 0.199 0.201 0.202 0.215 0.228 0.241 0.253 0.266 Abnormal ROE (ROE-r) 0.079 0.074 0.076 0.079 0.081 0.082 0.084 0.096 0.109 0.122 0.135 0.147 growth rate for B (1-k)*(ROEt-1) 0.000 0.198 0.192 0.195 0.197 0.199 0.201 0.202 0.215 0.228 0.241 0.253 Compounded growth 1.000 1.198 1.428 1.707 2.044 2.451 2.944 3.539 4.300 5.280 6.549 8.208 growth*AROE 0.079 0.088 0.109 0.134 0.165 0.202 0.246 0.341 0.469 0.643 0.881 1.209 required rate (r) 0.119 0.119 0.119 0.119 0.119 0.119 0.119 0.119 0.119 0.119 0.119 0.119 0.119 discount rate 1.119 1.251 1.400 1.566 1.752 1.960 2.193 2.453 2.744 3.070 3.434 3.842 div. payout rate (k) 0.000 Add to P/B PV(growth*AROE) 0.07 0.07 0.08 0.09 0.09 0.10 0.11 0.14 0.17 0.21 0.26 0.31 Cum P/B 1.07 1.14 1.22 1.30 1.40 1.50 1.61 1.75 1.92 2.13 2.39 2.70 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 0.60 0.59 0.66 0.72 0.79 0.87 0.95 1.17 1.44 1.76 2.16 2.65 Total P/B (P/B if we stop est. this period) 1.67 1.74 1.88 2.03 2.19 2.37 2.56 2.92 3.36 3.90 4.55 5.36 Implied price 15.06 15.67 16.93 18.30 19.78 21.38 23.11 26.40 30.37 35.19 41.09 48.35 Check: Beg. BV/Shr 8.94 10.71 12.77 15.26 18.27 21.91 26.32 31.64 38.44 47.20 58.55 73.38 Implied EPS 1.77 2.06 2.49 3.01 3.64 4.40 5.32 6.80 8.76 11.35 14.83 19.52 Implied EPS growth 0.164 0.209 0.209 0.209 0.209 0.209 0.278 0.287 0.296 0.306 0.316 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) are from Reuters (10/25/05). 2. Book value per share derived from 09/24/05 balance sheet. Total equity = 7,466M, common stock outstanding = 835.02M, Book Value/Share = 7,466/835.02 = $8.94. 3. Discount rate: Used a 20 year T-Bond with a rate of 4.77% as the risk free rate, with an expected return on the market of 9.5%, and Apple’s beta of 1.5 (from MSN Money) yielding a CAPM discount rate of 11.87%=(.0477+(1.5)*(.095-.0477). 4. Dividend payout ratio is the trailing 12 months as reported by Reuters = 0.00% (10/25/05). 5. Next fiscal year-end is 2006. 6. Current fiscal month is 1 (October). 7. Target ROE= 26.60%, the 5 year average for Computer Hardware Industry reported by Reuters. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $48.35. 2. Changing the discount rate to 11% (-.87%) keep the ROE at 26.6% the EBO valuation is $56.82. Thus, if expectations are realized we should earn about 11% a year. 3. Changing the growth rate to 26.5% (+5.59%) the EBO valuation is $56.27. 4. Changing the industry ROE to 21% (+5.6%) the EBO valuation is $34.83. Changing the discount rate to 11% we get close to the current price, keeping the ROE the same. When the ROE is adjusted to the current growth rate you see that the price drops to $34.83. If Apple is able to keep it current growth we should expect a lower price. A large reason for Apple’s current growth is from the iPod. If iPod sales were to slack we could see drop in the price. 4
  • II. Relative Valuation Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S 1 DELL Dell Inc. 76,310 31.83 1.88 16.93 18.26% 0.93 14.05 40.91% 0.34 1.53 2 HPQ Hewlett-Packard Co. 78,730 27.48 1.82 15.10 10.80% 1.40 2.12 7.86% 0.27 0.95 3 MSFT Microsoft Corp. 268,140 25.03 1.50 16.69 11.10% 1.50 5.52 14.54% 0.38 6.79 4 TXN Texas Instruments Inc. 46,340 28.55 1.62 17.62 19.00% 0.93 4.32 9.74% 0.44 4.19 AAPL Apple Computer Inc. 46,849 56.10 2.06 27.23 20.91% 1.30 6.23 5.91% 1.05 3.42 Implied Price based on: P/E PEG P/B Value P/S 1 DELL Dell Inc. $34.88 $39.94 $126.52 $18.28 $25.10 2 HPQ Hewlett-Packard Co. $31.10 $60.22 $19.09 $14.35 $15.58 3 MSFT Microsoft Corp. $34.37 $64.75 $49.71 $20.20 $111.38 4 TXN Texas Instruments Inc. $36.30 $39.95 $38.90 $23.60 $68.73 High $36.30 $64.75 $126.52 $23.60 $111.38 Low $31.10 $39.94 $19.09 $14.35 $15.58 Median $34.63 $50.09 $44.30 $19.24 $46.91 Indicator Interpretation P/E Bearish: Apple has a P/E ratio larger then all four competitors. Apple could be over valued, have high expected growth, or low risk. PEG (P/E/G) Neutral: Apple’s PEG ratio is large then two of it’s competitors and less then the other two. This puts it around the average of the four companies. P/B Neutral/Bearish: Apple’s P/B ratios is large then three competitors, but smaller than Dell’s. Value (P/B/ROE) Bearish: The value ratio for Apple is larger then all four competitors. Apple could be overvalued or is less risky. P/S Neutral: Apple’s P/S ratio is large then two competitors and less then the other two. Summary Two indicators are bearish, the rest are neutral. One reason for such a negative relative valuation is due to Apple not having any similar competitors. Since Apple is the only company that has control of the design and development of its entire product and currently has a large share of the MP3 player market.1 1 From Apple’s 10K-FY2004 from www.apple.com 5
  • III. Technical Analysis Chart 1: Bollinger Bands and Fast Stochastics Chart 2: Exponential Moving Average and MACD 6
  • Chart 3: Linear Regression Channel and Price Rate of Change Briefly discuss each indicator in the following table. Indicator Interpretation Bollinger Bands Bearish: Apple’s stock price is approaching the upper Bollinger Band. Stochastics Neutral: %K is 90.34 and %D is 75.93, %K is larger then %D which is a bullish indicator. %K is greater then 80% this could mean that Apple is overvalued, which is a bearish indicator. Moving Averages Bullish: The price is above both the long-run and short-run moving average. The direction of the moving average is upwards. MACD Neutral: The MACD is positive, a bullish indicator. The MACD is less then the signal line, a bearish indicator. Regression Neutral: Price has a upward trend which is a bullish indicator. A small divergence above the linear regression line, a bearish indicator. PriceROC Bullish: The rate of change is greater than zero. There is an upward trend suggesting that there is an increase in momentum. 7
  • IV. Earnings Analysis Earnings Surprises Sep-05: Jun-05: Mar-05: Dec-04: Sep-04: (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate 0.37 0.31 0.24 0.24 0.09 Actual 0.38 0.37 0.34 0.35 0.14 Difference 0.01 0.06 0.10 0.11 0.04 Mean Earnings Estimates Dec-05: This Mar-06: Next Sep-06: This Sep-07: Next LT Growth Quarter Quarter Fiscal Year Fiscal Year Rate Earnings 0.50 0.39 1.77 2.06 20.91% # Estimates 23 22 24 15 11 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Revised Up Revised Down Down Quarter ending 12/05 1 0 19 1 Quarter ending 03/06 1 0 16 1 Year ending 09/06 1 0 21 2 Year ending 09/07 0 0 5 1 Apple had positive earnings surprises in all of the last five quarters. The last quarter had small surprised earnings and the three quarters previously had significantly large surprise earnings. There has been a significant increase in the upward revision within the last four weeks. This could be do to the new iPods that have recently released and the recent news about Apple’s quadrupled profits. All of which are bullish indicators. 8
  • V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 6 7 6 5 Outperform 11 11 11 8 Hold 9 8 9 11 Underperform 0 0 0 0 Sell 1 1 1 0 No Opinion 1 1 1 1 Mean Rating 2.22 2.15 2.19 2.25 There has been steady recommendations of buy, out perform, and hold in the last two months. There has been an increase in buy and outperform, and a decline of hold recommendations from a year ago. I believe that these are bullish indicators. 9
  • VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 1,131,025,541 100.00% Total Positions 566 111.86% 610,753,792 54.00% New Positions 96 18.97% 27,231,928 2.41% Soldout Positions 79 15.61% -11,038,363 -0.98% Buyers 332 65.61% 102,078,144 9.03% Sellers 272 53.75% -88,913,064 -7.86% Beg. Total Inst. Positions 506 100.00% 597,588,712 52.84% # Net Buyers/3 Mo. Net Chg. 60 11.86% 13,165,080 1.16% The change in institutions holding Apple stock has increased by 60. There has been an increase in the number of shares that intuitions as a whole are holding. There are new institutions holding stocks and current institutions are increasing their holding. I believe that these all are bullish indicators. 10