Apple Computer, Inc. (AAPL) Amy Trudnowski
Date: 11/27/2006 Consensus Estimate 9/06A 9/07E 9/08E
Sector: Technology EPS $2.22 $2.71 $3.17
Industry: Technology Hardware & P/E 40.31 33.04 28.25
Current Price: $89.54 Long Term Growth Rate: 19.46%
52 Wk Price Range: $50.16 – 93.08 Ratio Analysis Co. Indus. Sector SP500
Ave. Daily Vol: 25,370,000 P/E (TTM) 40.31 31.89 30.94 20.68
Beta: 1.44 P/S (TTM) 4.05 2.60 5.21 2.96
Market Cap ($million): 76,380 P/B (MRQ) 7.80 11.04 5.78 3.93
Shares Out (million): 853.0 ROA (TTM) 13.84 10.32 11.18 8.29
Inst. Hold %: 77.30% EBO Valuation $54.93
Div Yld: 0.00% Recommendation: BUY
Total Debt/Equity: N/A Stop-loss Price: $72.00
Member S&P 500? Yes Price 6-mo prob 12-mo prob
Target Price $100.00 64% 73%
Investment Thesis Summary
• Apple Computer, Inc. has been shifting its Bearish – Using a CAPM discount rate of 10.87,
focus away from their lower-margin iPod the EBO valuation indicates the share price
business to their Intel-based Macintosh should be $54.93. This represents only 61
personal computers. The total Mac unit percent of its current price of $89.54.
growth of 30 percent versus 7 percent PC
market growth has not been fully Relative Valuation:
incorporated into their stock price. Neutral/Bearish – All five relative valuation
indicators were either neutral or bearish which
• Apple recently filed a patent for a device that signifies that Apple Computer, Inc. is overvalued
combines cell phone capability with the iPod. compared to similar firms.
The market has not fully reacted to this
substantial advance in iPod technology that Technical Analysis:
may develop a new digital relationship between Bullish – With five bullish technical indicators
one’s cell phone and computer. and one neutral one, the overall technical
analysis is bullish.
• Apple’s iPod has increasingly become a
status symbol to many of today’s young Earnings Analysis:
adults. With so much of this loyal Bullish – With increasing earnings surprises over
generation needing personal computers of the past five quarters and seven recent upward
their own in the near future, the market has EPS revisions, the outlook is positive for Apple.
not completely incorporated the momentum
and potential of the higher profit margin Analyst Recommendations:
Mac sales into their stock price. Bullish – Analysts are currently recommending
an outperform (buy) position for Apple.
• With the recent flop of Microsoft’s Zune
digital music player, it further substantiated Institutional Ownership:
Apple’s position as a leader in the market Bullish – The number of institutions owning
with their iPod products. The market has shares and the percent owned by institutions
undervalued the news of the technology have both increased over the past three months.
giant known as Microsoft falling short in
their battle for market share with Apple. Piotroski Analysis:
Bullish – Apple Computer, Inc. is in the first
quintile and has a total score of seven.
Apple Computer, Inc. (Apple) designs, manufactures, and markets personal computers and other related
software, services, peripherals and networking solutions. They are commonly known for their line of
portable digital music players (iPods) and their online distribution of third-party music, audio books, music
videos, and television shows (iTunes). The following is a list of Apple’s main products and services: the
Macintosh line of desktop and portable computers, the iPod digital music player, the Xserve G5 server and
Xserve RAID storage products, the Mac OS X operating system, several consumer and professional software
applications, the iTunes music store, and a portfolio of peripherals that support and enhance the Macintosh
and iPod product lines. The Company sells all these products worldwide through its online stores, its own
retail stores, its direct sales force, and third-party wholesalers and resellers. Apple has also stretched their
boundaries by selling a variety of third-party Macintosh compatible products, including computer printers,
storage devices, computer memory, digital video camcorders and digital still cameras, personal digital
assistants, and numerous other computing products and supplies through its online and retail stores. As for
its market, the Company sells to education, consumer, creative professional, business, and government
customers.1 The following financial information was retrieved from Apple’s 2005 annual report.
Fiscal Year Results by Americas Europe Japan Retail Other
Segment (in millions) Segments
Net Sales 6,590 3,073 920 2,350 998
Operating Income 798 454 140 151 118
Net Sales 4,019 1,799 677 1,185 599
Operating Income 465 280 115 39 90
Net Sales 3,181 1,309 698 621 398
Operating Income 323 130 121 (5) 51
Competition and Strategy
When it comes to the world of technology, the competition is intense. Apple Computer, Inc. is confronted
by this aggressive competition in all aspects of their business. The market for personal computers has always
been characterized by swift technological advances in both hardware and software. The increased capabilities
and use of personal computers has created a volatile market for new products with competitive prices,
features, and performance characteristics. Over the past few years, the extreme price competition in the
market for personal computers has put industry-wide downward pressures on gross margins. Other principal
competitive factors in the market for personal computers include relative price/performance, product quality
and reliability, design innovation, availability of software, product features, marketing and distribution
capability, service and support, and corporate reputation.
Apple Computer, Inc. is currently taking and will continue to take steps to respond to the competitive
pressures being placed on its personal computer sales as a result of innovations from competing platforms.
For example, in June 2006, the Company shipped certain models of its Macintosh computers with Intel
microprocessors and they have plans to complete the transition of all their computers to Intel chips by the
end of 2007. This change has greatly increased the popularity of Apple’s personal computers because the
fastest processing in the market has always come from Intel. The Company has also been putting pressure on
the giant known as Microsoft, as well as Dell, Hewlett-Packard, and Gateway, by creating computers that can
be opened up with a choice of operating system: a Mac or a PC. Apple is truly responding to consumers by
making it easier for them to adjust to a different type of operating system. 2
Apple Computer, Inc. 10K Report – Fiscal Year 2005
The other segment of Apple’s business that has been feeling extreme competitive pressure is the one that
encompasses their services and products related to music and other creative content. For example, Microsoft
recently launched their Zune music player that is supposed to directly compete with the iPod, especially on
price.3 There are predictions that the competition will only increase as hardware, software, and content
providers work together to offer integrated products competing with Apple’s offerings. However, the
Company has been seen as the original developer and continual innovator in this market. It currently has a
very strong competitive advantage by more effectively integrating an entire solution, including hardware
(iPod), software (iTunes), and distribution of third-party digital content (iTunes Music Store).²
As for Apple Computer, Inc.’s business strategy, it “leverages its ability, through the design and development
of its own operating system, hardware, and many software applications and technologies, to bring to its
customers around the world compelling new products and solutions with superior ease-of-use, seamless
integration, and innovative industrial design.”4 The following are Apple’s four main goals of their strategy:
Digital Hub: Apple believes personal computing is in an era in which the personal computer
functions for both professional and consumers as the digital hub for advanced new digital devices.
The Company has uniquely positioned itself within the industry to offer integrated digital hub
products and solutions.²
Expanded Distribution: Apple believes that a high quality buying experience with knowledgeable
salepersons who can convey the extreme value of their products and services is critical to attracting
and retaining customers. The Company has significantly increased the points of distribution for their
products, especially with their recent initiative to open up more company-owned retail stores.²
Education: For more than 25 years, Apple Computer, Inc. has focused on the use of technology in
education and has been committed to delivering tools to help educators teach and students learn.
The Company will continually create solutions that enable new modes of curriculum delivery, better
ways of conducting research, and opportunities for professional development of students and staff.²
Creative Professionals: Creative professionals constitute one of Apple’s most important markets
for both hardware and software products. The Company offers various software solutions that
incorporate the power, expandability, and features desired by creative professionals.²
Historical Revenue and Earnings:
Historical Revenue (in millions) Historical Earnings (per share)
FY (09/06) FY (09/05) FY (09/04) FY (09/06) FY (09/05) FY (09/04)
1st Quarter 5,749 3,490 2,006 $0.68 $0.37 $0.09
2nd Quarter 4,359 3,243 1,909 $0.49 $0.36 $0.06
3rd Quarter 4,370 3,520 2,014 $0.55 $0.39 $0.08
4th Quarter 4,837 3,678 2,350 $0.64 $0.52 $0.14
Total 19,315 13,931 8,279 $2.36 $1.64 $0.37
Earnings per share and historical revenue have increased drastically over the past three fiscal years. The first
and fourth quarters (July-December) of their fiscal year have always seen higher revenues and earnings. This
is due to an increase in sales during the back-to-school season and the holiday season. Even with these slight
quarter by quarter fluctuations, Apple Computer on a whole has shown an astounding growth pattern in
revenues and earnings.
Apple Computer, Inc. 10Q Report – 2nd Quarter Fiscal Year 2006
I. Fundamental Valuation
Apple Computer, Inc. PARAMETERS FY1 FY2 Ltg
EPS Forecasts 2.71 3.17 19.46% Model 1: 12-year forecasting horizon (T=12).
Book value/share (last fye) 11.75 and a 7-year growth period.
Discount Rate 10.87%
Dividend Payout Ratio 0.00%
Next Fsc Year end 2007
Current Fsc Mth (1 to 12) 2
Target ROE (industry avg.) 19.40%
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Long-term EPS Growth Rate (Ltg) 0.1946 0.1946 0.1946 0.1946 0.1946
Forecasted EPS 2.71 3.17 3.79 4.52 5.40 6.46 7.71
Beg. of year BV/Shr 11.750 14.460 17.630 21.417 25.941 31.345 37.801
Implied ROE 0.219 0.215 0.211 0.208 0.206 0.204
ROE (Beg. ROE, from EPS forecasts) 0.231 0.219 0.215 0.211 0.208 0.206 0.204 0.202 0.200 0.198 0.196 0.194
Abnormal ROE (ROE-r) 0.122 0.111 0.106 0.103 0.100 0.097 0.095 0.093 0.091 0.089 0.087 0.085
growth rate for B (1-k)*(ROEt-1) 0.000 0.231 0.219 0.215 0.211 0.208 0.206 0.204 0.202 0.200 0.198 0.196
Compounded growth 1.000 1.231 1.500 1.823 2.208 2.668 3.217 3.873 4.656 5.587 6.693 8.005
growth*AROE 0.122 0.136 0.159 0.187 0.220 0.259 0.307 0.361 0.425 0.499 0.584 0.683
required rate (r) 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109 0.109
discount rate 1.109 1.229 1.363 1.511 1.675 1.857 2.059 2.283 2.531 2.806 3.111 3.450
div. payout rate (k) 0.000
Add to P/B PV(growth*AROE) 0.11 0.11 0.12 0.12 0.13 0.14 0.15 0.16 0.17 0.18 0.19 0.20
Cum P/B 1.11 1.22 1.34 1.46 1.59 1.73 1.88 2.04 2.21 2.39 2.57 2.77
beyond current yr (Assume this yr's AROE forever) 1.01 1.02 1.07 1.14 1.21 1.29 1.37 1.46 1.55 1.64 1.73 1.82
Total P/B (P/B if we stop est. this period) 2.12 2.24 2.41 2.60 2.80 3.02 3.25 3.50 3.75 4.02 4.30 4.59
Implied price 25.38 26.78 28.86 31.09 33.50 36.10 38.89 41.82 44.89 48.10 51.45 54.93
Beg. BV/Shr 11.75 14.46 17.63 21.42 25.94 31.34 37.80 45.51 54.71 65.65 78.65 94.06
Implied EPS 2.71 3.17 3.79 4.52 5.40 6.46 7.71 9.19 10.94 13.00 15.42 18.25
Implied EPS growth 0.170 0.195 0.195 0.195 0.195 0.195 0.192 0.190 0.188 0.186 0.184
1. EPS Forecasts and long-term growth rate (LTG) were obtained from www.reuters.com on
November 27, 2006.
2. Book value per share derived from balance sheet figures found on www.reuters.com. Total equity
equaled $10,038,000,000 and total shares outstanding equaled 854,000,000 on September 30,
2006. Therefore, book value per share equaled $11.75 ($10,038,000,000/854,000,000=$11.75).
3. Discount rate: The risk free rate was based on the rate of the 20-year Treasury bond, which
equaled 4.76 percent on November 27, 2006. The discount rate was calculated using this risk free
rate, an expected market return rate of 9.00 percent, and an estimated beta of 1.44 from MSN
Moneycentral. This yielded a CAPM discount rate of 10.87 percent
(0.0476+1.44*[0.09-0.0476]=0.1087). With a beta greater than one, the CAPM discount rate is
expected to be more than the market return rate.
4. Dividend payout ratio is the trailing 12 months as reported by www.reuters.com.
5. Next fiscal year-end is September 30, 2007.
6. Current fiscal month is November 2006 (2).
7. Target ROE for the Technology Hardware and Equipment industry (5 yr. Avg.) equaled 19.40
percent as reported by www.reuters.com.
Output and Sensitivity Analysis:
1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
valuation is $54.93.
2. Changing the discount rate to 8.47 percent (-2.40 percent), the EBO valuation equals $89.33. If
expectations of the EBO model are realized, we expect to earn an 8.47 percent annual return.
3. Changing the growth rate to 36.25 percent (+16.79 percent), the EBO valuation equals $89.56.
4. Changing the industry ROE to 27.40 percent (+8.00 percent), the EBO valuation equals $88.44.
II. Relative Valuation
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. 60,210 27.01 1.36 19.86 12.45% 1.60 0.00 46.41% 0.00 1.07
2 HPQ Hewlett-Packard Co. 105,830 38.64 2.88 13.42 12.65% 1.06 2.83 7.85% 0.36 1.18
3 MSFT Microsoft Corp. 289,800 29.48 1.68 17.55 12.34% 1.42 8.10 16.18% 0.50 6.45
4 GTW Gateway 728.64 1.96 0.11 17.82 7.50% 2.38 2.81 -51.41% -0.05 0.18
AAPL Apple Computer, Inc. 76,480 89.54 3.17 28.25 19.46% 1.45 7.80 13.42% 0.58 4.05
Implied Price based on: P/E PEG P/B Value P/S
1 DELL Dell Inc. $62.96 $98.41 $0.00 $0.00 $23.66
2 HPQ Hewlett-Packard Co. $42.53 $65.43 $32.49 $55.54 $26.09
3 MSFT Microsoft Corp. $55.63 $87.72 $92.98 $77.12 $142.60
4 GTW Gateway $56.48 $146.56 $32.26 -$8.42 $3.98
High $62.96 $146.56 $92.98 $77.12 $142.60
Low $42.53 $65.43 $0.00 -$8.42 $3.98
Median $56.05 $93.06 $32.37 $27.77 $24.87
P/E Bearish – Apple Computer, Inc. has the highest P/E ratio of its comparables. This
is an indication that the company has high growth or low risk. Apple does not
currently pay out dividends which is most likely a factor of the high P/E ratio.
There is also the possibility that the company is overvalued.
PEG (P/E/G) Neutral – Apple Computer, Inc. has the middle P/E/G ratio next to its
competition. Relative valuation indicates that Apple should be trading at
approximately $93 dollars per share (very close to current price) based on P/E/G
ratios of similar companies assuming equal risk. This suggests that Apple’s high P/
E ratio is driven, at least in part, by their high growth. With a P/E/G ratio of 1.45,
Motley Fool states that it is potentially overvalued.
P/B Bearish – Apple Computer, Inc. has the second highest P/B ratio relative to industry
competitors, which is most likely driven by its high ROE. It could be a signal that
the company is overvalued or lower risk.
Value (P/B/ROE) Bearish – Apple Computer, Inc. has the highest value ratio of its comparables. This
could be an implication that the company’s high P/B ratio is not fully driven by their
high ROE. Apple might also just be overvalued or lower risk.
P/S Bearish/Neutral – Apple Computer, Inc. has the second highest P/S ratio. The
median P/S ratio of Apple’s competitors indicates that Apple is overvalued relative
to competition, assuming equal risk. This higher P/S ratio could be due to higher
profit margins or lower risk.
Summary Relative valuation indicates that Apple Computer, Inc.’s stock is neutral/bearish.
Each of the five indicators was either bearish or neutral which points towards the
fact that Apple may be overvalued. However, the complete reliability of this
valuation is in question due to the fact that not one of the competitors offers the
same scope of products as Apple (iPod, MacBook, iTunes, etc). The companies
have dissimilar market capitalizations and only slightly similar business functions.
The valuation is not completely unsound but it is not entirely dependable either.
Bollinger Bands Bullish – The current price is near the top Bollinger band which means that it is
poised for a move. Almost all the other technical indicators are positive; therefore,
this is a bullish indicator.
Stochastics Bullish - %K (91.22) is greater than the value of %D (86.33), which is a bullish
indicator. It also looks as though the gap between the two lines is increasing which
is another sign that the stock is bullish.
Moving Averages Bullish – The current price is trading above both the short-term and long-term
moving averages. This is a bullish indicator. Both moving averages lines are moving
upwards which is also a bullish signal for Apple’s stock.
MACD Bullish – The MACD line is above zero, which is a bullish indicator. However, the
MACD is currently below the signal line. This is typically a bearish indicator. The
MACD line appears to be increasing, which is a bullish indicator. The two bullish
indicators and one bearish indicator suggest that the MACD is more bullish than
Regression Neutral – The regression line is upward sloping, which is generally a bullish
indicator. The current share price is above the trend line. This is a bearish indicator.
When taken as a whole, the regression technical analysis is neutral.
PriceROC Bullish – The price has increased over the past 100 days, indicating a positive
momentum. Also, the increasing slope is another bullish indicator.
IV. Earnings Analysis
Sept. 2006 June 2006 Mar. 2006 Dec. 2005 Sept. 2005
(Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior)
Estimate 0.50 0.44 0.43 0.65 0.37
Actual 0.62 0.54 0.47 0.68 0.38
Difference 0.12 0.10 0.04 0.03 0.01
Mean Earnings Estimates
Dec. 2006 March 2007 Sept 2007 Sept 2008 LT Growth
This Quarter Next Quarter This Fiscal Year Next Fiscal Year Rate
Earnings 0.76 0.60 2.71 3.18 19.46
# Estimates 24 24 26 19 13
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Revised Up Revised
Quarter ending 12/06 2 0 3 0
Quarter ending 03/07 1 0 1 1
Year ending 09/07 2 0 4 0
Year ending 09/08 2 0 3 0
Earning surprises for Apple Computer, Inc. have all been positive over the past five quarters. The actual
amount of the earnings surprise has been increasing as well. This is a very positive indicator for the
If analysts’ expectations are met for this quarter, it would be an increase of 22.6 percent in earnings per
share from last quarter. However, a more accurate look at earnings would be to notice that analysts are
predicting an 11.8 percent increase in EPS for same quarter earnings in quarter one of fiscal year 2007.
There was an actual increase in same quarter earnings for the fourth quarter of 2006 of 63.2 percent. This
is an amazing growth in earnings and a positive indicator for the company.
Earnings estimates over the past week have all been positive with seven estimates revised upwards and no
estimates revised downwards. Over the past month, there have been a total of 11 EPS revisions upwards
and only one that was revised downwards. This is an extremely positive indicator for the company.
V. Analysts’ Recommendations
Current 1 Month Ago 2 Months Ago 1 Year Ago
Buy 11 11 11 6
Outperform 10 10 10 9
Hold 5 4 3 9
Underperform 0 0 0 0
Sell 0 0 0 1
No Opinion 0 0 0 1
Mean Rating 1.77 1.72 1.67 2.24
The overall mean rating for Apple Company, Inc. is currently 1.77, which indicates that analysts believe
the stock should be classified as outperform/buy. This is a positive, yet possibly neutral, indicator. The
mean rating for Apple has decreased from 2.24 to 1.77 over the past 12 months, which is a positive signal
for the stock. However, the mean rating has increased slightly over the past two months which is a
negative indicator for the company. The total number of buy and outperform ratings by analysts did not
decrease at all which is definitely a positive indicator for Apple Computer, Inc. Overall, this is a bullish
indicator for the stock.
VI. Institutional Ownership
# of Holders % Beg. Holders Shares % Shares
Shares Outstanding 852,731,943 100.00%
Total Positions 818 119.77% 659,161,792 77.30%
New Positions 121 17.72% 28,617,858 3.36%
Soldout Positions 68 9.96% -5,373,897 -0.63%
Buyers 473 69.25% 98,029,096 11.50%
Sellers 338 49.49% -46,509,452 -5.45%
Beg. Total Inst. Positions 683 100.00% 607,642,148 71.26%
# Net Buyers/3 Mo. Net Chg. 135 19.77% 51,519,644 6.04%
The overall institutional ownership is a bullish indicator with 135 new institutional investors and a 6.04
percent increase in the number of shares held by institutions over the past three months. This indicates
that new institutions are purchasing shares of Apple Computer Inc., and institutions that already own the
stock are increasing their positions in the company.
VII. Piotroski Analysis
A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): 7.80 P/B Ratio, 1st Quintile (Growth)
B. Piotroski Score: 7
Piotroski Item Variable needed to compute Value Points
1. Positive net income TTM net income 1,725,000,000 1
2. Positive cash flow TTM cash flow 1,382,000,000 1
3. Earnings Quality 0
4. Decreasing Debt Debt/assets most recent ann figure 1.55 1
Debt/assets previous ann figure 1.59
5. Increasing working capital Current ratio most recent ann figure 2.96 1
Current ratio previous ann figure 2.63
6. Improving Productivity Asset turnover most recent ann figure 1.4 1
Asset turnover previous ann figure 1.1
7. Growing Profitability ROA most recent ann figure 13.62% 1
ROA previous ann figure 3.71%
8. Issuing Stock Shares outstanding most recent ann 856 0
Shares outstanding previous ann 774
9. Competitive Position Gross margin most recent ann 29.0% 1
Gross margin previous ann 27.3%
A high Piotroski score of seven indicates that Apple Computer, Inc. is in a healthy and improving
financial position. The analysis indicated two areas where the company had not made positive progress.
Their cash flow over the past twelve months was actually less than their earnings which means that the
quality of earnings was not high. The other area that did not see improvement was the issuing of stock.
They have actually issued more stock which may be because of the high demand for their stock, especially
by institutions. The P/B ratios and quintile indicate that the stock is a growth stock rather than a value
stock. Overall, these indicators are bullish for Apple Computer, Inc.