Apple

Krause Fund Research Spring 2012
Technology
Recommendation: BUY
Analysts
Jeremy Gorsky jeremy-gorsky@uiowa.edu Jeremiah Hagen jeremiah-hagen@uiowa.edu Yang Jing yang-jing@uiowa.edu Linshan Li linshan-li@uiowa.edu
Apple Inc. (NSDQ: AAPL)

April 17, 2012
Current Price $609.60 Target Price $765-790
Apple Bytes Its Way To The Top

The iPad has revolutionized the booming tablet industry and dominates a 61% market share with a unit sales increase of 111% over the year ago quarter. A yearly increase of 334% in sales volume during FY2011 makes the iPad the most popular product in the tablet industry. Apple shattered analysts expectations for Q1 of its FY2012 with 37.04 million iPhones sold representing 128% unit growth over the year ago quarter. The iPhone is penetrating emerging markets in China, Asia-Pacific, and Europe focusing on global growth to drive revenues. Future product innovation in the iPhone fifth generation and iPad fourth generation will capture more market share while sustaining high levels of growth. Apples potential for penetrating the television market will again affirm its position as the top producer in consumer electronics. CEO Tim Cook announced dividends to be paid to shareholders beginning next quarter at a yield of 1.8% or $2.65 per share quarterly. He also announced a $10 billion buyback starting in fiscal year 2013, continuing through 2014 and 2015; signaling an undervalued company. On January 25, 2012, Apple topped Exxon Mobile as the largest company in the world by market capitalization; currently at $568.5 billion. Share price has consistently grown with a 48.26% increase YTD and a five year increase of 570.22%.
Company Overview
Apple Inc. was established April 1, 1976, and incorporated on January 3, 1977 in Cupertino, California. The company designs, manufactures and markets mobile communications and media devices, personal computers, portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, third party digital contents, and applications1. Apple products are sold worldwide through several markets and can be found through direct sales force in twelve countries.
Stock Performance Highlights

52 week High 52 week Low Beta Value Average Daily Volume $644.00 $310.50 1.26 25.04M
Share Highlights
Market Capitalization Shares Outstanding EPS (52 week period) P/E Ratio Dividend Yield (annual) $567.09B 932.37M $35.11 17.32 7.2% 22.28% 54.24% $108.249B
Company Performance Highlights

ROA ROE Sales
Financial Ratios
Current Ratio Debt to Equity 1.61 0.13%
One Year Stock Performance
Product Profit Margins

iPhone Profit Margin iPad Profit Margin Portable Profit Margin Desktop Profit Margin iPod Profit Margin 48.3% 25.4% 51.5% 55.8% 7.08% Figure 1: AAPL (blue) vs S&P 500 (gold) vs NSDQ (red) Source: google.com/finance
Important disclosures appear on the last page of this report. 12
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Investment Thesis
Based on research and forecasting models we concluded Apple has an intrinsic value of $775.30 per share. Trading at $606.90 currently constitutes an undervalued stock and the basis for our buy rating. Revenues from its core products are expected to increase at steady rates excluding the iPod, which essentially has been cannibalized by the iPhone and iPad. China, AsiaPacific, and Europe are excellent future markets with huge populations to generate revenues. Apple has contracts with the second and third largest mobile carriers in China while in the midst of a contract with the worlds largest carrier, China Mobile. The next iPhone and iPad are rumored to be the most innovative product to date and will, again, set the standard in innovation. The iCloud service continues be an efficient wireless storage center for a growing number of businesses and individual consumers. Possible penetration of the television industry will affirm Apples unrelenting product innovation. However, Apples enormous success places a target on its back for harsh scrutiny and fierce competition trying to overcome the worlds most valuable company.
affected by economic growth. Technology products are disposable so businesses and consumers will cut tech expenditures during tight economic times. GDP growth will slow this summer as oil prices are expected to reach record highs meaning a slow down for the technology industry. We expect modest GDP growth between 2.5% and 3.5% in 2012. From 2012-2016, GDP should increase as unemployment decreases and the economy experiences a cyclical bull. Real GDP is expected to range from 4 5% over the next five years. The technology industry will benefit from real GDP growth but the competition is fierce. Apple will remain a dominant force in the global industry even if domestic sales slow during quarter two and three. Figure 2 below displays historical GDP data from Bloomberg.
Economic Outlook
Overall Economic Outlook: The U.S. economy has picked up speed in 2012 with the S&P 500 peaking at $1419.04 on April 2; a three month gain of 11.12%2. The S&P is driven by the recovering financial sector and an expanding technology sector up 13% and 15% respectively3. The markets surged during the first quarter of 2012, but are currently experiencing a sell-off. High oil prices are inhibiting further economic growth as well as the Euro-Zones financial instability. Many investors are calling for a third round of quantitative easing to boost the economy but the Federal Open Market Committee remains firm that the economy is improving, just at a slower pace than demanded. A slow improving economy is necessary to avoid another financial crisis. Federal Reserve Chairman Ben Bernanke believes the economy is still far from a financial crisis recovery but it is experiencing strong organic growth. The summer of 2012 is projected to be volatile with oil prices driving up inflation and the possibility of a new war in the Middle East also has a dampening effect. Technology product sales may witness a lag over the summer with less disposable income by consumers so brand loyalty is expected to win over sales. Real Gross Domestic Product (GDP): GDP is the best metric to determine the growth of our economy, measuring the entire output of goods and services in the country. Real GDP increased 3% in the final quarter of 2011 for a year over year increase of 1.6%. Apple, as a technology company, is directly
Figure 2: Quarterly and Yearly GDP Growth4 Consumer Confidence/Sentiment: The latest consumer confidence reading by The Conference Board was at 70.2; down from Februarys 71.6 revised reading. The decrease stems from worries of future income prospects and rising gas prices. Even considering negative consumer confidence is at a healthy level. The University of Michigans Consumer Survey Center reported a lower than expected consumer sentiment number at 75.7 in March 2012. Sentiment is down because of pessimistic labor reports indicating less job creation than estimated; however, it is still at its most stable levels since pre-2008 financial crisis. The technology sector relies heavily on discretionary spending by consumers making confidence and sentiment reports pertinent for Apples outlook. Reports are optimistic providing positive outlook for the technology industry. Gas prices may affect consumer spending during the summer but high fees at the pump are becoming an accepted annoyance by Americans. Figure three displays the increase in sentiment levels.
Figure 3Source: Bi-Monthly Consumer Sentiment5
Important disclosures appear on the last page of this report.
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We expect consumer confidence to dip below 70 for April and regain stability in May and June. Sentiment will follow a similar trend taking a dip and then stabilizing over the summer once gas and commodity prices decrease from its peaks. Employment Status Marchs employment status report was a negative influence on the markets. Private sector and non-farm payrolls came in almost 50% short of estimates. The only positive news was an 8.2% unemployment rate, down from 8.3%. The decline is suggested to be from less people in the labor force rather than more hirings. The warm weather in February influenced increases in payrolls for that month but, Marchs numbers could not keep the pace. It was disappointing news to the market but the economy is on a slow recovery so subsiding numbers should not scare investors. Jobless claims have shown tremendous decrease in 2012, which can be attributed to the warm weather. The weather has allowed for more construction along with seasonal positions starting sooner than usual. The U.S. economy is in good shape as long as payrolls and jobless claims continue to improve at a moderate pace. Slow recovery is better than no recovery, and the United States is recovering. We expect the unemployment rate to hit 8.0% by the end of 2012 and continue to decrease through 2013. Oil prices and GDP have a great impact on unemployment so once the summer passes, oil prices will drop and GDP will increase. If GDP moves above 3% for 2012, expect non-farm payrolls and unemployment rates to improve drastically. Unemployment rates could reach 6.0% by the end of 2015, giving Apple a large consumer market with room for discretionary spending. Figure four illustrates the increase in unemployment since the beginning of the financial crisis.
third round of quantitative easing. Rising energy and food costs will devalue the dollar over the summer months justifying the wait for extended quantitative easing until after the summer if needed. Inflation will be the biggest contributor to lower real GDP numbers in the next quarter. Apple must be conscience of inflation considering the pile of cash in its reserve. We expect the year-over-year headline inflation rate to settle at 3.0% in 2012. Inflation from 2013-2016 will range between 4.0%-5.0% correlated with an increasingly improving economy. Figure 5 below shows the historical year over year CPI Index.
Figure 5 Source: Bloomberg CPI Index April 13, 20127 The technology industry benefits from high disposable income for non-necessities. Therefore, our summer sales forecast are moderate for the entire technology sector. Apple will maintain high levels of revenue through foreign sales in emerging markets such as China, Japan, and Europe. Apples geographical diversity, having retail stores in twelve different countries and delivering online orders to 120 countries, gives it distribution advantages over other firms in the tech industry. Euro-Zone Financial Crisis Since the summer of 2011, headlines from Europe have driven U.S. equities into severe volatility. Greeces default loomed over the market for almost six months and now Spain, Italy, and France are next on the EuroZone crisis list. Spain and Italy both experienced large increases in its 10-year bond yields after pessimistic bond auctions. Spain is set for another round of auctions on April 19 and a decision whether to request a bailout is dependent upon the results of the auction. The United States maintains that the Euro-Zone is able to fight the debt problems without our nations funds being implemented. The International Monetary Fund is holding its spring meeting in Washington D.C. April 2022, with the major topic of debate being the United States involvement in the debt crisis. The U.S. must establish a limit to its funding of the Euro debt problems in order to keep investors from fleeing the equities market. We believe the typical investor is fed up with the Euro-Zone headlines driving domestic stock markets. The U.S. must reassure the typical investor or risk a giant sell-off in the market. Debt problems are facing
Figure 4 Source: Bloomberg Unemployment Status April 6, 20126
Inflation The Consumer Price Index (CPI) is the major indicator of national inflation. Driven by food and energy costs, March inflation increased at 0.3% on track with estimates. Year-over-year headline inflation decreased from the February level of 2.9% to 2.6% for March. Energy prices are projected to drive up inflation over the summer, which is why the FOMC is holding back on a
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third round of quantitative easing. A QE3 would lower interest rates even more allowing the government to take on more debt. The national U.S. debt exceeds GDP by 103%, the worst debt to GDP ratio since WWII. The major reason the United States must get its own financial affairs in order before it funds the IMF to bail other defaulting countries. The IMF should not expect U.S. funding, which needs to distance itself from the markets fluctuating of the Euro-Zone extenuating financial insecurities. The United States will only preserve separation if officials are strong in their diplomatic order against the IMF. Currency Exchange Rates Apple has direct retail stores in twelve different countries and around 66% of cash holdings are overseas. The currency exchange rates are important since Apple can defer paying taxes on international revenues until it is brought back to the United States. The dollar has gained value over the Euro down to $1.30 per Euro. The Euro-Zone will continue to devalue its currency as bailouts and debt problems persist. The Euro-Zone crisis provides an opportunity to bring back profits at a low exchange rate, which for Apples cash hoard is critical. China has recently placed its Yuan currency in the market place. Tight government regulations still control the Yuan but this is good news that Chinas currency is more transparent. Currently, the Yuan is worth $6.315 American dollars8. Sales continue to grow in China and Apple should be leery of possible inflation in the country. The yen has fluctuated from $93 in April 2010 down to $77 in September 2011. It is currently at $80 as of April 13, and we expect this to remain constant between $80- $85 in 2012. The Japanese economy is stable even though its debt to GDP is the worst in the world at 230%9. Apple should be wary of the worsening Japan and Euro-Zone debt problems and take advantage if the exchange rates take steep declines.
Smart Phones Since the release of the iPhone in 2007 the market for smart phones has become one of the largest and most competitive industries. The Google Android operating system, which is used by several different smartphone manufacturers, is dominating the market with 49% market share. Android phones remain in the middle price range for smartphone costs and provide people at all different income levels with top technology. This is one of the few industries that Apple is not a dominating force, but the two companies take different approaches toward its sales. Apple which is the second largest smart phone provider with 29% of the market operates on its own system and doesnt sell its technology to other companies. The iPhone prices are the highest in the industry, which prevents it from taking over the market. The iPhone is considered as a luxury good and maintains high margins than its competition. Research in Motion has taken huge losses as companies and consumers prefer to have stronger technology. The Blackberry, which at one point was the largest seller, needs to improve in order to compete in this intense market. Overall, 78% of the smartphone market is dominated by Apple and Google who have expanded into other markets as well.
Figure 6 Source: CNet News (Whitney 2012)10 The selling points of smartphones are camera quality, size, speed, easy-use, applications, and as a fashion statement. Competition has grown driving down prices for components making smartphone attractive to all income levels. Henceforth, the pricing competition is a concern for Apple trying to maintain market share. Tablets In 2010, tablet computers emerged into the marketplace becoming a revolutionary mobile device. Tablets have been adopted by businesses, schools, military, government, hospitals and ordinary consumers as business and entertainment devices. Tablet sales have brought down global PC sales as consumers want a smaller and more mobile computer. Even though the tablet has seen unbelievable sales in the last two years, it does not replace computers. In the future, tablets will become identical to a PC allowing users to easily type and manage high processing components. The market has a strong future ahead and we predict a 45% increase in sales for 2013. Since the release of Apples iPad there has been little competition. Apple maintains 65-70% market share, while also having the highest price. Android, Samsung, Dell, and
Industry Analysis
Overview Consumer electronics over the last decade has become one of the largest and most important industries. Technology has been adopted by many different types of consumers around the world as the industry continuously grows. New markets are being created rapidly, and traditional companies are expanding into different markets. Tablets and smartphones have realized astronomical growth while PC and software manufactures are converting to compete in the market. Each company is trying to separate its product and create new, innovative features as competition intensifies. The top products in the consumer electronic industry are smartphones, tablets, computers, and MP3 devices. Many of these devices are incorporated with each other and have created convenience for consumers. These products are currently in the growth stage of product life cycle and have strong future expectations.
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HP have created tablets 100%+ lower in price than the iPad, but consumers demand the stylish and high-functioning iPad. Figure seven depicts the 2010 through estimated 2015, global tablet sales. By 2015, the tablet industry is expected to exceed $128 billion providing Apple with a chance to sustain its high levels of revenue.
leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and 1 innovative design . Apple seeks to maintain high levels of innovation in order to create quality products of the future. Company Segmentation Apple Inc. segments their business based on five geographical locations of sales: The Americas, Europe, Japan, Asia-Pacific, and Retail (i.e. outside of the top four Geographics).
Figure 7 Source: Statista Apple Reports11 Digital Music Players As music evolved from records, a-tracks, tapes, and CDs it has reached its farthest point at digital compatibility. Consumers now can manage thousands of songs on devices the size of a quarter. Apples iPod for the last decade has controlled this industry with 70% market share and almost no competition. Apple only has seven percent profit margins on the iPod but sales volume offsets the low margins. The innovation in consumer electronics has enabled other devices to have digital music capability. Smartphones and tablets, which are both increasing in sales, are cannibalizing this market. Even though we expect sales to decline digital music players will maintain a strong market. The prices have declined significantly as sales have decreased and people cannot afford a smartphone or tablet. Digital Music players will also remain popular among kids too young for cellphones, senior citizens, runners, and non- tech savvy consumers.
Figure 8 Source: Apple Inc. 10-K
Figure eight above shows the diversity and balance Apple has in its product availability. The Americas, is home to Apples headquarters and most retail locations, has remained the strongest purchaser of Apple products. Sales in America have slowly declined 9% over the last 3 years as Apple expands into new markets. The fastest growth has been from the Asia-Pacific market, which is up 187% over the last three years. This section, which includes China, has been in significant economic growth and Apple has capitalized. China is also the largest manufacturer for Apple products making inventory easily accessible. Japan and Europe together constitute about 1/3 of revenue; maintaining this percentage over the last 3 yrs. Overall, revenue is up 66% from last year and Apple maintains strong economic growth. Financial Summary In Q1 of its FY2012, Apple announced its best quarterly earnings and revenue to date with $13.06 Billion in net profit. Apples cash hoard of over $100 Billion is being utilized to payback shareholders with dividends and a share repurchase beginning in 2013. It still has no debt and has an AAA rating by credit rating agencies. In the last five years the stock price is up 570% and 48% year-to-date. Apple continues to expand into new geographic markets and new product innovation for financial prosperity. We anticipate large sales numbers for iPad fourth generation and iPhone fifth generation, which will come out within the year. Figure nine illustrates how astounding the increase in stock price has been. The stock has experienced steady increase even through economic crisis and financial uncertainty within the Euro-Zone.
Company Analysis
Overview Apple Inc. is the largest technology company in the world. A market capitalization of $568 billion distinguishes Apple from the other companies in the market. It has grown to be a global leader designing, manufacturing, and marketing: mobile communications, tablets, MP3, desktop computers, portable computers, all of which operate through its world renown iTunes App Store. Apple products are sold globally through Apples own retail stores, online, and third party retailers in over 120 different countries. Apple has revolutionized mobile technology and continues to be top in innovation. Business Strategy 1 Apple Inc. believes in a high-quality buying experience that will enhance consumer knowledge of the companys values and retain customers. Apples business strategy
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Apples Share Performince since 2003
innovation curve in the market. Apple already has the most applications in the world with over 500,000 and we expect continued growth when the iPhone fifth generation hits the market. Consumers, in the words of the late Apple CEO Steve Jobs, stay hungry and stay foolish and remember if you dont have an iPhone, you dont have an iPhone! iPad Since its origins on April 3, 2010, the tablet market has exploded into a highly competitive industry. The iPad has dominated the tablet industry with 68.3% market share and it contributes 18.1% to Apples revenues. Continuous upgrades have been made to the iPad and recently the New iPad was released with record sales of 3 million units in the first 3 days on the market. Apple sold 15.43 million iPads during 14 Q1, a 111 percent unit increase over the year-ago quarter , not including the New iPad sales. A main concern of the iPad is the price, which is $499-$829. Primary competitors such as Amazon and Motorola sell its tablets for $299 or less, making the iPad an unattractive comparison. Yet, it still maintains a majority of tablet sales and by far the most revenue in the market. Competition will become fierce as other companies compete with the iPad. Apple controls the majority market share having the first mover advantage, but we expect it will eventually decrease with new competition. The iPad can be used by any consumer, but a large percentage of the sales come from businesses. The military and several major institutions have made mass purchases of the product; transforming its offices to Apple software. Education is increasingly adopting the new technology and some schools are requiring students to have one. We believe Apple will control the tablet industry and expand into new markets. With high anticipation for the release of the iPad fourth generation, Apple is set to release another mind blowing tablet that goes beyond current technology. Look for a 3-D holographic display to amaze consumers once more. iPod When the iPod was released in November 2001, it brought the music industry to its peak of evolution, changing the way people listen to music. In 2006, the iPod had its biggest year comprising 39.7% of Apples revenue. Since the introduction of the iPhone, the iPod has consistently declined and only encompassed 6.9% of Apples revenue in Q1 2012. Figure eleven shows how little the iPod currently contributes to its revenues. Apple has found ways to incorporate the iPod function into its newer products, which will cause its sales to continuously decrease. The optimistic factor of the iPod is that it is the largest selling MP3 player in the world with over 70% market share, and no competitors besides cannibalization by its own product. The iPods range in price, size, gigabytes, and features, which makes it attractive to all consumers. Figure eleven depicts how little Apple relies on iPod revenues for its bottom line.
Figure 9 Source: google.com/finance12 Since 2001, when Apple entered into the mobile music industry (iPod), the stock price is up 4730.25%. To say this is phenomenal growth is an understatement. No other company has comparable growth over the last decade. The 2008 financial crisis, which brought America into the worst recession in decades, did not slow Apples growth. Consumers were spending less but still saving enough to purchase the latest Apple product. Core Products: iPhone Over the last four years Apple has globally revolutionized the smart phone market with a 29.5% market share. The rapid growth of iPhone sales has positioned it as the second largest smart phone seller in the world behind Android Operating System. In Q1 of its fiscal year Apple shattered expectations selling an astonishing 37.04 million iPhones representing 128% unit growth over the year ago quarter. These results were in part derived from the release of the iPhone 4S. Figure ten shows the global growth iPhone has accumulated since 2007. The last quarter was up seventeen million unit sales from the previous record of 20 million units in Q3 of 2011; while nearly doubling the previous quarters sales.
Figure 10 Source: Statista Apple Reports13 Apple continues to enter new geographic areas providing consumers with the smartest and most efficient mobile phone on the market. Its supremacy in the phone industry has transformed the computer company into a leader in phone innovation contributing to 43.47% of the companys revenue. The iPhones price has remained elevated from $199-$849 depending on gigabyte size and contract status of the consumer. Many believe the price is too high, but Apple produces luxury goods that have people in lines going out the door. The iPhone fifth generation is expected to be released in Q3 or Q4 of 2012 and we believe it will once again set the
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computers in the world. iTunes has several functions and download capabilities: music, music-videos, television shows, movies, ringtones, applications, games, podcasts, and audiobooks. Its efficient use has brought consumers to buy Apple products to sync easily. In 2011, iTunes offered a new product called the iCloud, which attracted many new consumers to convert to Apple products. The iCloud service allows for users to integrate all information on iTunes wirelessly to Apple products without having to plug in the devices for syncing or updating. The service has become increasingly popular making Apple products easier to use while saving people time and money. Consumers no longer need large, external memory devices when data is stored on the iCloud servers. Products and Markets Apple retail stores are located in high-traffic quality malls and urban areas. Locations are strategically determined in order to achieve its marketing goal of a high-quality buying experience. The store design is simple and open permitting customers to enter a relaxed environment and test Apples products. All salespersons are highly trained and knowledgeable of every product that is sold in retail stores. Apple products can be used by people of all ages and target electronic consumers. Significant customers that Apple tries to attract are educational service, small and mid-size businesses, government, and enterprises. Apple believes these groups can effectively integrate technology and have a higherlevel of knowledge. Some of the products sold to these consumers are: iPhones, iPads, iPods, iCloud, iTunes, iWork, iLife, hardware, software products and computer technologies, operating systems, displays and peripheral products, App store, and Apple TV. Apple is one of the few technology companies to innovate the buying experience; keeping consumers coming back for more. Supply of Components Most components of Apples manufacturing process are available from multiple sources. Unfortunately, Apple has several components which are customized for its products and, as a result, usually only found from one source. The custom components utilized result in greater supply and pricing risks that affect the overall manufacturing of products. The company is involved in talks of several manufacturing agreements with companies, but thus far only Sharp has signed on with Foxconn. Losses of these agreements make Apple subject to risk, supply shortage, and price increases that affect the companys financial and operating conditions. Apple Inc. allows 150 days for manufactures to complete its purchase orders. Resulting from tight deadlines are delays in manufacturing but none serious enough to affect operations. All of Apple products are designed in California, but all hardware is outsourced primarily to Asia. Europe also plays a small role in the manufacturing of products, but is not as prominent as the U.S. and Asia.
Figure 11 Source: Apple Inc. 10-K Mac Desktops The Mac desktop computer brought Apple to the company it is today. Although most consumers have transformed to portables, the desktop still maintains 5-6% of Apples revenue. The Mac receives most of its sales from educational institutions, businesses, and personal offices. Mac prices are higher than most competitors with an average price of $1350. We anticipate sales to decline to about 2% of Apples revenue. Mac Portables As Apple has grown its image over the last five years; the Mac portable has increased its market share significantly. In Q1 of FY2012 Apple recorded 5.2 million Macs sold during the quarter, a 26 percent unit increase over the year-ago 1 quarter . The Mac has been increasingly popular to students and for personal use because of its simplicity and better antivirus protection. World-Wide PC sales have been declining, but Mac has managed to grow its computer line. Even with the threat of the iPad cannibalizing portable computer sales, Apple has grown its market share to 11.6 % in the last year. Figure twelve shows that of the major players producing portable computers Apple is the only company with positive growth in the last year. The Mac is 14-15% of Apples revenue and we anticipate a slow decline, with more focus on phones and tablets. The price remains well above the average portable computer; unattractive to the lower income consumers. Although we believe sales will decrease in future years, prices will remain at a premium.
Figure 12 Source: TechCrunch.com14 iTunes In 2000, Apple purchased SoundJamnMP and transformed it into the household online music store that is now renowned as iTunes. iTunes eventually took over the music industry and changed the way people purchase music. It has grown to be the largest publically used music application for personal
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Research and Development One of Apples top business strategies is to continually invest in research and development. Apple believes it is critical to the development and sales of innovative products 1 and technologies . It spends an industry low 3% of sales on research and development expense. Competitors like Microsoft and Google spend 13+% of revenues. Research and development spending continues to increase but at a constant rate of 3% with sales. Total research and development expense was $2.4 billion, $1.8 billion and $1.3 1 billion in 2011, 2010 and 2009, respectively . Research and development has never exceeded 3% of sales and we expect that trend to continue as sales increase. The Future of Tim Cook New CEO When founder and CEO Steve Jobs passed away October 5, 2011 of pancreatic cancer, he left Tim Cook COO in charge of operations. With Jobs gone many thought the innovation and work ethic at Apple would suffer. Mr. Jobs, known for his distortion of reality, pushed employees past limits and demanded perfection. Few other CEOs in history could envision long-term product strategies as Jobs did. Tim Cook in his 7-month career as CEO has taken a different route in leading Apple. He has announced a dividend, which Jobs was extremely against, because it would attract investors and bring cash down. Cook has also announced a stock repurchase of $10 billion over three years. Overall, the stock has seen significant gains and the company maintains its status and innovation. Tim Cook will continue to grow the image of Apple and supply consumers with high quality products.
Diversity of Products For Apple to live up to its brand image and continuously innovate, diversifying the company became essential. Apples innovation into several markets involved integration off its other products. Originally a computer company, Apple then revolutionized the music industry. Combining these industries they entered the mobile communications industry. After deriving the iPhone they integrated its function into a larger more professional mobile device, and entered the tablet industry. By utilizing its original function Apple products have set the status-quo within its industries. Its continuous upgrades in each product line have people lining up out the door to purchase the next generation of their favorite product. Apple competes mainly against companies that have one or two market focuses; not a diverse market. A strong benefit from this allows for consumers to build a relationship with Apple and trust them for all electronic needs. The relationship has strengthened and Apples innovation and consumer confidence has risen making it the largest company by market capitalization. Financial Liquidity Apples financial statements are some of the most impressive reports in the market. On the balance sheet, Apple contains very little debt and over $100 billion in cash. With extreme financial liquidity, larger than any corporation in the world, Apple is well postured for growth. Apple already announced that it will be paying a quarterly dividend of 1.8% ($2.65/sh.) and instituting a $10 billion share repurchase program over the next three years. These strategic business actions are very positive and will benefit shareholders. Investors will be more interested in investing with Apple knowing it pays a quarterly dividend. The share repurchase program also shows that Apple believes its stock is undervalued. Repurchasing shares will decrease the amount of shares outstanding, which leads to an increase in stock value. Another action that Apple has taken is to decrease its data center energy costs by building a fuel cell and solar power plant. The plant will help fuel the future growth of Apple while generating revenues through selling excess energy. Beside for the recent announcements by Apple, there is room for future liquidity. Maintaining its cash hoard and keeping product margins around 40% will continue high levels of revenue. We anticipate future mergers and acquisitions to progress innovation in the market. Apple will attack or create a new market to increase the brand image as its products evolve within the different industries. Overall, Apple has the financial liquidity to continuously innovate and dominate several markets.
Future Outlook
Strengths: Brand Loyalty Very few companies in history have a cult following the way Apple is supported by its consumers. This lifestyle is what Steve Jobs envisioned when he created the first Apple computer in 1976. Unlike any other consumer electronic company, Apple chose a branding strategy of emotion. The personality of its core products is designed to express a lifestyle of imagination, desires, hope, passion, innovation, and easy-use in order to provide power to the people through technology15. Apple has achieved this image primarily over the last five years with its sparks in innovation. It has proven its ability to produce the smartest, most attractive products that are easy to use. Apple products internally and externally are designed by artists in order to bring out the beauty and distinction of high-performance technology. Due to its image, Apple products have always been sold at a premium. The company doesnt seek to attract all consumers, but the individuals looking to conform to its image and reputable status.
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Back to the Future What has already been accomplished plays a major role in determining the future outlook of a company. Apples innovation and growth has created products and applications used by consumers daily, and have transformed the world. Created first computer with graphical user interface (GUI). Invented the mouse (computing) 1984 Super Bowl commercial. First programmable universal remote. Firewire iTunes- largest online digital entertainment store. iPod- most selling MP3 player ever All-in-One computer (non-laptop) iPhone- First and most selling individual smartphone. Applications- most in world. iPad- re-defined tablet industry and production = Most Valuable Company in the World Weaknesses: Competition Pricing In order to maintain Apples brand image it must continue selling products at a premium. Even though having high profit margins is a huge benefit for Apple, it allows the competition to gain market share via lower prices. Consumers will demand cheaper products as smartphones and tablets eventually become saturated markets. Both of these markets already contain products to compete against Apple, but with prices 50-250% cheaper. Apple will need to boost innovation, or find a way to keep brand image and loyalty, without slashing prices too low. Manufacturing Process Apple components for its core products are purchased through multiple sources. In order to create the highest quality of products and continuously innovate they have temporary contractual agreements with companies in the Asia-Pacific, Europe, and United States for components. Because of the custom components, the company has a high supply and cost risks that affect the overall manufacturing of products. Apple remains subject to risk, supply shortage, and cost increases that affect the companys financial and operating conditions. The supply shortage has been recognized for releases of new products, which have taken as long as five to six weeks for shipments. Fair Labor Association After Apple agreed to be the first technology company associated with the FLA, many issues were uncovered at three Foxconn factories in Shenzhen, China. Even though Apple paid for the study, the findingswhich tapped over 35,000 anonymous Foxconn employees over the course of 3,000 hoursare independent and
sufficiently damning. It was discovered that Foxconn was violating Chinese laws, and working employees more than Forty hours per week and a maximum of thirt-six hours per month overtime16. The employees are also not allowed to work 7 days a week and several claimed that this rule has been breached. These issues have resulted in unhealthy work environments and violation of Chinese labor acts. Another issue is wages, which was above minimum wage. The minimum wage in Shenzhen is 1500RMB and Apple was paying a minimum of 1800RMB, which they agreed to raise to 2200RMB. Overall, Apple has complied with most of FLA changes and has until July 1, 2013 to fix it in totality. E-Book Collusion The U.S. Department of Justice filed an antitrust suit against Apple and several book publishers, claiming that the companies conspired to limit price competition in e-books17. This implication will cause Apple to prove in court that it negotiated pricing separately with each publisher to avoid collusion charges. We dont believe this event will affect the sales of iPads, but will cause Apple to spend money and time fighting in court. Potential Opportunities: New Products Apple continuously upgrades its products therefore we anticipate new features and innovation to drive consumer demand. Even though the iPhone 4s and New iPad sold more units than any other of its earlier products, we believe it was named 4s and New iPad for a reason. A common trend with Apple is took its consumers in suspense of the next innovation. It does not rename a product unless it had capabilities beyond the earlier version. We expect an iPhone fifth generation, mini-iPad, and iPad fourth generation are soon to come. The old versions, which are already being sold by the millions each quarter, express potential future growth for its successors. Besides upgrading already known features, possible features that could emerge are a 3-D holographic display, to make watching videos easier, and a laser keyboard that will allow users to easily type like a computer on a hard surface. The release of the New iPad contained a resolution that is equivalent or better than a high definition television. As rumors have been out for years, we believe it may be an appropriate time for Apple to enter the television industry. After already incorporating each of its products into one another we believe they can re-define the future of television. Merging the iPhone, iPod, iPad, and iTunes, it is very possible to create an extraordinary product that has never seen before. Emerging Markets The success of the iPhone and iPad rapidly growing around the world provides an opportunity to penetrate emerging markets. Within the United States, the top 3 mobile providers of AT&T, Verizon, and Sprint sell the
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iPhone. This has caused several people from smaller providers to switch in order to have top technology. If TMobile and US Cellular adopt the Apple products, it could increase US market share. The next biggest market and fastest growing is China with a population more than 1.3 billion. China, however, has been known for unhealthy inequalities in income levels. Recent economic growth has increased the movement of citizens out of rural poverty into the cities18 The economic growth has decreased the income level separation providing more jobs to the middle class. Chinas second and third largest mobile providers have adopted the iPhone, but Apple is struggling to grab China Mobile, the largest provider in the world with 655 million users. Adoption of Apple products by China Mobile would lead to record breaking sales as the sales in Asia-Pacific have shown the most growth year-overyear (view figure thirteen) than any other region. The last player is India which does not offer any iPhone or iPad sales. Mobile communication devices in India are significantly cheaper due to a weak economy and lower standard of living. Apples premium products will most likely not enter India unless wealthy consumers are demanding. A possible solution would be providing India with the old versions of iPhone whose prices are now as low as $49.99 with a two year contract. It is strategic play to clean out old inventory that retail stores can no longer sell.
estimated cash flows and driver values such as constant value return on invested capital of 114% and constant value growth rate of 2.5%. Cash flow forecasts started with a breakdown of revenues and estimates on the growth for specific products. All the information through the financial statements was estimated based on prior performance and future expectations. An estimated stock price of $775.30 provides investors with an opportunity to capitalize on the undervalued stock. Revenue Decomposition Revenues are the most vital part to the valuation model. We approached the task by breaking down year over year growth of each individual product. Fiscal Year 2010 and 2011 produced 52% and 66% increases in total revenue respectably. We expect revenues to subdue their surge to 22% increase in FY2012 tapering off to 5% by 2020. The large increases in prior years are a result of the iPad revolutionizing the tablet market. The major catalyst for Apple to sustain high levels of growth is continuing to penetrate emerging markets. Sixty-three percent of the 37.4 million iPhones activated were in China. Asia-Pacific countries are adapting new mobile technology with the growth of the top telecommunications company China Mobile. For Apple to control Chinas market it must sign a contract with China Mobile before the competition does. Should Google reach a deal before Apple, revenues and market share would take a hit. Apples iPad accounted for 19% of total revenues in 2011 growing unit sales by 334% from 2010. We expect the New iPad to push sales further but growth in sales will reduce to around 45% for 2012. The iPhone has recognized year over growth around 90% the previous three years. We estimated a drop off in the surge of iPhone sales to around 26.5% in FY 2012, tapering to a constant value growth rate of 6%. The iPhone and iPad are the two major streams of revenue for Apple. Both products are innovative in its respective markets and give Apple the first mover advantage. Meaning, Apple was first in the marketplace so it earned the right to set a premium on its prices. We do not foresee Apple lowering prices rather, a more strategic alternative by adding more inexpensive versions of its products. Apples resistance to lower prices will continue. It is the companys culture to sell high quality products at a higher price than the competitor. Consumers understand Apples products are expensive for the luxurious nature of the goods. For these reasons, we expect prices to stay higher than the competition until Apple is in a mature state and markets become more saturated. Operating Profit Net operating profit after taxes and liabilities (NOPLAT) is a major driver in the valuation analysis. NOPLAT is a great metric used in comparison of two firms to determine the more efficient operations. Apples NOPLAT has spiked from $6 billion to nearly $23 billion in three years. We expect it to grow by 50% over
Figure 13 Source: Apple Inc. 10-k
Valuation Analysis
An extensive valuation analysis of Apple Inc. was performed through discounted cash flow model (DCF), economic profit model (EP), relative P/E model, and P/E to growth models (PEG). The key driver values in the DCF and EP models concluded an intrinsic share price of $775.30. At this estimated value, Apple is currently undervalued by 27.2% with a current share price of $609. The DDM model provided a meek intrinsic value of $381.80. The relative P/E analysis gave a value closer to current trading value at $627.70 with a PEG analysis coming to an astounding $1436.53. Apple just announced dividends so we disregarded DDM results and focused on the DCF and EP approach that included
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the next three years before slowing to 6% growth in 2016 and slowly decreasing growth thereafter. Firms in the technology industry struggle to compete with Apples efficient and highly profitable operations. Discounted Cash Flow and Economic Profit Models The discounted cash flow (DCF) and economic profit (EP) models suggest an intrinsic value of $775.30. This is the foundation for the buy rating. An undervaluation of 27.2% is large given the high stock price, but Apple is far from its maturity stage. We prefer to use the DCF and EP models as a stronger estimate, because it calculates the present value of future cash flows by using our calculated WACC as the discount rate. Our calculated cost of equity then goes into the elapsed fraction giving the output for an intrinsic value of $775.30 in both models. A company such as Apple, with huge expected future cash flows, needs a valuation model that accounts for these large earnings. The DCF and EP models use cash flows and a constant value growth rate of 2.5% to reach an estimated intrinsic value. Real GDP growth historically averages 3-4% annually. We believe Apple will reach a stage of maturity around 2020 and will consistently grow at 2.5%. Relative P/E and PEG Ratios The relative P/E and PEG ratios attempt to estimate the intrinsic value of the stock using the average P/E and PEG ratios of seven other closely related companies. We chose Google as Apples main competitor in the smartphone market, Hewlett-Packard and Dell since both have competed against the Mac desktops and portables, AT&T for its close relation in the mobile industry, and IBM and Intel because of Apples relation to them in the software and server industry. An average of the seven companies P/E ratio is then multiplied by Apples earnings per share for the year to get a share price of $627.70. Dell and H-P are the laggards that bring down the P/E average and may not be suitable in this analysis. Apple far outperforms both these companies therefore the relative P/E is not the appropriate model to estimate its intrinsic value. A PEG ratio gives a large price of $1436.53, which is calculated by the companies average PEG multiplied by Apples five year growth estimate and its earnings per share. A large PEG ratio is not uncommon but we still consider the DCF and EP models as the most accurate. Dividend Discount Model The dividend discount model (DDM) is another tool for valuating a firms intrinsic value, also referred to as the fundamental P/E analysis. The DDM is more accurate now that the exact dividend amount has been specified by Mr. Cook. We estimated Apple will increase quarterly dividends by .2% in 2015, 2018, and 2020. The dividend payout is currently at low percentage but that only gives Apple room to increase the payout ratio as needed. Our income statement calculated the
dividends per share used in the valuation. Discounting dividends per share by the cost of equity gave an intrinsic value of $383.72. A low value compared to its current value and other estimates but cash flows are not accounted for in this model. Also, Apple is issuing dividends for the first time this year negating the effectiveness of the DDM. Weighted Average Cost of Capital: Apple has no public debt so in order to estimate a cost of debt we took the average 30 year bond yield of six related companies and calculated 4.757%. The weight of debt for Apple is nearly zero. Equity weight is above 99% thus the cost of equity drove our WACC model the most. An implied market risk premium of 6.03% was 20 obtained from Damodaran Online along with a mean weekly beta of 1.057 to obtain a weighted average cost of capital of 9.464%.
Sensitivity Analysis
Cost of Sales Apples margins on products are the main source for the extreme levels of revenue. Consumers pay top dollar for a high-end product they know is quality. We expect cost of sales to increase over the next nine years as Apple continues to innovate and release expensive products. The next product to amaze consumers will most likely be a flat-screen television fully integrated with other Apple products. Sharp has already signed a deal with Apple manufacturer Foxconn so look for Apple to unveil a revolutionary television to penetrate a new market in 2013. To test the variance of cost of sales to the value of the stock we ran a sensitivity analysis against selling, general, and administrative expense as percent of sales. Selling, General, & Administrative Selling, general, and administrative (SG&A) expense has been on a steady decline as a percent of sales. The past four years has seen a decline from 13% to 7%. We wanted to test how sensitive the intrinsic value is to fluctuations in expense and cost of sales. The results were very sensitive fluctuating from $1080 down to $394. We do not expect SG&A to increase instead we expect a continued value of 6% in 2016. We opted not to test the sensitivity of research and development percentages of sales because we expect Apple to maintain the same proportion of R&D expense to sales. CV Growths The constant value growth of the iPhone and iPad are difficult to estimate. The recent surge of popularity in these products begs the question how long Apple can sustain current growth levels. The next three years will have elevated levels of growth for both products but we expect growth to slow as Apple matures and possibly focuses on other markets. We forecast a CV growth rate of 6% for the iPhone and 5% for the iPad. A sensitivity
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analysis between the two variables shows little variation in the price. The two products are Apples main sources of revenue so a sensitivity analysis between them was pertinent. The constant value of growth was determined by choosing a percentage under our projected inflation and GDP percentages. 2.5 percent is our constant value growth rate for Apple and we tested this against the beta. A sampling of raw beta was taken from Bloombergs terminals and we took the mean of the weekly beta calculations. Beta and growth rate have a large impact on the stock price. A growth rate higher than 2.5% will push the stock price above $900 and a high beta could drive the stock price down to the $400 range. Apple already has a high beta so that is not of concern. The 2.5% constant value growth rate is modest by our expectations so our projected intrinsic value is possibly undervalued. Market Risk Premium and Risk Free Rate The rates of the market risk premium and the risk free rate plays a major role in calculating Apples intrinsic value. A one percent fluctuation in the risk premium parallels a $200 price shift in that direction. The risk free rate of 3.125% was determined from the thirty year bond yield on Bloombergs website19. An implied market risk premium 6.03% was used from Damodaran Online20. Running the sensitivity analysis between these two variables proves how sensitive the price is to the market. A low premium and low risk free rate drives the price above $1000 while a high risk free rate and high premium lowers the price to $500. CV ROIC The constant value of return on invested capital (ROIC) did not constitute much variation in our sensitivity analysis. A poor economy has the potential to produce bad returns in the tech industry. However, Apple has large future cash flows that protect it from the threats of a volatile economy. When tested against the CV growth rate, the results were much more sensitive to the growth rate. Clearly, the constant value growth rate that Apple maintains in its maturity stage has huge implications on its intrinsic value. Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not
a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
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References Cited
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Apple 10-K. September 24, 2011.
http://gizmodo.com/5897593/the-full-foxconn-reportheres-everything-you-need-to-know
17
finance.yahoo.com/echarts?s=^GSPC+Interactive#symbol= ^gspc;range=20120103,20120402;compare=;indicator=volu me;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;s ource=undefined; finance.yahoo.com/q/ta?s=XLF&t=3m&l=on&z=l&q=l&p= m100&a=&c=XLK http://www.bloomberg.com/markets/economic-calendar/ Real GDP Growth. March 29, 2012. http://www.bloomberg.com/markets/economic-calendar/ Consumer Sentiment. April 13, 2012. http://www.bloomberg.com/markets/economic-calendar/ Unemployment Status. April 6, 2012. http://www.bloomberg.com/markets/economic-calendar/ Consumer Price Index. April 13, 2012
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Forden, Sarah. Bloomberg Businessweek. April 17, 2012. http://www.businessweek.com/news/2012-04-17/u-dot-s-dotsues-apple-for-ebook-pricing-as-three-firms-settle Fang, Cai. China Daily. April 12, 2012. http://www.china.org.cn/opinion/201204/12/content_25126239.htm http://www.bloomberg.com/markets/ratesbonds/government-bonds/us/ http://pages.stern.nyu.edu/~adamodar/
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Wie, Lingling. Wall Street Journal. For Banks, Yuan Band Move is Selling Tool. April 17, 2012. http://online.wsj.com/article/SB10001424052702304432704 577347473114695582.html?mod=WSJ_Markets_LEFTTopS tories
Azeff, Paul & Bobrow, Kory. Seeking Alpha. Land of the Rising Debt to GDP Ratio. February 23, 2012. http://seekingalpha.com/article/384141-land-of-the-risingdebt-to-gdp-ratio
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Whitney, Lance. CNet News. January 10, 2012. http://news.cnet.com/8301-13579_3-57355900-37/iphone4s-inches-apple-closer-to-android-in-top-market-share/ http://www.etforecasts.com/products/ES_pcww1203.htm ww.google.com/finance?client=ob&q=NASDAQ:AAPL#
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http://www.apple.com/pr/library/2012/01/24AppleReports-First-Quarter-Results.html
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Crook, Jordan. TechCrunch. Apple Still on Top in Mobile PCs, but H-P takes the cake in Notebooks. February 23, 2012. http://techcrunch.com/2012/02/23/npd-apple-still-on-top-inmobile-pc-shipments-but-hp-takes-the-cake-in-notebooks/
Marketing Minds. Apples Branding Strategy. 2012. http://www.marketingminds.com.au/branding/apple_bra nding_strategy.html Biddle, Sam. Gizmodo. Overworked and In Danger: The Full Foxconn Report. March 29, 2012.
16
15
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AppleInc RevenueDecomposition FiscalYearsEndingDec.31

Products: iPhone # of units (thousands) y/y growth x avg sales price y/y growth Total Revenue (millions) y/y growth iPad # of units (thousands) y/y growth x avg sales price y/y growth Total Revenue (millions) y/y growth Macintosh Desktop # of units (thousands) y/y growth x avg sales price y/y growth Total Revenue (millions) y/y growth Macintosh Portables # of units (thousands) y/y growth x avg sales price y/y growth Total Revenue (millions) y/y growth iPod # of units (thousands) y/y growth x avg sales price y/y growth Total Revenue (millions) y/y growth Other Music Related Products & Services Total Revenue y/y growth Software, services, and other sales Total Revenue y/y growth Peripherals and other Hardware Total Revenue y/y growth Total Revenues (millions) y/y growth -11.60% 4,036 20.84% 2,411 9.19% 1,475 -12.93% 42,905 14% 4,324 -23.09% 7,214 20.17% 1,321 -8.52% 9,535 9% 3,182 -14.28% 1358 4,627 45.41% 1340 -1.33% 6,201 43.41% 9,035 25.24% 1,254 -5.07% 11,278 18.28% 4,958 665
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
20,731 78.3% 629 8.45% 13,033 93.31%
39,989 92.89% 630 0.16% 25,179 93.19% 7,458
72,293 80.78% 653 3.65% 47,057 86.89% 32,394 334.35% 628 -5.56% 20,358 310.61% 4,669 0.91% 1379 2.91% 6,439 3.84% 12,066 33.55% 1,271 1.36% 15,344 36.05%
91,451 26.5% 642 -1.68% 58,711 24.77% 46,971 45.0% 625 -0.48% 29,357 44.20% 4,716 1.0% 1,340 -2.83% 6,366 -1.13% 15,083 25% 1,250 -1.65% 18,853 22.87% 34,096 -20.0% 160 -8.57% 5,455 -26.81% 7,893 25.0% 3,161 7.0% 2,680 15.0% 132,475 22%
113,399 24% 640 -0.31% 72,575 23.61% 63,411 35% 620 -0.80% 39,315 33.92% 4,763 1% 1,330 -0.75% 6,335 -0.49% 18,401 22% 1,245 -0.40% 22,909 21.51% 26,595 -22% 155 -3.13% 4,122 -24.43% 9,471 20% 3,382 7% 2,974 11% 161,083 21.59%
137,213 21% 630 -1.56% 86,444 19.11% 82,435 30% 600 -3.23% 49,461 25.81% 4,810 1% 1,300 -2.26% 6,254 -1.28% 22,081 20% 1,240 -0.40% 27,380 19.52% 19,946 -25% 150 -3.23% 2,992 -27.42% 11,081 17% 3,619 7% 3,301 11% 190,532 18.28%
161,911 18% 620 -1.59% 100,385 16.13% 103,043 25% 575 -4.17% 59,250 19.79% 4,859 1% 1,260 -3.08% 6,122 -2.11% 26,055 18% 1,200 -3.23% 31,266 14.19% 14,361 -28% 147 -2.00% 2,111 -29.44% 12,522 13% 3,836 6% 3,566 8% 219,057 14.97%
186,197 15% 600 -3.23% 111,718 11.29% 123,652 20% 560 -2.61% 69,245 16.87% 4,907 1% 1,240 -1.59% 6,085 -0.60% 29,182 12% 1,180 -1.67% 34,435 10.13% 10,340 -28% 139 -5.44% 1,437 -31.92% 13,774 10% 4,066 6% 3,851 8% 244,611 11.67%
208,541 12% 580 -3.33% 120,954 8.27% 142,200 15% 550 -1.79% 78,210 12.95% 4,956 1% 1,200 -3.23% 5,947 -2.26% 31,808 9% 1,150 -2.54% 36,580 6.23% 7,135 -31% 137 -1.44% 977 -31.99% 14,462 5% 4,310 6% 4,082 6% 265,523 8.55%
229,395 10% 550 -5.17% 126,167 4.31% 156,420 10% 550 0.00% 86,031 10.00% 5,006 1% 1,180 -1.67% 5,907 -0.68% 34,035 7% 1,125 -2.17% 38,289 4.67% 4,923 -31% 132 -3.65% 650 -33.52% 15,186 5% 4,569 6% 4,327 6% 281,125 5.88%
243,159 6% 550 0.00% 133,737 6.00% 164,241 5% 540 -1.82% 88,690 3.09% 5,056 1% 1,150 -2.54% 5,814 -1.57% 36,077 6% 1,110 -1.33% 40,045 4.59% 3,298 -33% 125 -5.30% 412 -36.55% 15,945 5% 4,843 6% 4,500 4% 293,987 4.58%
257,748 6% 550 0.00% 141,762 6.00% 172,453 5% 540 0.00% 93,124 5.00% 5,106 1% 1,125 -2.17% 5,745 -1.20% 37,881 5% 1,100 -0.90% 41,669 4.05% 2,078 -37% 121 -3.20% 251 -39.02% 16,742 5% 5,133 6% 4,680 4% 309,106 5.14%
54,132 50,312 42,620

-1.27% 150 -7.06% 164 9.33% 2.26% 4,948 22.60% 2,573 6.72% 1,814 22.98% 65,225 52% -15.29% 175 6.71% -9.92% 6,314 27.61% 2,954 14.81% 2,330 28.45% 108,249 66%
8,091 8,274 7,453
Percentage Plugs Cost of Sales R&D SG&A Other Income Provision for Income Taxes Marketable Securities Accounts Recievable, net Inventories Deffered Tax Assets Vendo non-Trade Receivables Other Current Assets L-T Marketable Securities Net PPE Goodwill Acquired Intangible Assets Other Assets Accounts Payable Accrued Expenses Defferred Revenue non-current Defferred Revenue Other non-current Liabilities Common Stock Accumulated Other Comprehensive Income CF Plugs (growth plugs) Depreciation Stock-based compensation expense Deferred income tax expense (benefit) Short-Term Investments Capital Expenditures Long-Term Investments Intangible Assets (y/y decrease) Proceeds from Common Stock Dividends Paid Shares Outstanding Depreciation Expense
2012E
60.00% 3.0% 7.00% 1.00% 25.00% 18.00% 7.00% 1.50% 3.00% 6.00% 3.00%
2013E
60.25% 3.0% 6.40% 0.70% 25.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2014E
60.75% 3.0% 6.20% 0.80% 25.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2015E
61.00% 3.0% 6.10% 0.60% 25.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2016E
61.25% 3.0% 6.00% 0.50% 28.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2017E
61.75% 3.0% 6.00% 0.70% 28.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2018E
62.00% 3.0% 6.00% 0.60% 28.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2019E
62.25% 3.0% 6.00% 0.80% 28.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
2020E
63.00% 3.0% 6.00% 0.60% 28.00% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00%
32.00% 9.0% 0.9% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 10.11% 0.25%
29.0% 7.5% 0.9% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 12.00% 0.25%
29.55% 7.5% 0.9% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 14.00% 0.25%
30.00% 7.5% 0.9% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 14.87% 0.25%
30.00% 7.5% 0.9% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 12.02% 0.25%
32.00% 7.5% 0.8% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 10.94% 0.25%
33.47% 8.0% 0.8% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 8.00% 0.25%
36.11% 9.0% 0.8% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 5.00% 0.25%
41.02% 9.0% 0.8% 3.0% 4.0%

14.0% 8.5% 2% 2.00% 8.00% 2.00% 0.25%
15% 20% 60% 18% 35% 20% 80% 15% 7.2% 1% 10%
15% 20% -20% 18% 35% 20% 80% 15% 7.2% 1% 10%
15% 20% -20% 18% 30% 20% 80% 15% 7.2% 1% 10%
15% 20% -20% 18% 28% 20% 80% 3% 8.0% 1% 10%
15% 20% -20% 18% 26% 20% 80% 3% 8.0% 1% 10%
15% 20% -20% 18% 25% 20% 80% 3% 8.0% 1% 10%
15% 20% -20% 18% 25% 20% 80% 3% 8.8% 1% 10%
15% 20% -20% 18% 25% 15% 80% 3% 8.8% 1% 10%
15% 20% -20% 18% 25% 15% 80% 3% 9.8% 1% 10%
AppleInc CashFlowStatement FiscalYearsEndingDec.31

Cash & cash equivalents, beginning of year Operating Activities Net income (loss) Adjusted to Reconcile net in come to cash generated by operating Depreciation, amortization & accretion Stock-based compensation expense Deferred income tax expense (benefit) Changes in Working Capital Accounts receivable, net Inventories Vendor non-trade receivables Other current assets Other non-current assets Accounts payable Accrued Expenses Deferred revenue Deferred revenue- non-current Other current & non-current liabilities Net cash flows from operating activities Investing Activities Short-Term Investments Capital Expenditures Long-Term Investments Intangible Assets Other cash flow from investing activities Net cash flows from investing activities Financing Activities Proceeds from issuance of common stock Dividends Paid Net cash flows from financing activities Increase (decrease) in cash & cash equivalents Cash & cash equivalents, end of the year
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
30,801
37,512
44,084
50,109
53,276
57,257
59,913
62,549
63,651
2,086 1,402 4,589
2,399 1,682 3,671
2,759 2,018 2,937
3,173 2,422 2,349
3,649 2,906 1,880
4,196 3,488 1,504
4,825 4,185 1,203
5,549 5,022 962
6,381 6,027 770
(3,904) (1,211) (1,601) 555 (1,743) 3,915 2,013 (2,104) 34 498 31,156
(392) (429) (106) (858) (1,144) 4,005 2,432 429 34 2,289 46,726
(1,767) (442) (1,472) (883) (1,178) 4,123 2,503 1,394 35 2,356 50,949
(1,712) (428) (1,426) (856) (1,141) 3,994 2,425 571 36 2,282 55,452
(1,533) (383) (1,278) (767) (1,022) 3,578 2,172 511 36 2,044 57,772
(1,255) (314) (1,046) (627) (836) 2,928 1,777 418 37 1,673 60,808
(936) (234) (780) (468) (624) 2,184 1,326 312 38 1,248 62,542
(772) (193) (643) (386) (514) 1,801 1,093 257 39 1,029 64,695
(907) (227) (756) (454) (605) 2,117 1,285 302 40 1,210 66,071
(2,576) (3,400) 1,929 (438) (1,743) (6,228)
(3,039) (4,590) (3,379) (858) (1,144) (13,011)
(3,586) (5,967) (3,506) (883) (1,178) (15,121)
(4,232) (7,638) (1,880) (856) (1,141) (15,746)
(4,993) (9,624) (1,964) (767) (1,022) (18,370)
(5,892) (12,029) (1,361) (627) (836) (20,747)
(6,953) (15,037) (1,137) (468) (624) (24,219)
(8,204) (18,796) (1,160) (386) (514) (29,061)
(9,681) (23,495) (2,090) (454) (605) (36,325)
956 (2,218) (1,262) 23,667 33,482
1,099 (2,701) (1,602) 32,113 65,595
1,264 (3,174) (1,910) 33,919 99,514
1,453 (4,009) (2,555) 37,151 136,664
1,497 (4,262) (2,765) 36,637 173,301
1,542 (4,581) (3,039) 37,023 210,325
1,588 (5,272) (3,684) 34,639 244,964
1,636 (5,504) (3,868) 31,766 276,730
1,685 (6,238) (4,553) 25,194 301,924
AppleInc IncomeStatement FiscalYearsEndingDec.31

Net sales Cost of sales Gross margin Research & development expense Selling, general & administrative expense Total operating expenses Operating income (loss) Other income & expenses Income (loss) before provision for (benefit from) income taxes Provision for (benefit from) income taxes Net income (loss) Shares used in computing earnings per share: Weighted average shares outstanding Basic EPS Dividends Per Share
2009
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
36,537 65,225 108249 132,475 161,083 190,532 219,057 244,611 265,523 281,125 293,987 309,106 23,397 39,541 64431 79,485 97,053 115,748 133,625 149,824 163,960 174,298 183,007 194,737 13,140 25,684 43813 52,990 64,031 74,784 85,432 94,787 101,562 106,828 110,980 114,369 1,333 1,782 4,149 5,517 5,482 7,299 7,658 18,385 326 155 7,984 18,540 2,280 4,527 5,704 14,013 2429 7599 10028 33790 415 34205 8283 25922
3,974 9,273 13,248 39,743 1,325 41,067 10,267 30,801
4,832 10,309 15,142 48,889 1,128 50,016 12,504 37,512
5,716 11,813 17,529 57,255 1,524 58,779 14,695 44,084
6,572 13,362 19,934 65,498 1,314 66,812 16,703 50,109
7,338 14,677 22,015 72,772 1,223 73,995 20,719 53,276
7,966 15,931 23,897 77,665 1,859 79,524 22,267 57,257
8,434 16,868 25,301 81,526 1,687 83,213 23,300 59,913
8,820 17,639 26,459 84,521 2,352 86,873 24,324 62,549
9,273 18,546 27,820 86,550 1,855 88,404 24,753 63,651
893.02 909.46 6.39 15.41 N/A N/A
924.26 28.05
933.50
32.99
942.84
39.79
952.26
46.29
961.79
52.10
971.40
54.84
981.12
58.36
990.93
60.46
1000.84
62.50
1010.85
62.97
N/A
2.38
2.86
3.33
4.17
4.39
4.67
5.32
5.50
6.17
Apple Inc Balance Sheet Fiscal Years Ending Dec. 31 Assets Cash & cash equivalents Short-term marketable securities Accounts receivable, net Inventories Deferred tax assets Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant & equipment, net Goodwill Acquired intangible assets, net Other non-current assets Total assets Liabilities Accounts payable Accrued expenses Deferred revenue Total current liabilities Deferred revenue - non-current Other non-current liabilities Total liabilities Shareholders' Equity Common Stock Treasury Stock Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity Total Liabilities & Shareholder's Equity 2009 5,263 18,201 3,361 455 2,101 36,265 10,528 2,954 206 247 53,851 2010 2011 2012E 33,482 23,846 9,273 1,987 3,974 7,949 3,974 84,485 42,392 11,923 1,192 3,974 5,299 149,265 2013E 65,595 28,995 9,665 2,416 4,832 8,054 4,832 124,390 46,770 12,081 1,450 4,832 6,443 195,967 2014E 99,514 34,296 11,432 2,858 5,716 9,527 5,716 169,058 56,308 14,290 1,715 5,716 7,621 254,707 2015E 136,664 39,430 13,143 3,286 6,572 10,953 6,572 216,620 65,720 16,429 1,972 6,572 8,762 316,075 2016E 173,301 44,030 14,677 3,669 7,338 12,231 7,338 262,584 73,383 18,346 2,201 7,338 9,784 373,638 2017E 210,325 47,794 15,931 3,983 7,966 13,276 7,966 307,240 84,967 19,914 2,124 7,966 10,621 432,833 2018E 244,964 50,603 16,868 4,217 8,434 14,056 8,434 347,575 94,080 22,490 2,249 8,434 11,245 486,073 2019E 276,730 52,918 17,639 4,410 8,820 14,699 8,820 384,035 106,153 26,459 2,352 8,820 11,759 539,578 2020E 301,924 55,639 18,546 4,637 9,273 15,455 9,273 414,748 126,788 27,820 2,473 9,273 12,364 593,465
11,261 9,815 14,359 16137 5,510 5369 1,051 776 1,636 2014 4,414 6348 3,447 4529 41,678 44988 25,391 55618 4,768 7777 741 896 342 3536 2,263 3556 75,183 116371
5601 3376 10305 19282 4,485 2,252 26,019
12015 5723 2984 20722 1,139 5,531 27,392
14632 9247 4091 27970 1686 10100 39756
18,547 11,260 1,987 31,794 1,720 10,598 44,112
22,552 13,692 2,416 38,660 1,754 12,887 53,301
26,674 16,195 3,811 46,680 1,789 15,243 63,712
30,668 18,620 4,381 53,669 1,825 17,525 73,018
34,246 20,792 4,892 59,930 1,861 19,569 81,360
37,173 22,569 5,310 65,053 1,899 21,242 88,194
39,358 23,896 5,623 68,876 1,937 22,490 93,302
41,158 24,989 5,880 72,027 1,975 23,519 97,521
43,275 26,274 6,182 75,731 2,015 24,729 102,475
8,210 19,538 84 27,832 53851
10,668 37,169 (46) 47,791
13331 62,841 443 76615
13,397 91,424 331 105,153 149,264
19,328 3,300 126,235 403 142,666 195,967
26,674 3,300 167,145 476 190,996 254,708
32,563 3,300 213,246 548 243,056 316,075
29,406 262,260 612 292,278 373,638
29,039 314,937 664 344,639 432,833
22,490 369,578 703 392,771 486,073
14,699 426,622 735 442,056 539,578
6,182 484,036 773 490,990 593,465
75183 116371
AppleInc CommonSizeIncomeStatement FiscalYearsEndingDec.31

Net sales Cost of sales Gross margin Research & development expense Selling, general & administrative expense Total operating expenses Operating income (loss) Other income & expenses Income (loss) before provision for income taxes Provision for (benefit from) income taxes Net income (loss)
2007
2008
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
100.00 100.00 100.00 100.00 100.00 66.03% 65.69% 64.04% 60.62% 59.52% 60.00% 60.25% 60.75% 61.00% 61.25% 61.75% 62.00% 62.25% 63.00% 33.97% 34.31% 35.96% 39.38% 40.47% 40.00% 39.75% 39.25% 39.00% 38.75% 38.25% 38.00% 37.75% 37.00% 3.26% 12.34% 15.60% 18.37% 2.50% 20.86% 6.30% 14.56% 3.41% 11.58% 14.99% 19.32% 1.91% 21.23% 6.35% 14.88% 3.65% 11.36% 15.00% 20.96% 0.89% 21.85% 6.24% 15.61% 2.73% 2.24% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 8.46% 7.02% 7.00% 6.40% 6.20% 6.10% 6.00% 6.00% 6.00% 6.00% 6.00% 11.19% 9.26% 10.00% 9.40% 9.20% 9.10% 9.00% 9.00% 9.00% 9.00% 9.00% 28.19% 31.22% 30.00% 30.35% 30.05% 29.90% 29.75% 29.25% 29.00% 28.75% 28.00% 0.24% 0.38% 1.00% 0.70% 0.80% 0.60% 0.50% 0.70% 0.60% 0.80% 0.60% 28.42% 31.60% 31.00% 31.05% 30.85% 30.50% 30.25% 29.95% 29.60% 29.55% 28.60% 6.94% 7.65% 7.75% 7.76% 7.71% 7.63% 8.47% 8.39% 8.29% 8.27% 8.01% 21.48% 23.95% 23.25% 23.29% 23.14% 22.88% 21.78% 21.56% 21.31% 21.28% 20.59%
Apple Inc (NMS: AAPL)

Exchange rate used is that of the Year End reported date 2009 Assets Cash & cash equivalents Short-term marketable securities Accounts receivable, net Inventories Deferred tax assets Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant & equipment, net Goodwill Acquired intangible assets, net Other assets Total assets Liabilities Accounts payable Accrued expenses Deferred revenue Total current liabilities Deferred revenue - non-current Other non-current liabilities Total liabilities Shareholders' Equity Common stock Treasury Stock Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity 14.40% 49.82% 9.20% 1.25% 5.75% 0.00% 0.00% 99.26% 28.81% 8.08% 0.56% 14.40% 0.00% 147.39% 0.00% 0.00% 15.33% 9.24% 28.20% 52.77% 12.28% 6.16% 71.21% 17.26% 22.01% 8.45% 1.61% 2.51% 6.77% 5.28% 63.90% 38.93% 7.31% 1.14% 17.26% 3.47% 115.27% 0.00% 0.00% 18.42% 8.77% 4.57% 31.77% 1.75% 8.48% 42.00% 9.07% 14.91% 4.96% 0.72% 1.86% 5.86% 4.18% 41.56% 51.38% 7.18% 0.83% 9.07% 3.29% 107.50% 0.00% 0.00% 13.52% 8.54% 3.78% 25.84% 1.56% 9.33% 36.73% 25.27% 18.00% 7.00% 1.50% 3.00% 6.00% 3.00% 40.72% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 52.23% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 62.39% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 70.85% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 79.21% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 87.14% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 94.13% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 97.68% 18.00% 6.00% 1.50% 3.00% 5.00% 3.00% 2010 2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
63.77% 32.00% 9.0% 0.9% 25.3% 4.0% 112.67%
77.22% 29.03% 7.5% 0.9% 40.7% 4.0% 121.66%
88.73% 29.55% 7.5% 0.9% 52.2% 4.0% 133.68%
98.89% 30.00% 7.5% 0.9% 62.4% 4.0% 144.29%
107.35% 30.00% 7.5% 0.9% 70.8% 4.0% 152.75%
115.71% 32.00% 7.5% 0.8% 79.2% 4.0% 163.01%
123.64% 33.47% 8.0% 0.8% 87.1% 4.0% 172.90%
130.63% 36.11% 9.0% 0.8% 94.1% 4.0% 183.54%
134.18% 41.02% 9.0% 0.8% 97.7% 4.0% 191.99%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
14.00% 8.5% 2%
24.00%
1.50%
24.00%
1.50%
24.50%
2.00%
24.50%
2.00%
24.50%
2.00%
24.50%
2.00%
24.50%
2.00%
24.50%
2.00%
24.50%
2.00%
8.00% 33.30%
8.00% 33.09%
8.00% 33.44%
8.00% 33.33%
8.00% 33.26%
8.00% 33.22%
8.00% 33.19%
8.00% 33.17%
8.00% 33.15%
22.47% 53.47% 0.23% 76.17%
16.36% 56.99% -0.07% 73.27%
12.32% 58.05% 0.41% 70.78%
10.11% 0.00% 69.01% 0.25% 79.38%
12.00% 2.05% 78.37% 0.25% 88.57%
14.00% 1.73% 87.73% 0.25% 100.24%
14.87% 1.51% 97.35% 0.25% 110.96%
12.02% 0.00% 107.22% 0.25% 119.49%
10.94% 0.00% 118.61% 0.25% 129.80%
8.00% 0.00% 131.46% 0.25% 139.71%
5.00% 0.00% 145.12% 0.25% 150.37%
2.00% 0.00% 156.59% 0.25% 158.84%
AppleInc ValueDriverEstimation MarginalTaxRate FiscalYearsEndingDec.31 NOPLATCalculation NetSales CostofSales Research&Development Selling,General,Adm.Expense DepreciationExpense Incomebeforeprovisionforincometaxes InterestimpliedonLeasePayments EBITA Less:AdjustedTaxes ProvisionforIncomeTaxes TaxShieldfromImpliedLeaseInterest Taxonotherincome&expense TotalAdjustedTaxes EBITATotalAdjustedTaxes Plus:ChangeinDeferredTaxLiability NOPLAT(millions) InvestedCapital OperatingCurrentAssets: NormalCash(15%ofsales) NetA/R VendorTradeReceivables Inventories OtherCurrentAssets TotalOperatingCurrentAssets OperatingCurrentLiabilities AcountsPayable AccruedExpenses DeferredRevenue TotalOperatingCurrentLiabilites NetOperatingWorkingCapital Plus:NetPPE NetIntangibleAssets OtherAssets CapitalizedPVofOperatingLeases
CostofDebt WACC NormalCash 31.8% 2009
6% 10% 15% 24.4% 2010
24.2% 2011
2012E
2013E 161,083 97,053 4,832 10,309 1,936 46,953 223 $47,176
2014E 190,532 115,748 5,716 11,813 2,130 55,125 279 $55,404
2015E 219,057 133,625 6,572 13,362 2,343 63,155 348 $63,504
2016E 244,611 149,824 7,338 14,677 2,577 70,195 435 $70,630
2017E 265,523 163,960 7,966 15,931 2,834 74,831 522 $75,353
2018E 281,125 174,298 8,434 16,868 3,118 78,408 627 $79,035
2019E 293,987 183,007 8,820 17,639 3,430 81,091 752 $81,844
2020E 309,106 194,737 9,273 18,546 3,773 82,777 903 $83,680
42,905 65,225 108,249 132,475 25,683 39,541 64,431 79,485 1,333 1,782 2,429 3,974 4,149 5,517 7,599 9,273 606 815 1,600 1,760 11,134 17,570 32,190 37,983 88 97 143 178 $11,222 $17,667 $32,333 $38,161
3,831 4,527 8,283 10,267 12,504 14,695 16,703 20,719 22,267 23,300 24,324 24,753 464 393 575 719 899 1,124 1,405 1,756 2,107 2,529 3,035 3,642 104 38 100 321 273 369 318 296 450 408 569 449 4,399 4,957 8,959 11,307 13,676 16,188 18,426 22,771 24,824 26,237 27,928 28,844 6,823 12,709 23,374 26,854 33,500 39,216 45,078 47,860 50,529 52,799 53,916 54,836 (654) 465 (378) (1,960) (858) (883) (856) (767) (627) (468) (386) (454) 6,169 13,174 22,996 24,894 32,641 38,333 44,222 47,093 49,902 52,331 53,530 54,383 8.25% 31.12% 17.44% 15.36% 6.49% 5.96% 4.87% 2.29% 1.59%
6,436 9,784 3,361 5,510 4,414 455 1,051 3,140 7,861 13,392 28,620 12,015 5,723 2,984 20,722 7,898 4,768 342 2,263 1,609 16,880 1,139 5,531 10,210
16,237 5,369 6,348 776 10,877 39,607 14,632 9,247 4,091 27,970 11,637 7,777 3,536 3,556 2,378 28,884 1,686 10,100 17,098
19,871 9,273 7,949 1,987 3,974 43,054 18,547 11,260 1,987 31,794 11,260 11,923 3,974 5,299 2,972 35,429 1,987 10,598 22,844
24,162 9,665 8,054 2,416 4,832 49,130 22,552 13,692 2,416 38,660 10,470 12,081 4,832 6,443
3,715
28,580 11,432 9,527 2,858 5,716 58,112 26,674 16,195 3,811 46,680 11,432 14,290 5,716 7,621 4,644 43,703 3,811 15,243 24,650
32,859 13,143 10,953 3,286 6,572 66,812 30,668 18,620 4,381 53,669 13,143 16,429 6,572 8,762 5,805 50,712 4,381 17,525 28,806
36,692 14,677 12,231 3,669 7,338 74,606 34,246 20,792 4,892 59,930 14,677 18,346 7,338 9,784 7,257 57,402 4,892 19,569 32,941
39,828 15,931 13,276 3,983 7,966 80,984 37,173 22,569 5,310 65,053 15,931 19,914 7,966 10,621 8,708 63,140 5,310 21,242 36,588
42,169 16,868 14,056 4,217 8,434 85,743 39,358 23,896 5,623 68,876 16,868 22,490 8,434 11,245 10,450 69,486 5,623 22,490 41,374
44,098 17,639 14,699 4,410 8,820 89,666 41,158 24,989 5,880 72,027 17,639 26,459 8,820 11,759 12,540 77,217 5,880 23,519 47,818
46,366 18,546 15,455 4,637 9,273 94,277 43,275 26,274 6,182 75,731 18,546 27,820 9,273 12,364 15,048 83,051 6,182 24,729 52,140
5,601 3,852 2,053 11,506 1,886 2,954 247 2,011 1,459 8,557 Less:DeferredRevenue(longterm) 853 Othernoncurrentliabilities 3,502 InvestedCapital(millions) 4,202
37,543 2,416 12,887 22,240
ReturnonInvestedCapital: NOPLAT BeginningInvestedCapital ROIC FreeCashFlows: NOPLAT ChangeinInvestedCapital FCF EconomicProfit: BeginningInvestedCapital ROIC WACC EP
6,169 13,174 22,996 24,894 32,641 38,333 44,222 47,093 49,902 52,331 53,530 54,383 3,505 4,202 10,210 17,098 22,844 22,240 24,650 28,806 32,941 36,588 41,374 47,818 176% 314% 225% 146% 143% 172% 179% 163% 151% 143% 129% 114%
6,169 13,174 22,996 24,894 32,641 38,333 44,222 47,093 49,902 52,331 53,530 54,383 697 6,008 6,889 5,745 (604) 2,410 4,156 4,135 3,647 4,786 6,445 4,322 5,472 7,166 16,107 19,149 33,245 35,923 40,066 42,959 46,255 47,545 47,085 50,060
3,505 4,202 10,210 17,098 22,844 22,240 24,650 28,806 32,941 36,588 41,374 47,818 176% 314% 225% 146% 143% 172% 179% 163% 151% 143% 129% 114% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 5,818 12,754 21,975 23,184 30,357 36,109 41,757 44,212 46,608 48,672 49,392 49,601
2011 Operating Lease Obligations Operating Leases 338 365 362 345 320 1,302 3,032 654 2,378
2010 Operating Lease Obligations Operating Leases 266 267 260 244 226 826 2,089 480 1,609
2007 Operating Lease Obligations Operating Leases 134 134 134 132 122 498 1,154 278 876
Years Ended Sept. 30, 2012 2013 2014 2015 2016 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments
Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 P 6.00% 1.0
Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment 6.00% 4.1
Lease PV Lease Year Commitment Payment 1 338 319 2 365 325 3 362 304 4 345 273 5 320 239 6 & beyond 1,302 918 PV of Minimum Payments 2,378
Lease PV Lease Year Commitment Payment 1 266 251 2 267 238 3 260 218 4 244 193 5 226 169 6 & beyond 226 540 PV of Minimum Payments 1,609
Year 1 2 3 4 5 6 & beyond PV of Minimum Payments
Lease PV Lease Commitment Payment 222 209 234 208 228 191 214 170 199 149 199 532 1,459
Lease PV Lease Year Commitment Payment 1 134 126 2 134 119 3 134 113 4 132 105 5 122 91 6 & beyond 122 322 PV of Minimum Payments 876
AppleInc WeightedAverageCostofCapital(WACC)Estimation 10% ImpliedCostofDebt ComparableProxies Company MSFT HPQ DELL IBM INTC T BetaCalculation RatingS&P AAA BBB+ A A+ A+ A Term 30Year 30Year 30Year 30Year 30Year 30Year Average Yield 4.068% 5.299% 4.808% 5.246% 4.356% 4.765% 4.757% Years 2 3 5 7 Maximum Minimum Mean Median CapitalAssetPricingModel(CAPM) RiskFreeRate Beta MarketRiskPremium(Implied) CostofEquity Daily 0.846 0.874 0.946 0.988 0.988 0.846 0.9135 0.917 Weekly Monthly 1.098 0.759 1.08 0.997 0.988 1.253 1.062 1.322 1.098 1.322 0.988 0.759 1.057 1.08275 1.043 1.0405
CostofDebt CostofDebt MarginalTaxRate CostofDebt(AfterTax)
4.757% 24.20% 1.151%
3.125% 1.057 6.03% 9.499%
TargetCapitalStructure MarketvalueofEquity PVofOperatingLeases TotalCapitalization Debt/Capital WeightedAverageCostofCapital(WACC) CostofDebt(AfterTax) CostofEquity TargetDebt/Capitalization TargetEquity/Capitalization WACC
572,920 2,378 575,298 0.4134%
1.151% 9.499% 0.4134% 99.5866% 9.464%
AppleInc DividendDiscountModel(DDM)orFundamentalP/EValuationModel
FiscalYearsEndingDec.31 EPS KeyAssumptions CVgrowth CVROE CostofEquity FutureCashFlows P/EMultiple EPS(nextperiod) FutureStockPrice DividendsPerShare FutureCashFlows DiscountedCashFlows IntrinsicValue
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
$28.05 $32.99 $39.79 $46.29 $52.10 $54.84 $58.36 $60.46 $62.50 $ 62.97
2.50% 14.40% 9.50%
11.808 $ 62.97 743.50 $ 2.38 $ 2.86 $ 3.33 $ 4.17 $ 4.39 $ 4.67 $ 5.32 $ 5.50 $6.17 $749.67 $2.170 $2.389 $2.539 $2.899 $2.787 $2.709 $2.819 $2.661 $383.72 $362.74
AppleInc RelativeP/EandPEGValuationModel Ticker MSFT HPQ DELL IBM INTC GOOG T Company Microsoft HewlettPackardCo DellInc. InternationBusMachine IntelCorp GoogleInc AT&T Price $32.19 $23.58 $16.52 $207.29 $27.80 $655.76 $31.36 EPS 2012 $2.76 $2.86 $1.88 $13.06 $2.39 $29.76 $0.67 EPS 2013E $3.01 $4.42 $2.18 $16.46 $2.61 $49.81 $2.54 Average P/E12 11.7 8.2 8.8 15.9 11.6 22.0 46.8 17.9 P/E13 10.7 5.3 7.6 12.6 10.7 13.2 12.3 10.3 Est. 5yrGr. 7.96 4.25 5.84 10.83 11.61 18.15 7.78 PEG12 1.47 1.94 1.50 1.47 1.00 1.21 6.02 2.1 PEG13 1.34 1.26 1.30 1.16 0.92 0.73 1.59 1.2
AAPL
AppleInc
$609.60
$35.14
$49.89 17.3 12.2
19.59 0.9 0.6
ImpliedValue: RelativeP/E(EPS11) RelativeP/E(EPS12) PEGRatio(EPS11) PEGRatio(EPS12)
$627.70 $515.75 $1,436.53 $1,157.31
AppleInc KeyManagementRatios
FiscalYearsEndingDec.31 LiquidityRatios CurrentRatio QuickRatio DebttoEquityRatio CashRatio ActivityorAssetManagementRatios InventoryTurnoverRatio DaysinInventory ReceivablesTurnover AssetTurnover FinancialLeverageRatios DebttoEquityRatio DebtRatio ProfitabilityRatios ProfitMargin ReturnonAssets ReturnonEquity PayoutPolicyRatios PayoutRatio OtherRatios WorkingCapitalRatio
Formulas
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
CurrentAssets/CurrentLiabilities Cash+Receivables/CurrentLiabilities TotalLiabilities/TotalShareholderEquity (Cash+MarketableSecurities)/CurrentLiabilities
1.61 0.54 0.52 0.93
2.66 1.34 0.42 1.80
3.22 1.95 0.37 2.45
3.62 2.38 0.33 2.87
4.04 2.79 0.30 3.28
4.38 3.14 0.28 3.63
4.72 3.48 0.26 3.97
5.05 3.80 0.24 4.29
5.33 4.09 0.22 4.58
5.48 4.23 0.21 4.72
COGs/Inventory 365/InventoryTurnoverRatio NetSales/TotalReceivables NetSales/TotalAssets
139.50 2.62 20.16 0.93
66.67 5.48 14.29 0.89
66.67 5.48 16.67 0.82
66.67 5.48 16.67 0.75
66.67 5.48 16.67 0.69
66.67 5.48 16.67 0.65
66.67 5.48 16.67 0.61
66.67 5.48 16.67 0.58
66.67 5.48 16.67 0.54
66.67 5.48 16.67 0.52
TotalLiabilities/ShareholderEquity TotalDebt/TotalAssets
13.18% 292.71%
10.08% 338.38%
9.03% 367.66%
7.98% 399.78%
7.21% 432.87%
6.70% 459.24%
6.16% 490.78%
5.73% 520.97%
5.32% 553.29%
5.04% 579.13%
NetIncome/NetSales NetIncome/TotalAssets NetIncome/BeginningShareholderEquity
23.95% 22.28% 54.24%
23.25% 20.63% 40.20%
23.29% 19.14% 35.67%
23.14% 17.31% 30.90%
22.88% 15.85% 26.24%
21.78% 14.26% 21.92%
21.56% 13.23% 19.59%
21.31% 12.33% 17.38%
21.28% 11.59% 15.92%
20.59% 10.73% 14.40%
DividendsPerShare/BasicEPS
N/A
7.20%
7.20%
8.00%
8.00%
8.00%
8.80%
8.80%
9.80%
9.80%
CurrentAssetsCurrentLiabilities/NetSales
0.16
0.40
0.53
0.64
0.74
0.83
0.91
0.99
1.06
1.10
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outs Number of Options Outstanding (shares): Average Time to Maturity (years): Expected Annual Number of Options Exercised: Current Average Strike Price: Cost of Equity: Current Stock Price: $ $ 11,866,000 2.38 4,985,714 108.64 9.50% 628.47
Increase in Shares Outstanding: Average Strike Price: Increase in Common Stock Account: Change in Treasury Stock Expected Price of Repurchased Shares: Number of Shares Repurchased: Shares Outstanding (beginning of the year) Plus: Shares Issued Through ESOP Less: Shares Repurchased in Treasury Shares Outstanding (end of the year)
2011 2012E 2013E 2014E 2015E 4,985,714 4,985,714 4,985,714 4,985,714 4,985,714 $ 108.64 $ 118.96 $ 130.26 $ 142.63 $ 156.18 541,648,000 593,097,573 649,434,191 711,122,062 778,669,484 0 628.47 $ 0 3,300,000,000 3,300,000,000 3,300,000,000 688.17 $ 753.53 $ 825.11 $ 903.48 4,379,367 3,999,469 3,652,527 942,341,429 4,985,714 4,379,367 942,947,775 942,947,775 4,985,714 3,999,469 943,934,020 943,934,020 4,985,714 3,652,527 945,267,208
932,370,000 4,985,714 937,355,714
937,355,714 4,985,714 942,341,429
VALUATIONOFOPTIONSGRANTEDINESOP
TickerSymbol CurrentStockPrice RiskFreeRate CurrentDividendYield(7.2%Annually1.8% AnnualizedSt.Dev.ofStockReturns
aapl 609.60 3.125% 7.20% 44.50%
Rangeof OutstandingOptions Range1 Total
Average Number Exercise ofShares Price 11,866,000 108.64 11,866,000 $108.64
Average BS Value Remaining Option ofOptions Life(yrs) Price Granted 2.38 $ 181.13 $ 2,149,288,580 2.38 $ 508.87 $2,149,288,580
AppleInc DiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModels KeyInputs: CVGrowth CVROIC WACC CostofEquity FiscalYearsEndingDec.31 DCFModel FreeCashFlow(FCF) ContinuingValue(CV) TotalFreeCashFlow PVofFCF ValueofOperatingAssets Less: ESOP OperatingLeases Plus: ExcessCash(34%DomesticCash) LongTermInvestments ShortTermInvestments EquityValue SharesOutstanding IntrinsicSharePrice ElapsedFraction PartialYearAdjustedPrice
2.50% 114% 9.464% 9.499% 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
19,149 33,245 35,923 40,066 42,959 46,255 47,545 47,085 50,060 763,724 19,149 33,245 35,923 40,066 42,959 46,255 47,545 811,479 17,493 27,745 27,387 27,905 27,333 26,886 25,246 430,896 610,892 2,149 2,378 11,949 55,619 16,138 690,071 933.5 739.23 0.525 775.30
EPModel ROIC BeginningInvestedCapital WACC EconomicProfit(EP) ContinuingValue(CV) TotalEconomicProfit PVOfEconomicProfit BeginningInvestedCapital ValueofOperatingAssets Less: OperatingLeases ESOP Plus: ExcessCash(34%DomesticCash) LongTermInvestments ShortTermInvestments EquityValue SharesOustanding IntrinsicValue ElapsedFraction PartialYearAdjustedPrice
2012E 146% 17098 9.464% 23184
2013E 143% 22844 9.464% 30357
2014E 172% 22240 9.464% 36109
2015E 179% 24650 9.464% 41757
2016E 163% 28806 9.464% 44212
2017E 151% 32941 9.464% 46608
2018E 143% 36588 9.464% 48672
2019E
2020E 114% 47818 9.464% 49601
129% 41374 9.464% 49392 713198 23184 30357 36109 41757 44212 46608 48672 761953 21,180 27,732 30,135 29,083 28,131 27,091 25,845 404,597 17,098 610,892
2,378 2,149 11,949 55,619 16,138 690,071 933.5 739.23 0.525 775.30
CV Growth Rate
775.30 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
0.98 736.43 762.00 791.23 824.96 864.30 910.79 966.58
1 726.46 751.06 779.11 811.39 848.95 893.19 946.07
Beta 1.2 640.99 658.03 677.13 698.66 723.14 751.21 783.71
1.057 699.61 721.67 746.69 775.30 808.33 846.91 892.54
1.7 500.77 508.62 517.16 526.49 536.73 548.01 560.50
1.9 462.34 468.34 474.81 481.82 489.44 497.74 506.84
2.1 430.32 434.97 439.97 445.34 451.13 457.39 464.19
Market Risk Premium
775.30 4.50% 5.00% 5.20% 6.03% 6.50% 7.00% 7.50%
1.00% 1,578.96 1,369.01 1,300.59 1,080.11 987.23 905.60 837.41
2.00% 1,225.74 1,098.73 1,055.45 909.17 844.22 785.40 734.96
Risk Free Rate 3.00% 3.125% 1,006.99 985.36 921.94 904.06 892.13 875.47 788.01 775.30 740.05 728.99 695.67 686.03 656.87 648.40
4.00% 858.21 797.31 775.53 697.66 660.82 626.16 595.40
5.00% 750.48 704.73 688.14 627.72 598.55 570.74 545.77
5.50% 707.04 666.85 652.17 598.37 572.17 547.05 524.38
CV ROIC
775.30 70% 90% 100% 114% 125% 140% 160%
6.000% 1,475.47 1,484.68 1,487.91 1,491.50 1,493.71 1,496.20 1,498.79
7.000% 1,160.04 1,166.75 1,169.10 1,171.71 1,173.33 1,175.14 1,177.03
CV WACC 8.000% 959.14 964.29 966.09 968.09 969.33 970.72 972.17
9.464% 768.92 772.62 773.91 775.35 776.24 777.24 778.28
10.000% 717.82 721.13 722.30 723.59 724.39 725.28 726.21
11.000% 639.67 642.42 643.38 644.45 645.11 645.86 646.63
12.000% 577.96 580.27 581.08 581.98 582.53 583.16 583.81
CV Growth Rate
775.30 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
1.750% 792.33 822.66 857.60 898.27 946.20 1,003.55 1,073.37 1,160.25
2.000% 768.97 796.86 828.83 865.83 909.17 960.62 1,022.69 1,099.05
Risk Free Rate 2.500% 3.125% 726.46 680.01 750.19 699.61 777.15 721.67 808.05 746.69 843.83 775.30 885.73 808.33 935.48 846.91 995.50 892.54
4.000% 624.95 640.20 657.19 676.21 697.66 722.03 749.97 782.32
5.000% 572.98 584.68 597.57 611.84 627.72 645.52 665.58 688.38
5.500% 550.47 560.79 572.10 584.57 598.37 613.74 630.94 650.35
CV iPad Growth
775.30 1% 2% 3% 5% 7% 9% 11%
1% 760.53 761.81 763.09 765.65 768.21 770.77 773.33
2% 762.46 763.74 765.02 767.58 770.14 772.70 775.26
CV iPhone Growth 4% 6% 766.32 770.18 767.60 771.46 768.88 772.74 771.44 775.30 774.00 777.86 776.56 780.42 779.12 782.98
8% 774.04 775.32 776.60 779.16 781.72 784.28 786.84
10% 777.90 779.18 780.46 783.02 785.58 788.14 790.70
12% 781.76 783.04 784.32 786.88 789.44 792.00 794.56
SG&A %
775.30 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
50.00% 1,080.34 1,061.27 1,042.21 1,023.14 1,004.08 985.01 965.95
55.00% 985.01 965.95 946.88 927.82 908.75 889.69 870.62
COGs % 59.00% 908.75 889.69 870.62 851.56 832.49 813.43 794.36
63.00% 832.49 813.43 794.36 775.30 756.23 737.17 718.10
68.00% 737.17 718.10 699.04 679.97 660.91 641.84 622.78
75.00% 603.71 584.65 565.58 546.52 527.45 508.39 489.32
80.00% 508.39 489.32 470.26 451.19 432.13 413.06 394.00

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Krause Fund Research Spring 2012

Apple Inc. (NSDQ: AAPL)

Apple Bytes Its Way To The Top

Stock Performance Highlights

Company Performance Highlights

One Year Stock Performance

Product Profit Margins

Figure 3Source: Bi-Monthly Consumer Sentiment5

Important disclosures appear on the last page of this report.

Figure 4 Source: Bloomberg Unemployment Status April 6, 20126

Important disclosures appear on the last page of this report.

Important disclosures appear on the last page of this report.

Figure 8 Source: Apple Inc. 10-K

Important disclosures appear on the last page of this report.

Apples Share Performince since 2003

Important disclosures appear on the last page of this report.

Important disclosures appear on the last page of this report.

Important disclosures appear on the last page of this report.

Important disclosures appear on the last page of this report.

Figure 13 Source: Apple Inc. 10-k

Important disclosures appear on the last page of this report.

Important disclosures appear on the last page of this report.

Important disclosures appear on the last page of this report.

Apple 10-K. September 24, 2011.

Important disclosures appear on the last page of this report.

AppleInc RevenueDecomposition FiscalYearsEndingDec.31

20,731 78.3% 629 8.45% 13,033 93.31%

39,989 92.89% 630 0.16% 25,179 93.19% 7,458

54,132 50,312 42,620

8,091 8,274 7,453

32.00% 9.0% 0.9% 3.0% 4.0%

29.0% 7.5% 0.9% 3.0% 4.0%

29.55% 7.5% 0.9% 3.0% 4.0%

30.00% 7.5% 0.9% 3.0% 4.0%

30.00% 7.5% 0.9% 3.0% 4.0%

32.00% 7.5% 0.8% 3.0% 4.0%

33.47% 8.0% 0.8% 3.0% 4.0%

36.11% 9.0% 0.8% 3.0% 4.0%

41.02% 9.0% 0.8% 3.0% 4.0%

15% 20% -20% 18% 28% 20% 80% 3% 8.0% 1% 10%

15% 20% -20% 18% 26% 20% 80% 3% 8.0% 1% 10%

15% 20% -20% 18% 25% 20% 80% 3% 8.0% 1% 10%

15% 20% -20% 18% 25% 20% 80% 3% 8.8% 1% 10%

15% 20% -20% 18% 25% 15% 80% 3% 8.8% 1% 10%

15% 20% -20% 18% 25% 15% 80% 3% 9.8% 1% 10%

AppleInc CashFlowStatement FiscalYearsEndingDec.31

2,086 1,402 4,589

2,399 1,682 3,671

2,759 2,018 2,937

3,173 2,422 2,349

3,649 2,906 1,880

4,196 3,488 1,504

4,825 4,185 1,203

5,549 5,022 962

6,381 6,027 770

(2,576) (3,400) 1,929 (438) (1,743) (6,228)

(3,039) (4,590) (3,379) (858) (1,144) (13,011)

(3,586) (5,967) (3,506) (883) (1,178) (15,121)

(4,232) (7,638) (1,880) (856) (1,141) (15,746)

(4,993) (9,624) (1,964) (767) (1,022) (18,370)

(5,892) (12,029) (1,361) (627) (836) (20,747)

(6,953) (15,037) (1,137) (468) (624) (24,219)

(8,204) (18,796) (1,160) (386) (514) (29,061)

(9,681) (23,495) (2,090) (454) (605) (36,325)