Apple Computer (AAPL) Justin Wilson
Date: 12/01/06 Consensus Estimate 9/06A 12/06E 12/07E
Sector: Information Technology EPS 2.26 2.71 3.18
Industry: Technology Hardware & P/E 40.33 33.63 28.66
Current Price: 91.14 Long Term Growth Rate: 19.65
52 Wk Price Range: 50.16-93.15 Ratio Analysis Co. Indus. Sector SP500
Ave. Daily Vol: 26.05 Mil P/E (TTM) 40.33 31.86 30.37 20.5
Beta: 1.44 P/S (TTM) 4.05 2.59 5.09 2.92
Market Cap ($million): 77,740 P/B (MRQ) 7.8 11.05 5.69 3.92
Shares Out (million): 853 ROA (TTM) 13.84 10.26 11.25 8.33
Inst. Hold %: 77.3% EBO Valuation 47.99
Div Yld: 0 Recommendation: Buy
Total Debt/Equity: NA Stop-loss Price: 80.00
Member S&P 500? Yes Price 6-mo prob 12-mo
Target Price 105 46% 59%
Investment Thesis Summary
- Any hints that Microsoft could compete on an Bearish – The EBO valuation of 47.99 is well
even playing field with Apple in the mp3 player below the stock price of 91.14. The EBO
market would topple their stock price. This is not valuation was based on a discount rate of 9.5%.
fully incorporated into the stock price. The stock price is nearly double the EBO
− Apple is overvalued in both its fundamental and
relative valuations. Despite this, Apple’s stock is Relative Valuation:
in a bubble, therefore these valuations will not Bearish – Apple Computers has four bearish
effect the short term outlook of the stock unless indicators and one neutral indicator.
something causes the stock or industry to move.
− Apple is a risky company but its plans to expand Bullish – There were five bullish indicators, and
into the living room are ambitious. If Apple one neutral indicator.
succeeds they could have multiple hit products
with the ability to match the iPod in their ability to Earnings Analysis:
make money. This has not been fully Bullish – Earnings have been up, so have
incorporated into the stock price and counteracts earnings per share. Apple has beat analysts
the risk that Apple could fall behind in the mp3 expectations for the last 5 quarters.
− Apple makes quality products and is well run. Bullish – Analysts gave Apple computer a mean
The risk that the iPod will lose market share is rating of 1.77, with generally rising
worth the possible reward of dominance in home recommendations.
- Apple has run a successful music download Bullish – Institutional ownership is up 4.61%
business that could be used to expand into other
online download markets. While I believe analysts Piotroski Analysis:
have recognized the potential of the music 1st quintile with a Piotroski score of 8.
download business, the potential of the software
has not been fully incorporated into the stock
Apple is a technology company that focuses on the user experience as opposed to making technology for the
sake of technology. Their revenue is largely weighted in their Macintosh computers and their iPod mp3
players. Apple has 70% of the US market for mp3 players. Apple is a pioneer in creating a successful legal
online music downloading service. They focus on not necessarily being the market leader but expanding into
new products and emphasizing usability. They sell their products online and through their walk in stores all
over the world. They also sell third party products such as digital cameras, iPod accessories and camcorders
on their website. Apple’s CEO is Steve Jobs.
Net Sales by Product: In millions $ % of total sales
Desktops (b) 833 19.10%
Portables (c) 739 16.95%
Total Macintosh net 1,572 36.06%
iPod 1,714 39.32%
Other music related 485 11.13%
products and services
Peripherals and other 264 6.06%
Software, service, and 324 7.43%
other sales (f)
Total net sales 4,359 100%
Competition and Strategy
Apple Computer is under fierce competition from Microsoft, SanDisk, Dell Computer, Hewlett Packard, and
a multitude of other computer and mp3 player manufacturers. The market has been flooded by low cost
parts and computers, and the high end gaming rigs are using the latest in liquid cooling. Apples strategy to a
large extent is to not compete directly with these computer companies. Apple emphasizes a user experience
approach. In other words, what really matters is what it is like for the consumer to use Apple products, and
not on what the specs are, or how powerful the system is. Despite the correlation between the two, Apple
sees the user experience as first and foremost and the technology as secondary. Part of Apple's philosophy is
that if they make a product with the consumer in mind, instead of throwing their money at better specs and
conforming to standards, they can charge a premium on their products and have higher margins.
The new revolution in Apple is their attempt to become a technology and entertainment conglomerate by
extending their strategy of emphasizing the user experience into other markets. For example Apple just
announced a patent on phone technology. Many in the industry believe an iPhone could come as soon as
January 2007. AirPort Express which allows for music to be played on multiple stereo systems at once has
shown Apple Computer's desire to enter the living room. Apple has already made a foray into speakers with
the iHome and they announced plans for the iTV. ITV allows for people to connect their various devices
such as computer to television. This news coupled with interviews hint that Apple is poised to move into the
living room. Instead of focusing on becoming the market leader they could simply be a choice for a
multitude of different products. With the success of the iPod and the switch to Intel chips away from IBM
Apple has been moving farther into the mainstream. This is part of the reason why you are seeing Apple
with the ability to boot Windows on their new OS.
Apple Computer's biggest competitor in the computer department is Dell Computer, which is allied with
Microsoft and its Windows operating system. Dell has a strategy emphasizing supply chain management
while Microsoft has a strategy of exploiting its monopoly while trying to clean up its image by cooperating
with the Mozilla Foundation, various Linux developers and even Apple by making office applications for the
1. Information from the competition and company strategy comes from www.reuters.com, 2
www.wikipedia.org, www.slashdot.org, and www.apple.com.
Mac OS. Microsoft also is expanding into new markets like mp3 players and videogames. Both of these
companies don't directly compete with Apple since Apple has gone out of their way to cater to a niche
market of slick trendy upper middle class and artistic people. Dell is a discount low cost company. Microsoft
has a monopoly in operating systems but Apple's base is fiercely loyal and is not likely to be converting to
Microsoft products. Microsoft is looking to compete more directly in the mp3 player market.
It is unclear what Apple will do with its vital iPod segment. Apple currently has 70% of the US market share
and Microsoft has recently entered the market with its Zune player. With nine percent market share it
appears that Zune is the most credible challenge to Apple in this market. The mp3 player market still has a
lot of room to grow. iPod has not yet reached market saturation and Microsoft’s Zune is a new entrant.
Even a slight hint that Microsoft has the power to consistently gain market share in the mp3 player market
will be catastrophic to Apple and its stock price since iPod is serving as a cash cow. Upon announcement of
the Zune Apple Computer lowered the price of the iPod, improved the casing to the iPod Nano and raised
the capacity for the iPod to 80 gigabytes.
Apple has always been and still is a proponent of closed formats. Apple has locked down iTunes music so it
cannot play on other players with a system called Fairplay. Apple has also been known to ignore technology
standards in favor of its in house creations like Firewire. This part of the Apple strategy despite the
controversy it causes. Part of this strategy comes from its vertical integration, and its desire to differentiate
itself from the rest of the tech world. Apple tries to find the best technology workers by having a more
individualistic attitude towards work.
In summery Apple views itself as a company that is able to focus on what consumers want, as opposed to
making needless technology. They focus on the customers and ask them why they are dissatisfied in certain
markets. Apple sees growth opportunities by giving customers what they want and are not getting in markets
where companies are focusing on having state of the art technology as opposed to making a product that is
likable and usable. They will continue to expand into new markets while many of them will succeed.
Historical Revenue and Earnings:
Historical Revenue Historical Earnings
FY 09/06 FY 09/05 FY 09/04 FY 09/06 FY 09/05 FY 09/04
1st Quarter 5749 3490 2006 .68$ .37 .09
2nd Quarter 4359 3243 1909 .49$ .36 .06
3rd Quarter 4370 3520 2014 .55$ .39 .08
4th Quarter 4837 3678 2350 .64$ .52 .14
Total 19315 13931 8279 2.36$ 1.64 .37
Revenue and earnings have been increasing for the last three years. This shows Apples track record is very
good for delivering growth.
1. Information from the competition and company strategy comes from www.reuters.com, 3
www.wikipedia.org, www.slashdot.org, and www.apple.com.
I. Fundamental Valuation
PARAMETERS FY1 FY2 Ltg
EPS Forecasts 2.71 3.18 19.65% Model 1: 12-year forecasting horizon (T=12).
Book value/share (last fye) 11.75 and a 7-year growth period.
Discount Rate 11.63%
Dividend Payout Ratio 0.00%
Next Fsc Year end 2007
Current Fsc Mth (1 to 12) 2
Target ROE (industry avg.) 19.38%
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Long-term EPS Growth Rate (Ltg) 0.1965 0.1965 0.1965 0.1965 0.1965
Forecasted EPS 2.71 3.18 3.80 4.55 5.45 6.52 7.80
Beg. of year BV/Shr 11.750 14.460 17.640 21.445 25.997 31.444 37.962
Implied ROE 0.220 0.216 0.212 0.210 0.207 0.205
(Beg. ROE, from EPS forecasts) 0.231 0.220 0.216 0.212 0.210 0.207 0.205 0.203 0.201 0.198 0.196 0.194
(ROE-r) 0.114 0.104 0.099 0.096 0.093 0.091 0.089 0.087 0.084 0.082 0.080 0.078
(1-k)*(ROEt-1) 0.000 0.231 0.220 0.216 0.212 0.210 0.207 0.205 0.203 0.201 0.198 0.196
1.000 1.231 1.501 1.825 2.213 2.676 3.231 3.894 4.685 5.626 6.743 8.065
0.114 0.128 0.149 0.175 0.206 0.243 0.288 0.338 0.396 0.462 0.538 0.625
0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116
1.116 1.246 1.391 1.553 1.733 1.935 2.160 2.411 2.692 3.005 3.354 3.744
PV(growth*AROE) 0.10 0.10 0.11 0.11 0.12 0.13 0.13 0.14 0.15 0.15 0.16 0.17
1.10 1.20 1.31 1.42 1.54 1.67 1.80 1.94 2.09 2.24 2.40 2.57
(Assume this yr's AROE forever) 0.88 0.88 0.92 0.97 1.02 1.08 1.15 1.21 1.26 1.32 1.38 1.44
(P/B if we stop est. this period) 1.98 2.08 2.23 2.39 2.57 2.75 2.95 3.15 3.35 3.57 3.78 4.01
23.75 24.97 26.76 28.69 30.75 32.96 35.32 37.71 40.18 42.72 45.33 47.99
11.75 14.46 17.64 21.44 26.00 31.44 37.96 45.76 55.05 66.11 79.23 94.76
2.71 3.18 3.80 4.55 5.45 6.52 7.80 9.29 11.05 13.12 15.54 18.37
0.173 0.197 0.197 0.197 0.197 0.197 0.192 0.189 0.187 0.184 0.182
1. EPS Forecasts and long-term growth rate (LTG) were all gathered from www.reuters.com.
2. Book value per share derived from dividing book value of the equity by the total common shares
outstanding for the last fiscal year. Both of these numbers were gathered from www.reuters.com.
3. Discount rate: The discount rate of 11.63% was derived from the CAPM equation. The inputs were
the market rate, which was assumed to be 9.5% upon suggestion from Dr. Sias, a risk free rate of
4.66, which was generated from www.federalreserve.gov, and a beta of 1.44 given by
www.reuters.com. The CAPM equation is (r=rf+β(E(rm)-rf)).
4. Dividend payout ratio was taken from www.reuters.com. Apple currently does not pay dividends.
5. Next fiscal year-end is February 2007.
6. Current fiscal month is December 2006.
7. Target ROE= 19.38% from 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 47.99.
2. Changing the discount rate to 12.34 (which uses the CAPM with a discount rate of 10%) the EBO
valuation is 42.23. Changing the discount rate to 10.9 (which uses the CAPM with a discount rate of
9%) gives an EBO valuation of 54.97.
3. Changing the growth rate to 15% would create an EBO valuation of 34.5%
4. Changing the industry ROE to 10% would create an EBO valuation of 37.32.
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 60.78B 27.27 1.36 20.05 12.45% 1.61 19.74 46.40% 0.43 1.07
2 MSFT Microsoft 286.26B 29.12 1.68 17.33 12.34% 1.40 7.99 16.18% 0.49 6.36
3 HPQ Hewlett Packard 108.02B 39.44 2.88 13.69 12.46% 1.10 2.82 7.85% 0.36 1.18
4 SNDK SanDisk 10B 44.50 2.77 16.06 18.86% 0.85 2.64 8.86% 0.30 3.07
AAPL Apple Computers 78.00B 91.14 3.18 28.66 19.65% 1.46 7.80 13.42% 0.58 4.05
Implied Price based on: P/E PEG P/B Value P/S
1 Dell Dell $63.76 $100.64 $230.65 $66.71 $24.08
2 MSFT Microsoft $55.12 $87.77 $93.36 $77.43 $143.12
3 HPQ Hewlett Packard $43.55 $68.68 $32.95 $56.33 $26.55
4 SNDK SanDisk $51.09 $53.23 $30.85 $46.72 $69.09
High $63.76 $100.64 $230.65 $77.43 $143.12
Low $43.55 $53.23 $30.85 $46.72 $24.08
Median $53.10 $78.22 $63.16 $61.52 $47.82
P/E Bearish – Apple has a higher P/E ratio than all of the listed competitors, implying that
the stock is more risky, overvalued, or has higher expected growth.
PEG (P/E/G) Bearish – Apple has a higher PEG ratio than four of its five competitors. This could
mean that the company is overvalued, or the stock is less risky than its competitors.
This could also mean that there is a lower expected growth.
P/B Neutral – Apple computer has a P/B ratio of 7.8 which is higher than two of its
competitors, and lower than one of its competitors.
Value (P/B/ROE) Bearish – The value ratio is higher than all its competitors at .58. This implies that
Apple Computer could be either overvalued, or more risky.
P/S Bearish – The P/S ratio is higher than four of its five competitors. This implies that the
stock could be overvalued, or that it is less risky.
Summary Bearish – This stock has four bearish indicators and one neutral indicator. This implies
that the stock is overbought, or that the stock is less risky than its competitors. It is
difficult to argue that Apple is less risky than its competitors, with Microsoft entering the
MP3 player market, and the company venturing into new products as often as it does.
Microsoft depends on a cash cow of Windows, and Dell and Hewlett Packard sells to a
pretty saturated market. This combined with the EBO valuation heavily implies that the
reason people are buying Apple stock is because they believe that Apple will continue to
increase its growth rate. Or they think that even if Apple is overvalued and in a bubble.
Perhaps they believe Apples stock will continue to perform from momentum, even if the
company isn't making enough money to justify the stock price.
III. Technical Analysis
Bollinger Bands Bullish – The price is very close to the top band so the stock is poised to move soon.
Other technical indicators hint at a positive gain.
Stochastics Neutral -- %K is about equal to %D, and the gap is decreasing.
Moving Averages Bullish – The price is above both moving average lines.
MACD Bullish – The MACD is above the signal line and greater than zero.
Regression Bullish – The line has a positive slope. Apple Computer's current price is also slightly
below the line.
PriceROC Slightly Bullish – The line is above zero and still seems to be moving upwards. The
current price is above the line though.
IV. Earnings Analysis
Date: 09/2006 Date: 06/2006 Date: 03/2006 Date: 12/2005 Date: 9/2005
(Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior)
Estimate .50 .44 .43 .65 .37
Actual .62 .54 .47 .68 .38
Difference .12 .10 .04 .03 .01
Mean Earnings Estimates
Date: 12/2006 Date: 03/2007 Date: 2007 Date: 2008 LT Growth Rate
Earnings 6349.28 5246.45 22892.50 26629.79 19.65
# Estimates 24 24 26 19 13
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Down Revised Up Revised Down
Quarter ending 12/2006 1 0 3 0
Quarter ending 03/2007 0 0 1 1
Year ending 2007 1 0 4 0
Year ending 2008 1 0 3 0
Apple had positive earnings surprises for the last five quarters. The number of analysts revisions
upwards has been overwhelmingly higher than downwards revisions with only one downward revision in the
last four months. Earnings are up and on the rise and they have been beating estimates. Every bit of
information here is good news and these numbers look great for Apple.
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 4 9
Underperform 0 0 0 0
Sell 0 0 0 1
No Opinion 0 0 0 1
Mean Rating 1.77 1.72 1.72 2.24
The overall mean rating for the stock is 1.77 which would be a buy. Analysts are nearly unchanged in
their recommendations in the last two months. Since there was an extra analyst added recently, I would not
necessarily consider the extra hold recommendation as enough to warrant a negative indicator. In the last
year analysts have improved their recommendations. In the last two months their recommendations have
been nearly unchanged. This leaves Apple with two positive indicators and one neutral indicator for an
overall positive indicator.
VI. Institutional Ownership
# of Holders % Beg. Holders Shares % Shares
Shares Outstanding 1,103,492,885 100.00%
Total Positions 818 119.77% 853,000,000 77.30%
New Positions 121 17.72% 28,500,812 2.58%
Soldout Positions 67 9.81% -5,106,897 -0.46%
Buyers 473 69.25% 97,245,608 8.81%
Sellers 338 49.49% -46,375,796 -4.20%
Beg. Total Inst. Positions 683 100.00% 802,130,188 72.69%
# Net Buyers/3 Mo. Net Chg. 135 19.77% 50,869,812 4.61%
The percent of institutions owning the Apple has been up 4.61 in the last three months. This is a highly
positive indicator. More institutions are buying Apple and the overall position is much higher.
VII. Piotroski Analysis
A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): 1
B. Piotroski Score: 7
Piotroski Item Variable needed to compute Value Points
1. Positive net income TTM net income 1725 1
2. Positive cash flow TTM cash flow 1382 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% 1
Gross margin previous ann 27.3%