APPLE INC.

FINANCE 101
With Professor Melvyn Teo
Rishit Kataruka| Saurav Ray| Shruti Dixit| Hector Sada
• Conclusion 8
• Recommendations (Buy, Sell, or Hold) 7
• EPS Forecast and Price Forecast 6
• Beta and Sharpe Analysis 5
• Comparison with Competitors (Cumulative Returns) 4
• Financial Ratio Analysis (Liquidity, Solvency, Profitability) 3
• Industry Overview 2
• Company Overview 1
Agenda
APPLE INC - OVERVIEW
 Apple Inc. - Overview
Brief history :
– Founded in April 1, 1976 in Cupertino,
California by Steve Jobs and Steve Wozniac

Current news :
– Product Launch : iPad in April, 2010
– Product Introduction : New iPhone in August,
2010
 Apple Inc. - Overview
Product line :
– Macbook
– iPod
– iPhone

Competitors :
– Microsoft (Operating Systems)
– Dell (Hardware/PCs)
– RIM/Nokia/Samsung (Smartphones)
 Company Overview
SWOT Analysis
Strengths Weakness
•Strong Brand Image •Product Recalls
•Robust Financial Performance •Patent Infringement
•Focus on R&D

Opportunities Threats
•Smartphones •Intense Competition
•New Retail Stores •Uncertain global economic
•Strong market reaction to the conditions
iPad •Declining PC Sales
•Dependence of specific suppliers
Industry Overview - Technology
Major players

– Hardware/PC’s :
1. Dell
2. HP
3. Fujitsu
4. Sony

– Software :
1. Microsoft
2. Linux
Industry Overview - Technology
Major players

– Music:
1. Creative
2. Sony

– Smartphones :
1. Nokia
2. Samsung
3. RIM
 Major industry trends
Rise and spread of the internet

Gain in popularity of social media

Web 2.0
APPLE INC – FINANCIAL
RATIOS
 Financial Ratios (Liquidity)
Current ratio
– Net Current Assets over Net Current
Liabilities
– Measures how “liquid the firm is”

Quick ratio
– Similar to current ratio
– Excludes inventories in the current assets
– More accurate
 Current Ratio
Apple
Current Ratio Comparison
5.00 Microso
ft
4.50
Dell
4.00

3.50

3.00
Current Ratios

2.50

2.00

1.50

1.00

0.50

0.00
2004 2005 2006 2007 2008 2009
 Explanation (Current Ratio)
We see Apple’s current ratio start to
improve from 2006
– Slight dip from 2005 to 2006, due to increased
need of funds for R and D
– Apple can cover about 2.5 times of it’s current
liabilities with it’s current assets in 2009

Out-doing both it’s competitors in recent

years
 Quick Ratio
Quick Ratio Comparison
5.00

4.50

4.00

3.50

3.00 Apple
Microsoft
Quick Ratio

2.50 Dell

2.00

1.50

1.00

0.50

0.00
2004 2005 2006 2007 2008 2009
 Explanation (Quick Ratio)
Almost the same as the current ratio

Once again Apple proves itself to be more

liquid in recent years
Financial Ratios (Solvency Ratios)
Debt ratio
– Obtained by dividing debt and assets
– Gives a measure of how much of the company’s
assets are funded by debt

Equity Multiplier
– Obtained by dividing total assets and total equity
– Shows a company's total assets per dollar of
stockholders' equity. A higher equity multiplier
indicates higher financial leverage
 Debt Ratio
Debt Ratio Comparison
1.00

0.90

0.80

0.70

0.60 Apple
Microsoft
Debt Ratios

0.50 Dell

0.40

0.30

0.20

0.10

0.00
2004 2005 2006 2007 2008 2009
 Explanation (Debt Ratio)
Apple saw it’s debt ratio increase from
2007 to 2008 and then fall from 2008 to
2009
– This is because of increased R and D spending
on new products such as the iPhone 3GS and
iPad
– Dropped in 2009 once the iPhone 3GS was
launched
 Equity Multiplier
Equity Multiplier Comparison
8.00

7.00

6.00

5.00
Apple
Equity Multiplier

Microsoft
4.00 Dell

3.00

2.00

1.00

0.00
2004 2005 2006 2007 2008 2009
Explanation (Equity Multiplier)
Apple and Microsoft are both similar and
show lower leverage than Dell

Hence less of Apple’s assets are funded by

debt
Financial Ratios (Profitability)
Profit margin
– Measure of how much of the company’s net sales actually
translates to a profit

ROE
– Measure of how much sales is generated by one unit of
equity

ROA
– Measure of how much sales is generated by unit of assets
 Profit margin
Profit Margin Comparison
0.35

0.30

0.25

Apple
0.20
Profit Margin

Microsoft
Dell

0.15

0.10

0.05

0.00
2004 2005 2006 2007 2008 2009
 Explanation (Profit Margin)
Microsoft has highest profit margin
– Doesn’t deal in hardware
– Hence lower inventory and operating costs

Apple has a rising profit margin over the

last few years
– Increasing sales
– Reducing operating costs and greater operating
efficiency
 ROE
ROE Comparison
1.00

0.90

0.80

0.70

0.60 Apple
Microsoft
0.50 Dell
ROE

0.40

0.30

0.20

0.10

0.00
2004 2005 2006 2007 2008 2009
 ROA
ROA Comparison
0.30

0.25

0.20

Apple
Microsoft
Dell
ROA

0.15

0.10

0.05

0.00
2004 2005 2006 2007 2008 2009
 Explanation
Dell has the highest ROE of the three
– However this is not necessarily reflective of
good performance
– Much higher level of debt than equity

Apple’s ROE & ROA is rising steadily

– Shows just the right balance of debt and
equity
 Comparison with industry

Ratios Apple Industry

Current ratio 2.55 1.59

Inventory turnover 56.75 9.09

PE Ratio 21.69 16.68

Profit Margin 20.04 1.41

APPLE INC – CUMULATIVE
RETURNS
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Historical Cumulative returns
Apple
– Experiencing radical growth in returns over the
last few years
– Apple product launches always see a huge spike in
stock prices
– Products are highly anticipated and Apple is
always innovating

Both Dell and Microsoft have been relatively

stagnant and closer to the market
APPLE INC – BETA & SHARPE
RATIO
 Beta
Company Apple Microsoft Dell
Beta
1.615316856 0.9627993 1.301850061
t-Stat 5.848322709 6.2811 6.196594959
R-square 0.325113523 0.357188068 0.350992368

•Measure of volatility or systematic risk

•Apple: High risk relative to the market
•Microsoft : Beta lower than 1
•Dell : Risky, but less volatile than Apple
•High Beta for Apple vs. Dell vs. Microsoft:
• Demand drops in recession for Apple - it is a niche market and its lesser for Dell
as it’s slightly more diversified.
• Due to Networking effect and lock-in effect, Microsoft is affected the least.
 Sharpe Ratio

Apple Microsoft Dell S&P500

0.109257 0.014083 -0.03163 -0.01054

 Explanation (Sharpe Ratio)
Sharpe Ratio: Measure of return for one
extra unit of risk for an asset riskier than a
risk-free asset

Apple has a positive Sharpe Ratio as

compared to the market

This means that we would expect positive

returns for the extra risk we bear
APPLE INC – EPS & SHARE
PRICE FORECAST
EPS and Share Price forecast
Historical EPS

Sales growth rate and percentage of sales

Methodology for calculating new EPS

Forecasted EPS

Forecasted price
 Historical EPS
Apple Historical EPS
10.00

9.00

8.00

7.00

6.00
Apple Historical EPS
5.00
EPS

4.00

3.00

2.00

1.00

0.00
2004 2005 2006 2007 2008 2009
 Explanation
Steep rise in net income over the years

Driven by growth in sales of iPhone, iPod

Touch and new MacBook line
 Growth in Sales
Apple Sales Growth
50,000.00

45,000.00

40,000.00

35,000.00

30,000.00
Apple Sales Growth
Sales

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2004 2005 2006 2007 2008 2009
 Explanation
Steep rise in sales

Product innovation

Superior marketing strategy

 Methodology for Forecast
Calculated sales growth forecast based on weighted average
of past sales growths

Calculated weighted average of net income as a percentage

of sales

Assumed the number of shares to be constant and used

average over the last six years

Divided net income forecast by number of shares to get

EPS

Forecasted PE Ratio using a weighted average method

 EPS and Price Forecast
Forecasted EPS: $10.82

Forecasted PE Ratio: 29.56

Price per share forecast: Forecasted EPS

* forecasted PE = $319.87
 Recommendation
According to our calculations, we give
Apple a “Strong Buy” rating

Estimated price rise of $95

% rise in value of about 42%

 Other Reasons
Steve Jobs returned to the company

Announcement of the release of a new

iPhone

Hundreds and thousands of advance

orders for iPad
"Apple's customers are more than customers -- they're fans.
The whole world held its breath before the iPad was
announced. That's brand management at its very best.”
- Norbert Reithofer, CEO of BMW
QUESTIONS