Apple

1
Apple

• STUDENT MANAGED INVESTMENT FUND
• Katherine Gonzalez
• Zachary Schwager
• Carlos Valcarcel
• Special Thanks to John Neumann

2
Agenda

1. Company Overview
2. Product line-up
3. Geographical Sales
4. Apple 10 yr Stock chart
5. Industry Overview
6. Current Events
7. Fundamental Analysis
8. DuPont Analysis
9. Market Share
10. Pro Forma Income Statement
11. Relative Valuation
12. Absolute Valuation
13. Recommendations

3
Company Overview

• Apple Inc. was founded by Steve Jobs and Steve
  Wozniak in 1976.
• Apple Computer, Inc., is an American
  multinational corporation with a focus on
  designing and manufacturing consumer electronics
  and closely related software products
• As of September 2007, the company operates 194
  retail stores in the United States, and more in
  the United Kingdom, Japan, Canada, and Italy
• For a variety of reasons, ranging from its
  philosophy of comprehensive aesthetic design to
  their advertising campaigns, Apple has engendered
  a distinct reputation in the consumer electronics
  industry and has cultivated a customer base that
  is unusually devoted to the company and its
  brand, particularly in the United States.

4
Product line-up

• Computers
• Cellular phones
• MP3 players
• Software
• Online Music Vendor
• Distributes third party computer Accessories
• Apple TV an online television adapter

5
Revenue by Product
6
Geographical Sales

• The Company manages it business on a geographic
  basis. The operating segments consist of
  Americas, Europe, Japan, and Retail.

7
AAPL 10 Year Stock Chart
8
Industry Overview

• Apple Inc. competes in the Technology Industry,
  Their focus is
• Computers
• Cellular Phones
• Online music
• Software
• Computer accessories
• The Technology Industry is highly competitive and
  characterized by rapid technological advances in
  both hardware and software.
• Because Apple participates in several components
  of the highly dynamic Technology Industry,
  Apples strategy has been to be an Innovator
  rather than a follower.
• Apples Greatest competitor is the Microsoft
  Corporation.

9
Current Events

• Financial Results
• Apple reported highest ever 4th quarter revenue
  and earnings
• Revenue increase over 6.22 billion or 29, driven
  by strong Mac and iPods sales
• Robust growth from iTunes revenue
• 2007 Fiscal Year EPS 3.93, up 73
• iPhone
• Apple sold over 1.1 million iPhones over the last
  quarter,
• Began selling iPhones in Europe November 9, 2007
• Apple plans to sell 10 million iPhones in 2008
• Apple will also unveil a new sub-portable MacBook
  
• The ultra-portable laptop is expected to be 50
  thinner than the existing MacBook
• Will contain flash-based memory instead of a disc
  drive.
• New Apple store highlights "geniuses," services
• Apple stores pulled in 1.25 billion in revenue
  in the company's last fiscal quarter
• 42 jump from a year earlier and accounting for
  a fifth of total revenue.

10
Income/Cash Flow

• Sales
• Net Income
• Cash Flow from Operations

11
Sales Growth
12
Net Income Growth
13
Cash Flow from Operations
14
Operating Performance

• ROE
• ROA
• EBIT
• Net Profit Margin
• Asset Turnover

15
ROE
16
ROA
17
EBIT
18
Net Profit Margin
19
Asset Turnover
20
Short Term Liquidity

• Current Ratio
• Quick Ratio
• Receivables Turnover

21
Current Ratio
22
Quick Ratio
23
Receivables Turnover
24
Long-term Solvency
Debt to Equity 2000 2001 2002 2003 2004 2005 2006 2007
AAPL 7.305 8.087 7.717 7.199 0.000 0.000 0.000 0.000
DELL 7.892 10.505 11.301 9.190 8.136 9.149 21.546 11.681
HPQ 34.323 39.823 23.090 21.120 18.390 15.439 18.617 23.315
MSFT 0.000 0.000 0.000 0.000 0.000 0.000 21.617 0.000
Industry Avg 16.300 31.100 25.400 25.400 20.400 45.700 21.100 28.200
SP 500 73.300 66.600 73.000 86.100 60.800 138.300 68.100 81.800

Financial Leverage Financial Leverage 2000 2001 2002 2003 2004 2005 2006 2007
AAPL 1.656 1.536 1.538 1.614 1.586 1.550 1.723 1.744
DELL 2.100 2.700 3.100 3.000 3.200 4.100 7.700 4.600
HPQ 2.200 2.300 2.000 1.900 1.900 2.000 2.200 2.300
MSFT 1.261 1.244 1.296 1.259 1.261 1.472 1.735 2.031
Industry Avg 1.700 1.900 1.700 1.900 1.800 2.300 2.100 2.900
SP 500 2.400 1.100 2.500 3.000 1.900 4.500 3.100 9.800

TIE 2000 2001 2002 2003 2004 2005 2006 2007
AAPL 51.700 5.700 27.500 15.750 62.800 N/A N/A N/A
DELL N/A 57.9 90.4 201.2 290.3 315.1 133.60 84.10
HPQ 21.1 N/A 10.5 14.5 17 12.2 20.70 25.20
MSFT N/A N/A N/A N/A N/A N/A N/A N/A
Industry Avg 64.6 33.4 20.7 255.9 122.8 359.3 349.90 461.20
SP 500 1037.4 48.7 43.9 57.3 68.1 222.8 316.10 753.50
25
DuPont Analysis
  2000 2001 2002 2003 2004 2005 2006 2007
ROE () 21.800 (0.922) 1.622 1.635 5.721 21.241 22.846 28.520
Asset Turnover 1.335 0.836 0.932 0.947 1.114 1.424 1.345 1.128
Net Profit Margin 9.846 -0.690 1.132 1.096 3.213 9.533 10.298 14.563
Financial Leverage 1.659 1.598 1.537 1.576 1.599 1.565 1.649 1.736
Decompose ROE into its components (Asset
Turnover, Net Profit Margin, Financial Leverage)
in order to analyze what might be trying to
change ROE. Net Profit Margin Has significantly
been increasing and affecting ROE.
26
Market Share
Aggregate Industry Revenue Aggregate Industry Revenue Aggregate Industry Revenue              
Sales 2000 2001 2002 2003 2004 2005 2006 YTD 2007 E(2008)
Apple 7,983.00 5,363.00 5,742.00 6,207.00 8,279.00 13,931.00 19,315.00 16,891.00 30,045.0
Dell 25,265.00 31,888.00 31,168.00 35,404.00 41,444.00 49,121.00 55,788.00 43,968.00 64,380.0
HPQ 48,870.00 45,226.00 56,588.00 73,061.00 79,905.00 86,696.00 91,658.00 75,993.00 113,476.0
MSFT 22,956.00 25,296.00 28,365.00 32,187.00 36,835.00 39,788.00 44,282.00 41,531.00 62,382.0
IBM 85,089.00 83,067.00 81,186.00 89,131.00 96,293.00 91,134.00 91,423.00 69,920.00 102,077.0
MOT 32,107.00 26,468.00 23,422.00 23,155.00 29,663.00 35,262.00 42,879.00 26,976.00 40,163.0
GOOG 19.10 86.40 439.50 1,465.90 3,189.20 6,138.60 10,604.90 11,767.40 16,694.0
QCOM 3,196.80 2,679.80 2,915.00 3,847.00 4,880.00 5,673.00 7,526.00 6,852.00 10,171.0
JAVAD 15,721.00 18,250.00 12,496.00 11,434.00 11,185.00 11,070.00 13,068.00 10,337.00 14,568.0
RIMM 221.30 294.10 306.70 594.60 1,350.40 2,065.80 3,037.00 3,384.60 7,961.0
Total 241,428.20 238,618.30 242,628.20 276,486.50 313,023.60 340,879.40 379,580.90 307,620.00 461,917.00
Market Share Market Share                
Sales 2000 2001 2002 2003 2004 2005 2006 YTD 2007 2008
Apple 3.307 2.248 2.367 2.245 2.645 4.087 5.089 5.491 6.5

• A comparison with Apples main competitors to
  establish its market-share in the industry

27
Pro Forma Income Statement
Industry Revenues ---------------------gt 379,580.90   307,620.00   461,917.00
  2006   2007   2008
Market Share 5.09   7.80   6.50
           
Desktop 3,319.0 17.18 4,020.0 16.75  
Portables 4,056.0 21.00 6,294.0 26.22  
Ipod 7,676.0 39.74 8,305.0 34.60  
Other Music Related products Services 1,885.0 9.76 2,496.0 10.40  
Iphone Related products and Serivces -   123.0 0.51  
Peripherals other hardware 1,100.0 5.70 1,260.0 5.25  
Software, service, and other net sales 1,279.0 6.62 1,508.0 6.28  
Total Net Revenue 19,315.0 100.00 24,006.0 100.00 30,045.0
Total COGS 13,717.00   15,852.00   21,559.95
GROSS PROFIT 5,598.00   8,154.00   8,485.05
Gross Profit Margin 28.98   33.97    
Total COGS as of Rev 71.02   66.03   71.76
SGA, Operating Expenses 3,145.0   3,745.0   4,482.71
Op Exp as of Revenue 16.28   15.60   14.92
OPERATING INCOME 2,453.00   4,409.00   4,002.33
28
Pro Forma Income Statement cont .
Unusual Item         0
OPERATING Inc After Unusual Item 2,453.00   4,409.00   4,002.33
OTHER INCOME (EXPENSE)          
Interest Income 394.0   647   657.5624
Interest Expense 0.0   0.0   0.0
Net Interest Income (Expense) 394.0   647.0   657.6
Gain on sales of prop/equip 0.0   0.0   0
Other Income (Expense) Net 29.0   48.0   48.0
EBT 2,818.00   5,008.00   4,611.90
Income Taxes 829.00   1,512.00   1,385.87
EAT 1,989.00   3,496.00   3,226.02
NET INCOME 1,989.00   3,496.00   3,226.02
Diluted Shares 877.5   889.3   905.3
EPS 2.27   3.93   3.56
Realized Tax Rates 29.42   30.19   30.05
29
Relative Valuation
30
Relative Valuation
PE Comparable 2000 2001 2002 2003 2004 2005 2006 2007 P/E 2008
AAPL 12.80 101.00 28.00 69.30 45.50 35.90 43.40 41
DELL 47.8 23.5 51 38.8 33.5 25.5 15.8 24.3 19.8
0.2678 4.2979 0.5490 2.0687 1.7843 2.2722 1.7860 2.0707
PE Comparable 2000 2001 2002 2003 2004 2005 2006 2007 P/E 2008
AAPL 12.80 101.00 28.00 69.30 45.50 35.90 43.40 41
HPQ 32.9 13.8 22.8   19.5 28 29.3 21.7 17.3
0.3891 7.3188 1.2281 3.5538 1.6250 1.2253 2.0000 2.3699
PE Comparable 2000 2001 2002 2003 2004 2005 2006 2007 P/E 2008
AAPL 12.80 101.00 28.00 69.30 45.50 35.90 43.40 41
MSFT 35.5 36.9 45.4 40.2 36.9 22.9 22.9 20.7 17
0.3606 2.7371 0.6167 1.8780 1.9869 1.5677 2.0966 2.4118
PE Comparable 2000 2001 2002 2003 2004 2005 2006 2007 P/E 2008
AAPL 12.80 101.00 28.00 69.30 45.50 35.90 43.40 41
Industry Avg. 132.8 178.3 131.7 74.3 81.1 45.7 36.7 65.1 29.4
0.0964 0.5665 0.2126 0.8545 0.9956 0.9782 0.6667 1.3946
PE Comparable 2000 2001 2002 2003 2004 2005 2006 2007 P/E 2008
AAPL 12.80 101.00 28.00 69.30 45.50 35.90 43.40 41
SP500 106.9 86 56.4 44.5 39.1 38.1 26.7 34.4 22.7
0.1197 1.1744 0.4965 1.7724 1.1942 1.3446 1.2616 1.8062
31
Relative Valuation
EPS (2008)1 3.56 EPS (2008)2 4.98 Current
Price 194.30
  Average Median
AAPL/DELL 1.860829 1.786008
AAPL/HPQ 2.477153 1.625
AAPL/MSFT 1.60624 1.878049
AAPL/Ind Avg. 0.624349 0.666667
AAPL/SP500 1.051916 1.194226
E(price 2008) using EPS1 E(price 2008) using EPS2
AAPL / Dell Price 125.89 176.11
AAPL / HPQ Price 100.08 140.00
AAPL / MSFT Price 113.66 159.00
AAPL / Industry Price 69.78 97.61
AAPL / SP500 Price 96.51 135.00

Industry Avg. / Benchmark 87.07 87.07
Average Price Estimate Average Price Estimate
Using EPS1 101.18
Using EPS2 141.54
32
Absolute Valuation

• FCFF Model

33
Absolute Valuation - Cost Of Capital
Costs of Capital          
CAPM Another K Another K
10 yr T-Strip 4.26 HPQ Bond Outstanding HPQ Bond Outstanding 5.16
Beta 1.442
Risk Premium 6.50 Costs of Capital Costs of Capital
CAPM 4.26 1.442(6.5) 4.26 1.442(6.5) YTM 5.16
Equity Premium Equity Premium 3
k1 13.63 k2 k2 8.16
34
Absolute Valuation
FCFFStarting from CFO FCFFStarting from CFO FCFFStarting from CFO FCFFStarting from CFO FCFFStarting from CFO FCFFStarting from CFO 2007 2006 2005 2004 2003
Operating Activities Operating Activities Operating Activities                
Net Income Net Income Net Income       3,496.0 1,989.0 1,328.0 266.0 69.0
Depreciation/Depletion Depreciation/Depletion Depreciation/Depletion Depreciation/Depletion     317.0 225.0 179.0 150.0 113.0
  Depreciation Depreciation Depreciation     317.0 225.0 179.0 150.0 113.0
  Depletion Depletion      
Amortization Amortization Amortization      
  Amortization of Intangibles Amortization of Intangibles Amortization of Intangibles Amortization of Intangibles  
  Amortization of Acquisition Costs Amortization of Acquisition Costs Amortization of Acquisition Costs Amortization of Acquisition Costs  
Deferred Taxes Deferred Taxes Deferred Taxes       78.0 53.0 50.0 19.0 (11.0)
Non-Cash Items Non-Cash Items Non-Cash Items       254.0 174.0 486.0 131.0 (1.0)
  Accounting Change Accounting Change Accounting Change     (1.0)
  Discontinued Operations Discontinued Operations Discontinued Operations Discontinued Operations  
  Extraordinary Item Extraordinary Item Extraordinary Item    
  Unusual Items Unusual Items Unusual Items     12.0 11.0 437.0 85.0 (16.0)
  Purchased RD Purchased RD Purchased RD     0.0
  Equity in Net Earnings (Loss) Equity in Net Earnings (Loss) Equity in Net Earnings (Loss) Equity in Net Earnings (Loss)  
  Other Non-Cash Items Other Non-Cash Items Other Non-Cash Items     242.0 163.0 49.0 46.0 16.0
Changes in Working Capital Changes in Working Capital Changes in Working Capital Changes in Working Capital     1,325.0 (221.0) 492.0 368.0 119.0
  Accounts Receivable Accounts Receivable Accounts Receivable     (385.0) (357.0) (121.0) (8.0) (201.0)
  Inventories Inventories       (76.0) (105.0) (64.0) (45.0) (11.0)
  Prepaid Expenses Prepaid Expenses Prepaid Expenses     (34.0)
  Other Assets Other Assets Other Assets     (1,459.0) (2,666.0) (185.0) (201.0) (30.0)
  Accounts Payable Accounts Payable Accounts Payable     1,494.0 1,611.0 328.0 297.0 243.0
  Accrued Expenses Accrued Expenses Accrued Expenses    
  Payable/Accrued Payable/Accrued Payable/Accrued    
  Taxes Payable Taxes Payable Taxes Payable    
  Other Liabilities Other Liabilities Other Liabilities     1,751.0 1,296.0 534.0 325.0 152.0
  Other Changes, Net Other Changes, Net Other Changes, Net    
    Other Assets Liabilities, Net Other Assets Liabilities, Net Other Assets Liabilities, Net  
    Other Operating, Net Other Operating, Net Other Operating, Net  
Net Cash from Operating Activities Net Cash from Operating Activities Net Cash from Operating Activities Net Cash from Operating Activities Net Cash from Operating Activities   5,470.0 2,220.0 2,535.0 934.0 289.0
Plus Interest Expense X (1-Tax Rate) Plus Interest Expense X (1-Tax Rate) Plus Interest Expense X (1-Tax Rate) Plus Interest Expense X (1-Tax Rate) Plus Interest Expense X (1-Tax Rate)   0.0 0.0 0.0 2.2 5.9
Less Investment In Fixed Capital Less Investment In Fixed Capital Less Investment In Fixed Capital Less Investment In Fixed Capital Less Investment In Fixed Capital   986.0 657.0 260.0 176.0 174.0
Free Cash Flow to the Firm Free Cash Flow to the Firm Free Cash Flow to the Firm Free Cash Flow to the Firm Free Cash Flow to the Firm   4,484.0 1,563.0 2,275.0 760.2 120.9
                     
        Geometric Avg   147        
35
Absolute Valuation
E(FCFF) FCFF2007 (1g)t
E(FCFF) 2008 2009 2010 2011 2012 2013
5,829.20 7,577.96 9,851.35 12,806.75 16,648.78 21,643.41
PV(2007) 2008 2009 2010 2011 2012 2013 Sum
K1 5,129.85 5,868.72 6,714.01 7,681.06 8,787.39 10,053.07 44,234.11
K2 5,389.42 6,477.67 7,785.66 9,357.77 11,247.32 13,518.41 53,776.26
36
Absolute Valuation Terminal Value
E(FCFF)2014 FCFF20013 (1g)
FCFF MODELE(FCFF1)/k-g FCFF MODELE(FCFF1)/k-g FCFF MODELE(FCFF1)/k-g
Using k1
E(FCFF2014) k1 g est(IV2013) est(IV2007)
est(IV2013)1 4484.000 0.1363 0.00 32,898.019 15283.10891
est(IV2013)2 21859.846 0.1363 0.01 173,078.746 80405.48963
est(IV2013)3 22076.280 0.1363 0.02 189,821.838 88183.663
est(IV2013)4 22292.714 0.1363 0.03 209,715.088 97425.27445
est(IV2013)5 22509.148 0.1363 0.04 233,739.855 108586.2237
est(IV2013)6 22725.582 0.1363 0.05 263,332.354 122333.7197
est(IV2013)7 22942.016 0.1363 0.06 300,681.733 139684.7533
est(IV2013)8 23158.450 0.1363 0.07 349,297.894 162269.8845
est(IV2013)9 23374.884 0.1363 0.08 415,184.449 192878.1529
est(IV2013)10 23591.319 0.1363 0.09 509,531.719 236708.1355
est(IV2013)11 23807.753 0.1363 0.1 655,860.956 304686.8689
Using
E(FCFF2014) k2 g est(IV2013) est(IV2007)
est(IV2013)1 4484.000 0.0816 0.00 54950.980 34322.22
est(IV2013)2 21859.846 0.0816 0.01 305305.107 190692.7
est(IV2013)3 22076.280 0.0816 0.02 358381.165 223843.8
est(IV2013)4 22292.714 0.0816 0.03 432029.339 269844.3
est(IV2013)5 22509.148 0.0816 0.04 541085.289 337960.3
est(IV2013)6 22725.582 0.0816 0.05 719163.992 449187.7
est(IV2013)7 22942.016 0.0816 0.06 1062130.382 663403.5
est(IV2013)8 23158.450 0.0816 0.07 1996418.135 1246957
est(IV2013)9 23374.884 0.0816 0.08 14609302.800 9124927
est(IV2013)10 23591.319 0.0816 0.09 -2808490.309 -1754175
est(IV2013)11 23807.753 0.0816 0.1 -1293899.604 -808166
37
Absolute Valuation
Scenario One 0 Growth Rate Scenario One 0 Growth Rate Scenario One 0 Growth Rate
PV with 0 Growth Rate PV with 0 Growth Rate
PV(2007) 2008 2009 2010 2011 2012 2013 Sum
K1 3,946.04 3,472.62 3,055.99 2,689.35 2,366.70 2,082.76 17,613.45
K2 4,145.71 3,832.94 3,543.77 3,276.41 3,029.23 2,800.69 20,628.76

Firm Value Using 0 Growth Rate Firm Value Using 0 Growth Rate Firm Value Using 0 Growth Rate
K1 E(Price 2007) 36.99
K2 E(Price 2007) 61.79
Scenario Seven 6 Growth Rate Scenario Seven 6 Growth Rate Scenario Seven 6 Growth Rate
K1 E(Price 2007) 206.81
K2 E(Price 2007) 806.45

Scenario Eight 7 Growth Rate Scenario Eight 7 Growth Rate Scenario Eight 7 Growth Rate
K1 E(Price 2007) 232.21
K2 E(Price 2007) 1,462.65

Scenario Nine 8 Growth Rate Scenario Nine 8 Growth Rate Scenario Nine 8 Growth Rate
K1 E(Price 2007) 266.63
K2 E(Price 2007) 10,321.27

Scenario Ten 9 Growth Rate Scenario Ten 9 Growth Rate Scenario Ten 9 Growth Rate
K1 E(Price 2007) 315.91
K2 E(Price 2007) (1,912.06)

Scenario Eleven 10 Growth Rate Scenario Eleven 10 Growth Rate Scenario Eleven 10 Growth Rate
K1 E(Price 2007) 392.35
K2 E(Price 2007) (848.30)
Scenario two 1 Growth Rate Scenario two 1 Growth Rate Scenario two 1 Growth Rate
K1 E(Price 2007) 140.15
K2 E(Price 2007) 274.90

Scenario Three 2 Growth Rate Scenario Three 2 Growth Rate Scenario Three 2 Growth Rate
K1 E(Price 2007) 148.90
K2 E(Price 2007) 312.18

Scenario Four 3 Growth Rate Scenario Four 3 Growth Rate Scenario Four 3 Growth Rate
K1 E(Price 2007) 159.29
K2 E(Price 2007) 363.90

Scenario Five 4 Growth Rate Scenario Five 4 Growth Rate Scenario Five 4 Growth Rate
K1 E(Price 2007) 171.84
K2 E(Price 2007) 440.50

Scenario Six 5 Growth Rate Scenario Six 5 Growth Rate Scenario Six 5 Growth Rate
K1 E(Price 2007) 187.30
K2 E(Price 2007) 565.57
38
Recommendation

• Buy 100 Shares