Apple Computer Incorporated 7

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Apple Computer Incorporated 7

  1. 1. Apple Inc. (AAPL) Scott Curry Date: 9/29/08 Consensus Estimate TTM FY1 FY2 Sector: Technology EPS 5.11 5.22 6.10 Industry: Technology Hardware & P/E 20.58 20.90 17.89 Equiptment Current Price: 97.06 Long Term Growth Rate: 23% 52 Wk Price Range: 100.59-202.96 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 30,240,000 P/E (TTM) 20.58 5.93 7.43 26.67 Beta: 2.53 P/S (TTM) 3.03 .72 .70 2.22 Market Cap ($million): $93,250 P/B (MRQ) 4.75 2.31 2.51 4.56 Shares Out (million): 885.88 ROA (TTM) 17.25 3.69 4.26 8.14 Inst. Hold %: 65.00% EBO Valuation $235.71 Div Yld: N/A Recommendation: Total Debt/Equity: 7 Stop-loss Price: Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price 211.33 9% 17% Investment Thesis Summary Fundamental Valuation: • Apple has been one of the most successful Bullish – EBO valuation suggests a price of technology companies over the past few $235.71, which is 243% of the current price. years due to its innovative products, specialized niche of consumers, and Relative Valuation: enormously successful advertising Discuss relative valuation Technical Analysis: • Apple’s earnings have been steadily Neutral – 3 bullish indicators and 3 bearish increasing over the past few years, and show indicators. no signs of slowing down with new products like the iPhone, and new iPod Nano being Earnings Analysis: introduced. Bullish – Apple has had positive earnings surprises over the past 5 quarters, with neutral revisions for the next fiscal year. • Apple picked up on the digital music trend early and now dominates it with the iPod Analyst Recommendations: and iTunes. Apple’s market share is 8 times Bullish – 28 of 34 analyst recommendations larger than its closest competitor in digital are either buy or outperform, with only 1 sell media. recommendation. Institutional Ownership: Neutral/Bearish – Institutional ownership • A new line of low cost MacBook laptops are dropped, but only by 1.21%. Number of shares to be announced later this year, and should bought and sold were relatively close. help Apple compete with cheaper Windows running laptops Piotroski Analysis: Neutral –Piotroski score was 6, which is • iPhone sales have destroyed even bullish medium or neutral. Apple has a P/B ratio of sales estimates for 2008, and have now 4.75, making it a growth stock. topped 10 million units. 1
  2. 2. Company Summary Apple Inc. (AAPL), incorporated in 1977, is currently one of the largest computer companies in the world with a market cap of over $112 billion. Apple designs, manufactures, and markets personal computers, portable digital music players, and mobile telecommunications devices. Apple sells its products worldwide through its online and retail stores. The company is best known for its Mac OS X operating system, its iPod line of music players, its iPhone PDA, and its iTunes music program/music store. They sell chiefly to educators, individual consumers, and creative professionals. Due to reasons such as their philosophy of aesthetic design, user friendly interfaces, and to their distinctive advertising campaigns, Apple has established a unique and devoted customer base, primarily in the U.S. Forbes Magazine recently named Apple “the most admired company in the United States. Apple Inc. Revenue by Product Product 2007 Revenue ($Millions) % of Total Revenue Desktop Computers 4,020 16.75 Laptop Computers 6,294 26.22 iPods 8,305 34.60 Other Music Products(iTunes 2,496 10.40 Store etc) iPhone and related products 123 0.51 Software and Services 1,508 6.28 Peripherals/Other Hardware 1,260 5.25 Apple Inc. % of Net Sales by Operating Segment America 48.30% Europe 22.75% Japan 4.50% Retail 17.14% Other Segments 7.30% Competition and Strategy Apple is currently the fifth largest company in the technology sector by market cap. Their main competition in the sector includes Microsoft ($250,170,030,000 MktCap), IBM ($161,795,010,000 MktCap), Cisco Sys. ($141,990,960,000 MktCap ), Hewlett-Packard ($117,885,920,000 MktCap), and Dell ($33,305,200,000 MktCap). Apple is in competition with all of these companies, but their main competitor is Microsoft. This is due to the competition between the two companies operating systems, Apple’s Mac OS X and Microsoft’s Windows OS, and recently between Apple’s iPod and Microsoft’s Zune music player. Due to the large market share dominated by Microsoft, IBM, and other PC producers in the business environment, Apple has had to adjust its market strategy over the last decade or so. They have decided to not compete directly with the Windows and PC companies for the same market demographics and instead pursue their own niche in the technology sector. It is in their pursuit of this niche where Apple exceeds, and where their competitive advantages come from. Apple emphasizes a user-friendly experience when using their products. Their OS X operating system for example is much less confusing and more innovative than Windows. With this strategy they have dominated markets such as education and creative professionals, two of their biggest customers. Their hardware design is unrivaled in the tech sector, with their innovative, elegant, and aesthetically pleasing products. Perhaps their best competitive advantage and their biggest success has come from their ability to think outside of the box with the creation of products branching out from traditional hardware and software design. Apple jumped on the digital music bandwagon early with the creation of the iPod, which has still yet to be topped in terms of aesthetics, design, or flat out sales. Their iTunes music player, and innovative iTunes Store have been hugely successful. By allowing both iTunes and the iPod to work with Windows, Apple has 2
  3. 3. become the leader in digital music, which accounts for 45% of their revenue. They continue to tap other markets, most recently the cell phone market with the release of the iPhone, which was met with critical acclaim. The iPhone currently accounts for a small amount of Apple’s revenue (.51%), but that should continue to grow as time goes on and Apple begins to focus more attention on it. The other area that Apple exceeds in is marketing. They simply understand what will get people excited about their products, and then they execute on that vision. They choose not to talk about technology or specifics in their ads, but rather how their products will make your life better. Their hugely successful iPod ads won an award from AdWeek. Apple knows better than anyone how to associate an image and lifestyle with their products. This is evident in their recent line of “I’m a Mac”/”I’m a PC” commercials, depicting the Mac as a young, hip person, contrasted with the uptight, nerdish looking PC. This illustrates the kind of niche that Apple has pursued and developed over the past decade or so. Historical Revenue and Earnings: Historical Revenue Historical Earnings FY 09/08 FY 09/07 FY 09/06 FY 09/08 FY 09/07 FY 09/06 1st Quarter 9,608 7,115 5,749 1.81 1.17 .68 2nd Quarter 7,512 5,264 4,359 1.19 .89 .49 3rd Quarter 7,464 5,410 4,370 1.21 .94 .55 4th Quarter N/A 6,217 4,837 N/A 1.04 .63 Total 24,584 24,006 19,315 4.21 4.04 2.35 Apple’s revenue and earnings per share have steadily increased over the past two years. Both current year revenue and current year earnings have exceeded previous year totals without yet reporting 4th quarter results. 3
  4. 4. I. Fundamental Valuation Apple Inc. PARAMETERS FY1 FY2 Ltg EPS Forecasts 5.22 6.10 23.54% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 16.66 and a 7-year growth period. Discount Rate 4.60% Dividend Payout Ratio 0.00% Next Fsc Year end 2009 Current Fsc Mth (1 to 12) 1 Target ROE (industry avg.) 10.11% Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Long-term EPS Growth Rate (Ltg) 0.2354 0.2354 0.2354 0.2354 0.2354 Forecasted EPS 5.22 6.10 7.54 9.31 11.50 14.21 17.55 Beg. of year BV/Shr 16.660 21.880 27.980 35.516 44.826 56.327 70.536 Implied ROE 0.279 0.269 0.262 0.257 0.252 0.249 ROE (Beg. ROE, from EPS forecasts) 0.313 0.279 0.269 0.262 0.257 0.252 0.249 0.219 0.190 0.160 0.131 0.101 Abnormal ROE (ROE-r) 0.267 0.233 0.223 0.216 0.211 0.206 0.203 0.173 0.144 0.114 0.085 0.055 growth rate for B (1-k)*(ROEt-1) 0.000 0.313 0.279 0.269 0.262 0.257 0.252 0.249 0.219 0.190 0.160 0.131 Compounded growth 1.000 1.313 1.679 2.132 2.691 3.381 4.234 5.288 6.447 7.670 8.899 10.062 growth*AROE 0.267 0.306 0.375 0.461 0.567 0.697 0.859 0.916 0.927 0.876 0.753 0.554 required rate (r) 0.046 0.046 0.046 0.046 0.046 0.046 0.046 0.046 0.046 0.046 0.046 0.046 0.046 discount rate 1.046 1.094 1.144 1.197 1.252 1.310 1.370 1.433 1.499 1.568 1.640 1.715 div. payout rate (k) 0.000 Add to P/B PV(growth*AROE) 0.26 0.28 0.33 0.38 0.45 0.53 0.63 0.64 0.62 0.56 0.46 0.32 Cum P/B 1.26 1.54 1.86 2.25 2.70 3.23 3.86 4.50 5.12 5.68 6.14 6.46 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 5.56 6.07 7.12 8.37 9.84 11.57 13.63 13.90 13.44 12.15 9.99 7.03 Total P/B (P/B if we stop est. this period) 6.81 7.61 8.99 10.61 12.54 14.81 17.49 18.40 18.56 17.82 16.12 13.48 Implied price 113.91 127.26 150.31 177.52 209.67 247.63 292.47 307.73 310.37 298.05 269.61 225.51 Check: Beg. BV/Shr 16.66 21.88 27.98 35.52 44.83 56.33 70.54 88.09 107.41 127.79 148.26 167.63 Implied EPS 5.22 6.10 7.54 9.31 11.50 14.21 17.55 19.32 20.38 20.47 19.37 16.95 Implied EPS growth 0.169 0.235 0.235 0.235 0.235 0.235 0.101 0.055 0.004 -0.054 -0.125 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) were obtained from www.rueters.com on September 29th, 2008. 2. Book value per share derived from… 3. Discount rate: the discount rate was found by using the CAPM calculation and the following inputs. For the risk free rate the most recent 20 year T-bond rate was used as of Oct 3, 2008 which was 4.48%1. The expected return on the market used was 9.5% as suggested along with the company beta of 1.07. Calculation: 0.0448 + 2.53(0.095 – 0.0448) = 4.6% 4. Dividend payout ratio was obtained from www.reuters.com on Oct 3, 2008 5. Next fiscal year-end is September, 2009 6. Current fiscal month is 2 7. Target ROE= return on equity 5yr average for the industry which is 20.43% Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $225.51 2. Changing the discount rate to… 3. Changing the growth rate to… 4. Changing the industry ROE… 1 http://www.federalreserve.gov/releases/h15/Current/ 4
  5. 5. II. Relative Valuation Comparables 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 29.81B 15.21 1.58 9.63 12.54% 0.77 10.02 57.79% 0.17 0.45 2 HPQ Hewlett-Packard 101.39B 41.40 3.99 10.38 10.00% 1.04 2.60 11.65% 0.22 0.89 3 MSFT Microsoft 232.82B 25.50 2.16 11.81 11.00% 1.07 5.42 26.46% 0.20 3.25 4 IBM International Busniess Machines 124.93B 92.21 9.81 9.40 7.00% 1.34 4.82 28.55% 0.17 1.31 AAPL Apple Inc. 97.68B 110.26 6.46 17.07 23.54% 0.73 4.43 19.84% 0.22 2.82 Implied Price based on: P/E PEG P/B Value P/S 1 DELL Dell $62.19 $116.74 $249.39 $85.62 $17.59 2 HPQ Hewlett-Packard $67.03 $157.79 $64.71 $110.21 $34.80 3 MSFT Microsoft $76.26 $163.20 $134.90 $101.15 $127.07 4 IBM International Busniess Machines $60.72 $204.20 $119.97 $83.37 $51.22 High $76.26 $204.20 $249.39 $110.21 $127.07 Low $60.72 $116.74 $64.71 $83.37 $17.59 Median $64.61 $160.49 $127.43 $93.38 $43.01 Indicator Interpretation P/E Bearish – Apple has the highest P/E ratio. PEG (P/E/G) Neutral – Apple’s PEG ratio is within those of its closest competitors’. P/B Neutral – Apple’s P/B ratio is relatively close to all of its competitors. Value (P/B/ROE) Neutral – Apple’s value ratio is right around the value of its competitors’. P/S Neutral/Slightly Bearish – Apple has the second highest P/S ratio. It doesn’t come close to Microsoft’s but it is reasonably higher than the other companies in the industry. Summary Relative valuation is rather Neutral for Apple. One bearish indicator, 4 neutral indicators. 5
  6. 6. III. Technical Analysis Insert three charts here (see instructions) 1) Bollinger Chart/Stochastic Chart 2) EMA/MACD Chart 6
  7. 7. 3) Linear Regression/Momentum Briefly discuss each indicator in the following table. Indicator Interpretation Bollinger Bands Bullish - The stock price is currently near the lower band, indicating that the stock price is poised for a rise. Stochastics Bullish - %K is less than %D and is near/under the 20% indicator, suggesting that the stock is oversold Moving Averages Bearish – The price is below both the 25 day and 50 day EMA line. The gap is fairly large also, both bearish signals. MACD Neutral/Bearish – The MACD has been about equivalent to the EMA which is a neutral signal, but the MACD is currently less than zero, which is a bearish signal. Regression Bullish – The stock price recently dropped below the 100 day linear regression line, Momentum Bearish – The momentum has steadily decreased over the past few weeks, indicating negative momentum in the stock’s price 7
  8. 8. IV. Earnings Analysis Earnings Surprises Date: Date: Date: Date: Date: (06/08) (03/08) (12/07) (09/07) (06/07) Estimate 7,367.46 6,959.98 9,523.79 6,059.29 5,292.72 Actual 7,464 7,512 9,608 6,217 5,410 Difference 96.54 552.02 84.21 157.71 117.28 Mean Earnings Estimates 12/07 Date: 03/08 Date: This Date: Next LT Growth Fiscal Year Fiscal Year Rate Earnings 9,523.79 6,959.98 32,691.80 40,589.5 23.54 # Estimates 24 28 29 29 13 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 12/07 0 0 0 0 Quarter ending 03/08 0 0 0 0 Year ending 09/08 0 4 1 5 Year ending 09/09 2 3 2 4 Earnings surprises have been a bullish signal. Apple has enjoyed positive earnings surprises over the past few years. Estimated earnings are predicted to increase over the next year, and Apple’s long term growth rate is high at 23.54%. Revisions for the current year appear bearish, almost all revisions being down. Revisions for next year are more neutral. 8
  9. 9. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 18 18 17 17 Outperform 10 10 9 9 Hold 5 3 3 3 Underperform 0 0 0 0 Sell 1 1 1 1 No Opinion 0 0 0 0 Mean Rating 1.71 1.62 1.63 1.63 With 28 out of 34 analysts advocating either buy or outperform and only one analyst suggesting sell, analyst recommendations for Apple stock is very positive. VI. Institutional Ownership Paste the institutional ownership spreadsheet here. To make it look nice, select it in Excel, hit copy, hit paste special, and select “Picture.” # of Holders % Beg. Holders Shares % Shares Shares Outstanding 885,997,479 100.00% Total Positions 1,219 87.07% 576,305,920 65.05% New Positions 1 0.07% Soldout Positions 233 16.64% Buyers 587 41.93% 65,909,100 7.44% Sellers 768 54.86% -76,655,304 -8.65% Beg. Total Inst. Positions 1,400 100.00% 587,052,124 66.26% #Buyers - #Sellers -181 43.32% -10,746,204 -1.21% There is a slightly bearish trend in the institutional ownership seen above. There has been a decrease of 1.21% in the institutional ownership. There were almost 13% more owners than sellers than there were buyers, but the number of shares being sold and bought were almost even. The only new position was only a .07% shareholder. 9
  10. 10. VII. Piotroski Analysis A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): P/B = 4.75, Quintile = 1, Growth B. Piotroski Score: 6 Piotroski Item Variable needed to compute Value Points 1. Positive net income TTM net income 4,602.0 1 2. Positive cash flow TTM cash flow 6,997.0 1 3. Earnings Quality 1 4. Decreasing Debt Debt/assets most recent ann figure 1.74 Debt/assets previous ann figure 1.72 0 5. Increasing working capital Current ratio most recent ann figure 2.36 Current ratio previous ann figure 2.24 1 6. Improving Productivity Asset turnover most recent ann figure 1.1 Asset turnover previous ann figure 1.3 0 7. Growing Profitability ROA most recent ann figure 16.43% ROA previous ann figure 13.83% 1 8. Issuing Stock Shares outstanding most recent ann 889M Shares outstanding previous ann 877M 0 9. Competitive Position Gross margin most recent ann 34% Gross margin previous ann 29% 1 Total 6 10

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