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  1. 1. Joe Dinges BFIN 423 – Investment Analysis December 10, 2002 Research Project Introduction At the beginning of the semester if one were to ask me my view of the financial marketplace right now and what my investment strategy would be if I actually had money, I can tell you that it would be a lot different then it is now. Seeing all of the uncertainty in the investment market, it is hard not to be skeptical about when stock prices will rise and when it is a safe time to put your money out there. However, since that time I have learned a lot about investments and the nature of the beast. While I by no means claim to be an expert on finance, and while my knowledge on the subject is all strictly through studying, not experience, I am confident that I would fair well in investing. Keeping all of this in mind, while looking for an asset to do this research paper on, I wanted to put this knowledge to good use. I thus came to the logical conclusion that I should do this paper on an investment asset that I would look seriously at investing in and rationalizing my decision. The success of my strategy is then based on the grade I receive on this project and I can then see if I have come very far in my education here at Gonzaga. For my investment asset, I chose Apple Computer Co. Background on Apple and the Computer Industry Apple was born in 1976 when two high school friends got together and created what they called the Apple I. While the initial sales did not take off, the overall product was a step in the right direction. It was not until 1977, when the Apple II debuted at a local computer trade show, when Apple made a huge impact on the computer market. The first personal computer to come in a plastic case and include color graphics, the
  2. 2. Apple II was an impressive machine. Orders for Apple machines multiplied by several times after its introduction. In 1981, IBM released its first PC. With the power of Big Blue behind it, the PC quickly began to dominate the playing field. In May of 1985, the longtime headman of Apple, Steve Jobs (Co-founder) resigned. During this time, Microsoft was beginning to release Windows 1.0. It was at this time that Microsoft agreed not to use Apple’s technology in this version, but due to a loophole in the agreement, Microsoft was able to use it in all other versions of their Windows Operating System. This is marked as the changing of the guard in the computer industry. It was not until 1998, when Jobs rejoined Apple, that the company became a success again. For almost 12 straight quarters, Jobs brought positive revenues to the company and had their stock as high as 130 points. While the company experienced a slide in late 2000 and through somewhat of early 2001, it has bounced back and had positive results since. At the present moment, the control of the PC market is lead by Hewlett-Packard / Compaq at 17.2%, followed by Dell Computer at 14.4% (New York Times). Apple appears to keeping competitive holding about 5% of the PC market (CNN). Market Share Apple’s has roughly 5% of the market to date in the overall computer market. This number is a bit debatable because Apple’s computer turnover rate is not as high as the PC market, so there are not as many sales per year. In addition, all software that sells as a hybrid (both PC and Apple version) is generally credited to the PC side of the market. (2) Apple does have a bit of a leg up in the education market, where it
  3. 3. commands a 23% market share, which is a sizeable chunk, especially in the computer industry. In 1996, however, Apple commanded a 45% share, which totally dominated the market. This was solely because of Apple’s easy-to-use nature and graphical interface. The PC side of the industry has gone to great lengths to shrink Apple’s share of the market, namely Dell, because it is the one segment of the market that, even when the market is down as a whole, has consistent sales and continues to sell computers and software to potential lifetime buyers. Financial History When Apple first hit the stock market, it was king of the hill until the court ruling on the Microsoft decision. Since that time the stock has been mostly down, up until the time Steve Jobs rejoined the company and stock prices soared. Most recently, the company has declined in value since late 2000, which is most likely due to the tech bubble bursting. Since that point in time, Apple and Dell are two of the only companies in the computer industry to turn a consistent profit. Granted, Apple has had a few losses since then, but the vast majority of their fiscal quarters have had positive gains. Apple’s volume has always stayed consistent, especially for market standards, although since late 2000 the stock has been traded more frequently, most likely due to a split in mid-year and the tech bubble bursting. This factor could signal that investors see Apple as a growth stock in the long run, possibly because it is the only major competitor in the computer industry that can hold a candle to Microsoft. Figure 1 Apple vs. Dell (Financial Comparison – Last 5 Years)
  4. 4. Personal Theories My take on Apple’s worth as an asset is one that it is a solid stock that has high highs and low lows. From the stock’s conception, it has shown potential to be quite prosperous. At other times, it has shown that its stock price is only a few dollars higher than the amount of cash they have divided by the number of shares they have. This makes me look at the company as a prime candidate with which to make money. It is in a market that it may not own much of the share right now, but has the potential to become a huge player. Let me explain: Dell, Compaq/HP, IBM, etc. all rely on Microsoft as their operating system supplier. While Microsoft is definitely a big player in the industry, it too has seen hard times. With government sanctions all but inevitable for Microsoft, and the yearn for consumers to have another choice, plays into the hands of Apple. They have started to infiltrate this market by introducing the iPod, which is rated as the best MP3 player on the market by many, which is a product in high demand for consumers, particularly by
  5. 5. those whom already own a computer. Secondly, Apple has run a campaign for the last year called the switch campaign, in where they have past PC (especially Windows) users relate their own personal stories of why they switched to Macs, and how it has affected them. To date the campaign has proven to be a success, not so much in market share, but in consumers realizing that, there are other alternatives. Apple computers are known to be a bit pricey, but the company contends that consumers pay the premium for the quality and the life of their product. Because of the state of the stock market right now consumers are weary of the dollars they spend and studies show that consumers buying computers right now are going more for bargain machines. However, the stock market is destined to rise again in the future and when it does, consumers will start to pamper themselves again, and with the shelf life of computers, it is only a matter of time before consumers look to buy new machines. Apple has thus put themselves in a good position to take a large part of the computer market. Further, with Apple sporting a roughly $4.3 billion balance sheet, it does not look like the company will be one that goes under any time soon. With the price of its shares only a smidge higher than this figure, it is about as close as one can get to a safe investment if one purchases now, for it is unlikely that even in the event of profit loss, the company’s cash balance should remain fairly high so the stock shouldn’t bottom out. Conclusions In researching Apple over the semester it seems very apparent to me that the company is one that is like a roller coaster, with really good times, and with times that are not so great. Throughout the semester I realized that in picking stocks, my personal
  6. 6. theory is one that you buy stocks that seem to be selling at under their potential, and that have a record of accomplishment and for being a success. (Especially if they have done it more than once.) The stock market is in a position right now where many stocks are selling quite low and it is my opinion that the market will go up in close to a year driven by stocks that have real value. I believe Apple to be one of those stocks, mainly for the reasons I have discussed throughout this paper. With the cash that Apple has on hand, they are too liquid to get into to much financial trouble, and it is improbable that short-term financial concerns could hamper this position. It is illogical for the stock price to drop below the company’s cash value, and it close to that point at this time. Thus, because the company has shown to have great gains in the past and it seems very unlikely for the stock to go too much lower, the stock has a far greater potential than risk, and those are the investments that financial analysts look for. While the tech industry at times can be a crap shoot, I take a piece of wisdom from a wise investor, Warren Buffet. Invest in assets that you understand. Buffet never entered the tech market while it was booming with the sole reason for not investing in it being that he did not understand the industry. I sympathize with Buffet on this notion, but being a lifelong Apple user, I feel as though I might be more informed on this particular asset than most, and while I am not saying it is a failsafe investment, I think the upside outweighs the risk by far.
  7. 7. Appendix A: Balance Sheet Annual Financials Balance Sheet (Fiscal Year-End 9/30) 2002 2001 2000 1999 All dollar amounts in millions except per share amounts. 09/28/2002 09/28/2001 09/29/2000 9/25/1999 Cash 2,252.00 2,310.00 1,191.00 1,326.00 Marketable Securities 2,085.00 2,026.00 2,836.00 1,900.00 Receivables 565.00 466.00 953.00 681.00 Inventories 45.00 11.00 33.00 20.00 Raw Materials n/a n/a n/a n/a Work In Progress n/a n/a n/a n/a Finished Goods n/a n/a n/a n/a Notes Receivable n/a n/a n/a n/a Other Current Assets 441.00 330.00 414.00 358.00 Total Current Assets 5,388.00 5,143.00 5,427.00 4,285.00 Property, Plant, and Equipment, Gross 621.00 564.00 419.00 318.00 Accumulated Depreciation n/a n/a n/a n/a Property, Plant, and Equipment, Net 621.00 564.00 419.00 318.00 Investment Advances To Subsidiaries 39.00 128.00 n/a n/a Other Non-Current Assets n/a n/a n/a n/a Deferred Charges n/a n/a n/a n/a Intangibles 119.00 76.00 n/a n/a Deposits And Other Assets 131.00 110.00 957.00 558.00 Total Assets 6,298.00 6,021.00 6,803.00 5,161.00 Notes Payable n/a n/a n/a n/a Accounts Payable 911.00 801.00 1,157.00 812.00 Current Long Term Debt n/a n/a n/a n/a Current Portion Capital Leases n/a n/a n/a n/a Accrued Expenses 747.00 717.00 776.00 737.00 Income Taxes n/a n/a n/a n/a
  8. 8. Other Current Liabilities n/a n/a n/a n/a Total Current Liabilities 1,658.00 1,518.00 1,933.00 1,549.00 Mortgages n/a n/a n/a n/a Deferred Charges To Income 229.00 266.00 463.00 208.00 Convertible Debt n/a n/a n/a n/a Long Term Debt 316.00 317.00 300.00 300.00 Non-Current Portion Of Capital Leases n/a n/a n/a n/a Other Long Term Liabilities n/a n/a n/a n/a Total Liabilities 2,203.00 2,101.00 2,696.00 2,057.00 Minority Interest Liabilities n/a n/a n/a n/a Preferred Stock n/a n/a 76.00 150.00 Common Stock, Net 1,826.00 1,693.00 1,502.00 1,349.00 Capital Surplus n/a n/a n/a n/a Retained Earnings 2,325.00 2,260.00 2,285.00 1,499.00 Treasury Stock n/a n/a n/a n/a Other Equity (56.00) (33.00) 244.00 106.00 Total Shareholder Equity 4,095.00 3,920.00 4,107.00 3,104.00 Total Liabilities Shareholders Equity 6,298.00 6,021.00 6,803.00 5,161.00