aapl apple inc. sector: information technology hold · sectors. apple operates in a highly...

Analysts: Spencer Elkinton,

Jake Gregg and Adam SmithWashburn University

Applied Portfolio Management

Report Date: 4/18/2016

Market Cap (mm) $614,005 Annual Dividend $2.03 2‐Yr Beta (S&P 500 Index) 1.19 Apple Inc.

Return on Capital 139.9% Dividend Yield 1.9% Annualized Alpha ‐13.0% Compared With:

EPS (ttm) $9.46 Price/Earnings (ttm) 11.3 Institutional Ownership 5.8% Alphabet Inc.

Current Price $106.72 Economic Value‐Added (ttm) $49,438 Short Interest (% of Shares) 0.9% Samsung Electronics Co. Ltd.

12‐mo. Target Price $130.00 Free Cash Flow Margin 17.8% Days to Cover Short 1.0 and the S&P 500 Index

Business Description

Total Revenue 14.3% Free Cash Flow 9.1%

EBIT 8.8% Total Invested Capital 1.2%

NOPAT 8.3% Total Assets 18.2%

Earnings Per Share 13.3% Economic Value‐Added 8.7%

Dividends Per Share 73.4% Market Value‐Added 2.3%

2011 2012 2013 2014 2015

31.2% 35.3% 28.7% 28.7% 30.5%

N/A 20.4% 13.8% 33.4% 17.8%

6.9% 6.7% 8.3% 6.4% 8.1%

0.0% 0.4% 2.4% 1.8% 1.7%

2011 2012 2013 2014 2015

4.01 6.38 5.72 6.49 9.28

0.00 0.38 1.64 1.82 1.98

3.96 6.32 5.59 6.37 9.12

N/A 4.88 3.63 10.03 7.21

Datasource: Capital IQ

NOPAT

Free Cash Flow

Earnings Yield

Dividend Yield

Per Share Metrics

Earnings

Dividends

Free Cash Flow Margin

Apple Inc. designs, manufactures, and markets mobile communication and

media devices, personal computers, and portable digital music players to

consumers, small and mid‐sized businesses, education, and enterprise and

government customers worldwide. The company also sells related software,

services, accessories, networking solutions, and third‐party digital content and

applications. It offers iPhone, a line of smartphones; iPad, a line of multi‐

purpose tablets; and Mac, a line of desktop and portable personal computers.

The company also provides iLife, a consumer‐oriented digital lifestyle software

application suite; iWork, an integrated productivity suite that helps users

create, present, and publish documents, presentations, and spreadsheets; and

Investment Thesis

Apple continues to be a strong stock for the SIF, boasting growing revenue,

large market share and a dedicated consumer base, and high returns on

assets, equity, and invested capital. Apple has steadily increased R&D

investment in order to maintain its competitive advantage. The Information

Technology sector is currently underweighted in the SIF, and we believe

that as macroeconomic recovery slows, this sector will foster strong growth

with lower volatility than the currently overweighted Energy and Utilities

sectors. Apple operates in a highly competitive and rapidly changing sector

while maintaining a low beta, which has led us to the decision to hold with

the potential to increase our position.

ANNUALIZED 3‐YEAR CAGR

Margins and Yields

Operating Margin

AAPL Apple Inc. Sector: Information Technology HOLD

‐30%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%AAPL ^SPX

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%AAPL GOOGL KOSE:A005930

0

5

10

15

20

25

2012 2013 2014 2015

Price/Earnings Price/Free Cash Flow

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

2011 2012 2013 2014 2015

EBIT Net Operating Profit After Tax

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2011 2012 2013 2014 2015

Economic Value‐Added Market Valued‐Added

0%

20%

40%

60%

80%

100%

120%

140%

160%

2011 2012 2013 2014 2015

ROA ROE ROIC

Apple Inc. AAPL Sector Information Technology Alphabet Inc. GOOGL Sector Information Technology

2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Total Revenue 108,249 156,508 170,910 182,795 233,715 Total Revenue 37,905 46,039 55,519 66,001 74,989

Cost of Goods Sold 64,431 87,846 106,606 112,258 140,089 Cost of Goods Sold 13,188 17,176 21,993 25,313 28,164

Gross Profit 43,818 68,662 64,304 70,537 93,626 Gross Profit 24,717 28,863 33,526 40,688 46,825

SG&A Expense 7,599 10,040 10,830 11,993 14,329 SG&A Expense 7,313 8,946 10,986 13,982 15,183

R&D Expense 2,429 3,381 4,475 6,041 8,067 R&D Expense 5,162 6,083 7,137 9,832 12,282

Dep. & Amort. 0 0 0 0 0 Dep. & Amort. 0 0 0 0 0

Other Oper. Exp. 0 0 0 0 0 Other Oper. Exp. 0 0 0 0 0

Operating Income 33,790 55,241 48,999 52,503 71,230 Operating Income 12,242 13,834 15,403 16,874 19,360

Interest Expense 0 0 (136) (384) (733) Interest Expense (58) (85) (81) (101) (104)

Other Non‐Oper. Exp. (104) (566) (324) (636) (812) Other Non‐Oper. Exp. (314) (450) (298) (272) (270)

EBT ex‐Unusuals 34,205 55,763 50,155 53,278 72,606 EBT ex‐Unusuals 12,682 13,999 15,790 17,247 19,985

Total Unusual Exp. 0 0 0 205 (91) Total Unusual Exp. (356) 470 109 12 (334)

Earnings Before Tax 34,205 55,763 50,155 53,483 72,515 Earnings Before Tax 12,326 14,469 15,899 17,259 19,651

Income Tax Expense 8,283 14,030 13,118 13,973 19,121 Income Tax Expense 2,589 2,916 2,739 3,639 3,303

Net Income 25,922 41,733 37,037 39,510 53,394 Net Income 9,737 10,737 12,733 14,136 16,348

Earnings per Share $4.01 $6.38 $5.72 $6.49 $9.28 Earnings per Share $15.08 $16.41 $19.13 $20.91 $23.88

Dividends per Share $0.00 $0.38 $1.64 $1.82 $1.98 Dividends per Share $0.00 $0.00 $0.00 $0.00 $0.00

Effective Tax Rate 24.22% 25.16% 26.15% 26.13% 26.37% Effective Tax Rate 21.00% 20.15% 17.23% 21.08% 16.81%

Total Common Shares 6,470 6,544 6,477 6,086 5,753 Total Common Shares 646 654 666 676 685

Year‐end Stock Price $57.76 $95.30 $68.96 $100.75 $114.71 Year‐end Stock Price $322.95 $353.69 $560.36 $530.66 $778.01996 997 998 999 1000 996 997 998 999 1000

Assets 2011 2012 2013 2014 2015 Assets 2011 2012 2013 2014 2015

Cash and Equivalents 9,815 10,746 14,259 13,844 21,120 Cash and Equivalents 8,723 13,849 17,628 16,585 15,409

Short‐Term Investments 16,137 18,383 26,287 11,233 20,481 Short‐Term Investments 34,643 33,310 39,819 46,048 56,517

Total Cash & ST Invest. 25,952 29,129 40,590 25,158 41,995 Total Cash & ST Invest. 43,366 47,159 57,447 62,633 71,926

Total Receivables 11,717 18,692 20,641 27,219 30,343 Total Receivables 5,427 7,885 9,290 9,974 13,459

Inventory 776 791 1,764 2,111 2,349 Inventory 35 505 0 0 0

Prepaid Expenses 0 0 0 0 0 Prepaid Expenses 1,710 2,132 3,253 3,412 3,139

Total Current Assets 44,988 57,653 73,286 68,531 89,378 Total Current Assets 52,758 60,454 72,886 78,656 90,114

Net PPE 7,777 15,452 16,597 20,624 22,471 Net PPE 9,603 11,854 16,524 23,883 29,016

Total Assets 116,371 176,064 207,000 231,839 290,479 Total Assets 72,574 93,798 110,920 129,187 147,461

Liabilities and Equity Liabilities and Equity

Accounts Payable 14,632 21,175 22,367 30,196 35,490 Accounts Payable 588 2,012 2,453 1,715 1,931

Accrued Expenses 4,829 6,749 8,427 18,372 24,169 Accrued Expenses 3,069 5,490 6,253 7,474 8,293

Short‐Term Debt 0 0 0 6,308 8,499 Short‐Term Debt 3,225 4,222 3,374 4,777 4,428

Total Current Liab. 27,970 38,542 43,658 63,448 80,610 Total Current Liab. 8,913 14,337 15,908 16,779 19,310

Long‐Term Debt 0 0 16,960 28,987 53,463 Long‐Term Debt 2,986 2,988 1,990 2,992 1,995

Total Liabilities 39,756 57,854 83,451 120,292 171,124 Total Liabilities 14,429 22,083 23,611 25,327 27,130

Preferred Equity 0 0 0 0 0 Preferred Equity 0 0 0 0 0

Common Stock & APIC 13,331 16,422 19,764 23,313 27,416 Common Stock & APIC 20,264 22,835 25,922 28,767 32,982

Retained Earnings 62,841 101,289 104,256 87,152 92,284 Retained Earnings 37,605 48,342 61,262 75,066 89,223

Treasury Stock 0 0 0 0 0 Treasury Stock 0 0 0 0 0

Total Common Equity 76,615 118,210 123,549 111,547 119,355 Total Common Equity 58,145 71,715 87,309 103,860 120,331

Total Equity 76,615 118,210 123,549 111,547 119,355 Total Equity 58,145 71,715 87,309 103,860 120,331

Total Liab. and Equity 116,371 176,064 207,000 231,839 290,479 Total Liab. and Equity 72,574 93,798 110,920 129,187 147,461

Income Statement Highlights

Balance Sheet Highlights

Income Statement Highlights

Balance Sheet Highlights

1. Margins and Profitability AAPL, of 22 Copyright Robert A. Weigand, Ph.D., 2016

AAPL Apple Inc. GOOGL Alphabet Inc.

Profit Margins 2011 2012 2013 2014 2015 Profit Margins 2011 2012 2013 2014 2015

Gross Profit Margin 40.5% 43.9% 37.6% 38.6% 40.1% Gross Profit Margin 65.2% 62.7% 60.4% 61.6% 62.4%

Operating Profit Margin 31.2% 35.3% 28.7% 28.7% 30.5% Operating Profit Margin 32.3% 30.0% 27.7% 25.6% 25.8%

Net Profit Margin 23.9% 26.7% 21.7% 21.6% 22.8% Net Profit Margin 25.7% 23.3% 22.9% 21.4% 21.8%

Free Cash Flow Margin N/A 20.4% 13.8% 33.4% 17.8% Free Cash Flow Margin N/A 12.9% ‐3.4% 0.9% ‐1.0%

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Gross Profit Margin Operating Profit Margin

0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 2015


0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 2015

Gross Profit Margin AAPL GOOGL

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2011 2012 2013 2014 2015

Operating Profit Margin AAPL GOOGL

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2011 2012 2013 2014 2015

Net Profit Margin AAPL GOOGL

Analyst Comments: AAPL's margins have been recovering since 2013, though have been in ranging competition with GOOGL. While AAPL's gross profit margin has consistently been 20‐25% below GOOGL, AAPL's operating margin has risen above GOOGL since 2013 and AAPL's net margin has risen above GOOGL since 2014. Though GOOGL significantly outperforms AAPL's gross profit margin, AAPL is able to convert revenues to bottom line profits more efficiently than GOOGL. AAPL's growing operating and net profit margins are a positive sign of revenue‐to‐profit conversion for investors.

‐10.0%‐5.0%0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%

2012 2013 2014 2015

Free Cash Flow Margin AAPL GOOGL



Profitability Ratios 2011 2012 2013 2014 2015 Profitability Ratios 2011 2012 2013 2014 2015

Net Profit Margin 23.9% 26.7% 21.7% 21.6% 22.8% Net Profit Margin 25.7% 23.3% 22.9% 21.4% 21.8%

× Total Asset Turnover 0.9 0.9 0.8 0.8 0.8 × Total Asset Turnover 0.5 0.5 0.5 0.5 0.5

= Return on Assets 22.3% 23.7% 17.9% 17.0% 18.4% = Return on Assets 13.4% 11.4% 11.5% 10.9% 11.1%

× Equity Multiplier 1.5 1.5 1.7 2.1 2.4 × Equity Multiplier 1.2 1.3 1.3 1.2 1.2

= Return on Equity 33.8% 35.3% 30.0% 35.4% 44.7% = Return on Equity 16.7% 15.0% 14.6% 13.6% 13.6%

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Return on Assets Return on Equity

0%2%4%6%8%10%12%14%16%18%

2011 2012 2013 2014 2015

Return on Assets Return on Equity

0.0

0.2

0.4

0.6

0.8

1.0

2011 2012 2013 2014 2015

Total Asset Turnover AAPL GOOGL

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013 2014 2015

Return on Assets AAPL GOOGL

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2011 2012 2013 2014 2015

Return on Equity AAPL GOOGL

Analyst Comments: AAPL's profitability ratios have been in general downtrends, though they have been outperforming GOOGL. AAPL's total asset turnover has consistently outperformed GOOGL by 0.3, while ROA has outperformed GOOGL by 7‐9% and ROE has outperformed GOOGL by 15‐30%. AAPL's ROA has been in consolidation following a 5% drop in 2013, while ROE has risen nearly 15% since 2013. AAPL's outperformance of GOOGL in profitability ratios indicates AAPL's greater return on deployment of assets and equity than its competitor.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014 2015

Equity Multiplier AAPL GOOGL



Multiples and Yields 2011 2012 2013 2014 2015 Multiples and Yields 2011 2012 2013 2014 2015

Price/Earnings 14.4 14.9 12.1 15.5 12.4 Price/Earnings 21.4 21.6 29.3 25.4 32.6

Price/Book 3.2 3.5 2.2 2.6 2.3 Price/Book 2.9 2.5 3.4 2.8 3.6

Price/Free Cash Flow N/A 19.5 19.0 10.0 15.9 Price/Free Cash Flow N/A 39.1 N/A 629.1 N/A

Earnings Yield 6.9% 6.7% 8.3% 6.4% 8.1% Earnings Yield 4.7% 4.6% 3.4% 3.9% 3.1%

Dividend Yield 0.0% 0.4% 2.4% 1.8% 1.7% Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0%

0.0

5.0

10.0

15.0

20.0

25.0

2012 2013 2014 2015


0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

2012 2013 2014 2015

Earnings Yield Dividend Yield

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

2012 2013 2014 2015

Earnings Yield AAPL GOOGL

Analyst Comments:

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2012 2013 2014 2015


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2012 2013 2014 2015

Price to Earnings AAPL GOOGL

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2012 2013 2014 2015


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2012 2013 2014 2015

Price to Book AAPL GOOGL

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2012 2013 2014 2015

Price to Free Cash Flow AAPL GOOGL

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2012 2013 2014 2015

Dividend Yield AAPL GOOGL

2. Relative Valuation and Debt AAPL, of 22 Copyright Robert A. Weigand, Ph.D., 2016


Liquidity and Debt 2011 2012 2013 2014 2015 Liquidity and Debt 2011 2012 2013 2014 2015

Current Ratio 1.61 1.50 1.68 1.08 1.11 Current Ratio 5.92 4.22 4.58 4.69 4.67

Quick Ratio 1.58 1.48 1.64 1.05 1.08 Quick Ratio 5.92 4.18 4.58 4.69 4.67

Days Sales Outstanding 39.51 43.59 44.08 54.35 47.39 Days Sales Outstanding 52.26 62.51 61.08 55.16 65.51

Inventory Turnover 139.50 197.86 96.89 86.59 99.50 Inventory Turnover 1083.00 91.17 N/A N/A N/A

Total Debt to Assets 0.0% 0.0% 8.2% 15.2% 21.3% Total Debt to Assets 8.6% 7.7% 4.8% 6.0% 4.4%

Long‐Term Debt to Equity 0.0% 0.0% 13.7% 26.0% 44.8% Long‐Term Debt to Equity 5.1% 4.2% 2.3% 2.9% 1.7%

Times Interest Earned N/A N/A 360.29 136.73 97.18 Times Interest Earned 211.07 162.75 190.16 167.07 186.15

0.00.20.40.60.81.01.21.41.61.8

2011 2012 2013 2014 2015

Current Ratio Quick Ratio

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2011 2012 2013 2014 2015

Current Ratio Quick Ratio

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2011 2012 2013 2014 2015

Current Ratio AAPL GOOGL

Analyst Comments:

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015

Total Debt to Assets AAPL GOOGL

0.0

50.0

100.0

150.0

200.0

250.0

2011 2012 2013 2014 2015

Days Sales Outstanding Inventory Turnover

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2011 2012 2013 2014 2015

Days Sales Outstanding Inventory Turnover

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Total Debt to Assets Long-Term Debt to Equity

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

2011 2012 2013 2014 2015

Total Debt to Assets Long-Term Debt to Equity

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Long-Term Debt to Equity AAPL GOOGL

2. Relative Valuation and Debt AAPL, of 22 Copyright Robert A. Weigand, Ph.D., 2016


Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2011 2012 2013 2014 2015

Total Cash and ST Investments 25,952 29,129 40,590 25,158 41,995 Total Cash and ST Investments 43,366 47,159 57,447 62,633 71,926

+ Receivables 11,717 18,692 20,641 27,219 30,343 + Receivables 5,427 7,885 9,290 9,974 13,459

+ Inventory 776 791 1,764 2,111 2,349 + Inventory 35 505 0 0 0

− Accounts Payable 14,632 21,175 22,367 30,196 35,490 − Accounts Payable 588 2,012 2,453 1,715 1,931

− Accrued Expenses 4,829 6,749 8,427 18,372 24,169 − Accrued Expenses 3,069 5,490 6,253 7,474 8,293

= Net Oper. Working Capital 18,984 20,688 32,201 5,920 15,028 = Net Oper. Working Capital 45,171 48,047 58,031 63,418 75,161

+ Net Property, Plant & Equip. 7,777 15,452 16,597 20,624 22,471 + Net Property, Plant & Equip. 9,603 11,854 16,524 23,883 29,016

= Total Invested Capital 26,761 36,140 48,798 26,544 37,499 = Total Invested Capital 54,774 59,901 74,555 87,301 104,177

÷ Total Weighted Shares 6,470 6,544 6,477 6,086 5,753 ÷ Total Weighted Shares 646 654 666 676 685

= Total Invested Capital/Share $4.14 $5.52 $7.53 $4.36 $6.52 = Total Invested Capital/Share $84.85 $91.53 $112.00 $129.16 $152.17


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2011 2012 2013 2014 2015

Operating Income (EBIT) 33,790 55,241 48,999 52,503 71,230 Operating Income (EBIT) 12,242 13,834 15,403 16,874 19,360

× (1−Effective Tax Rate) 24.2% 25.2% 26.2% 26.1% 26.4% × (1−Effective Tax Rate) 21.0% 20.2% 17.2% 21.1% 16.8%

= Net Oper. Profit After Tax 25,607 41,342 36,183 38,786 52,448 = Net Oper. Profit After Tax 9,671 11,046 12,749 13,316 16,106

− ∆ Total Invested Capital N/A 9,379 12,658 (22,254) 10,955 − ∆ Total Invested Capital N/A 5,127 14,654 12,746 16,876

= Free Cash Flow N/A 31,963 23,525 61,040 41,493 = Free Cash Flow N/A 5,919 (1,905) 570 (770)

NOPAT per Share $3.96 $6.32 $5.59 $6.37 $9.12 NOPAT per Share $14.98 $16.88 $19.15 $19.70 $23.53

Free Cash Flow per Share N/A $4.88 $3.63 $10.03 $7.21 Free Cash Flow per Share N/A $9.04 ($2.86) $0.84 ($1.12)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

2011 2012 2013 2014 2015

Total Invested Capital per Share AAPL GOOGL

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

2012 2013 2014 2015

NOPAT per Share AAPL GOOGL

($5,000)

$0

$5,000

$10,000

$15,000

$20,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

Analyst Comments: AAPL has increased NOPAT significantly since 2011 and has consistently recorded 3‐4x as much NOPAT as GOOGL, GOOGL far outperforms AAPL's NOPAT per share. AAPL has recorded positive free cash flow since 2012, with a low of +$9,379 in 2012. GOOGL conversely has recorded negative free cash flow in 2013 and 2015 as invested capital has exceeded NOPAT. AAPL has invested less than GOOGL in 2013 and 2015, which is cause for concern as the Technology Hardware, Storage, and Peripherals is a rapidly‐developing and changing sector. Though AAPL's proportionally and sometimes absolutely lower than GOOGL invested capital is a negative signal for investors, consistently positive free cash flow available to investors is a positive signal.

3. Value Creation and DCF Model AAPL, of 22 Copyright Robert A. Weigand, Ph.D., 2016


Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted %

Equity Capitalization $659,975 91.4% 8.435% 7.711% Equity Capitalization $532,646 98.8% 8.244% 8.146%

+ Total Debt $61,962 8.6% 5.000% 0.316% + Total Debt $6,423 1.2% 5.000% 0.050%

+ Preferred Stock $0 0.0% 0.000% 0.000% + Preferred Stock $0 0.0% 0.000% 0.000%

= Value of All Securities $721,937 100.0% = Value of All Securities $539,069 100.0%

Effective Tax Rate 26.37% Alternative RF Rate: Effective Tax Rate 16.81% Alternative RF Rate:

Risk‐Free Rate 1.910% 1.910% 1.924% Risk‐Free Rate 1.910% 1.910% 1.924%

Beta (5‐Yr) 0.932 Alternative Beta: 0.93221 Beta (5‐Yr) 0.905 Alternative Beta: 0.90485

Market Risk Premium 7.0% Market Risk Premium 7.0%

CAPM Cost of Equity 8.435% CAPM Cost of Equity 8.244%

Weighted Average Cost of Capital: 8.027% Weighted Average Cost of Capital: 8.195%

8.027% 8.027% 8.027% 8.027% 8.027%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2011 2012 2013 2014 2015

Return on Invested Capital 95.7% 114.4% 74.1% 146.1% 139.9% Return on Invested Capital 17.7% 18.4% 17.1% 15.3% 15.5%

Economic Value‐Added 23,459 38,441 32,266 36,655 49,438 Economic Value‐Added 5,182 6,137 6,639 6,162 7,568

Market Valued‐Added 297,062 505,412 323,155 501,574 540,620 Market Valued‐Added 150,337 159,749 285,715 254,832 412,315

EVA per Share $3.63 $5.87 $4.98 $6.02 $8.59 EVA per Share $8.03 $9.38 $9.97 $9.12 $11.05

MVA per Share $45.92 $77.24 $49.89 $82.42 $93.96 MVA per Share $232.88 $244.11 $429.20 $377.01 $602.25

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

2011 2012 2013 2014 2015

EVA per Share AAPL GOOGL

0

100,000

200,000

300,000

400,000

500,000

600,000

0

10,000

20,000

30,000

40,000

50,000

60,000

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Economic Value-Added Market Valued-Added

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Analyst Comments: ROIC has been risen to outstanding levels, far above the WACC and above competitor GOOGL's WACC. Due to this spread, AAPL is able to generate significant EVA and far more than its competitors can generate. Though AAPL's ROIC displays more volatility than GOOGL's ROIC, AAPL's ROIC is a substantially higher range. AAPL's high ROIC, conservative WACC, and growing EVA are a positive sign of value creation for investors.

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Return on Invested Capital AAPL GOOGL

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Long‐Term Growth Rate: Long‐Term Growth Rate:

AAPL Apple Inc. 2.0% GOOGL Alphabet Inc. 2.0%

Intrinsic Value Model 2011 2012 2013 2014 2015 Intrinsic Value Model 2011 2012 2013 2014 2015

PV of Future FCFs 644,221 663,972 693,747 688,397 702,165 PV of Future FCFs ‐5,520 ‐11,892 ‐10,962 ‐12,430 ‐12,679

+ Value of Non‐Oper. Assets 25,952 29,129 40,546 25,077 41,601 + Value of Non‐Oper. Assets 43,366 47,159 57,447 62,633 71,926

= Total Intrinsic Firm Value 670,173 693,101 734,293 713,474 743,766 = Total Intrinsic Firm Value 37,846 35,267 46,485 50,203 59,247

− Total Debt 0 0 16,960 35,295 61,962 − Total Debt 6,211 7,210 5,364 7,769 6,423

= Intrinsic Value of Equity 670,173 693,101 717,333 678,179 681,804 = Intrinsic Value of Equity 31,635 28,057 41,121 42,434 52,824

÷ Total Weighted Shares 6,470 6,544 6,477 6,086 5,753 ÷ Total Weighted Shares 646 654 666 676 685

= Per Share Intrinsic Value $103.58 $105.92 $110.75 $111.44 $118.50 = Per Share Intrinsic Value $49.00 $42.87 $61.77 $62.78 $77.16

vs. Year‐End Stock Price $57.76 $95.30 $68.96 $100.75 $114.71 vs. Year‐End Stock Price $322.95 $353.69 $560.36 $530.66 $778.01

Over (Under) Valuation/Share ($45.83) ($10.62) ($41.78) ($10.69) ($3.79) Over (Under) Valuation/Share $273.95 $310.82 $498.58 $467.88 $700.85

% Over (Under) Valued ‐44.2% ‐10.0% ‐37.7% ‐9.6% ‐3.2% % Over (Under) Valued 559.0% 725.0% 807.1% 745.3% 908.3%

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MVA per Share AAPL GOOGL

Analyst Comments: AAPL is consistently mildly undervalued, while GOOGL is severly overvalued. AAPL's undervalutation is in a manageable range for investors to take advantage of the undervaluation the market is likely to realize. While AAPL's stock prices have risen steadily, GOOGL's price have risen rapidly, which is a concern when coupled with GOOGL's low intrinsic valuation. AAPL's Piotroski scores significantly outperform GOOGL, reaching an impressive score of 9/10 in 2015 while GOOGL peaked at 8 in 2013 and 2014 then fell to the moderately‐high 7/10 in 2015. Both companies are considered "in the safe zone" with their Altman scores, though GOOGL strongly outperforms AAPL. Per the intrinsic value model and the Piotroski score, AAPL has historically been the better investment of the two companies.

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Return on Invested Capital WACC



Piotroski Financial Fitness Scorecard 2012 2013 2014 2015 Piotroski Financial Fitness Scorecard 2012 2013 2014 2015

Positive Net Income 1 1 1 1 Positive Net Income 1 1 1 1

Positive Free Cash Flow 1 1 1 1 Positive Free Cash Flow 1 0 1 0

Growing ROA (% change NI > % change TA) 1 0 0 1 Growing ROA (% change NI > % change TA) 0 1 0 1

Earnings Quality (Operating Income > Net Income) 1 1 1 1 Earnings Quality (Operating Income > Net Income) 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 1 0 0 0 Total Assets Growing Faster Than Total Liabilities 0 1 1 1

Increasing Liquidity (Current Ratio) 0 1 0 1 Increasing Liquidity (Current Ratio) 0 1 1 0

% Change Shares Outstanding < +2.0% 1 1 1 1 % Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1

Expanding Operating Margin 1 0 1 1 Expanding Operating Margin 0 0 0 1

Asset Turnover (% change sales > % change assets) 0 0 0 1 Asset Turnover (% change sales > % change assets) 0 1 1 0

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1

Piotroski Score (max = 10) 8 6 6 9 Piotroski Score (max = 10) 5 8 8 7


Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015 Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015

(Current Assets‐Current Liabilities)/Total Assets 0.1303 0.1718 0.0263 0.0362 ## (Current Assets‐Current Liabilities)/Total Assets 0.5900 0.6164 0.5748 0.5762

Retained Earnings/Total Assets 0.6904 0.6044 0.4511 0.3812 ## Retained Earnings/Total Assets 0.6185 0.6628 0.6973 0.7261

Earnings Before Interest & Tax/Total Assets 1.0354 0.7811 0.7473 0.8092 ## Earnings Before Interest & Tax/Total Assets 0.4867 0.4583 0.4310 0.4333

Market Value Equity/Total Liabilities 6.4675 3.2117 3.0582 2.3140 ## Market Value Equity/Total Liabilities 6.2889 9.4792 8.4975 11.7799

Sales/Total Assets 0.8880 0.8248 0.7877 0.8038 ## Sales/Total Assets 0.4903 0.5000 0.5104 0.5080

Altman Score 9.21 5.59 5.07 4.34 Altman Score 8.47 11.72 10.71 14.02

Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23


24‐Sep‐11 29‐Sep‐12 28‐Sep‐13 27‐Sep‐14 26‐Sep‐15

Apple Inc. AAPL Information Technology Report Date:

Average

2011 2012 2013 2014 2015 2011 ‐ 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue 108,249 156,508 170,910 182,795 233,715 Total Revenue 226,704 240,306 245,112 257,367 262,515

% growth N/A 44.6% 9.2% 7.0% 27.9% 21.2% % growth ‐3.0% 6.0% 2.0% 5.0% 2.0%

Gross Profit 43,818 68,662 64,304 70,537 93,626 Gross Profit 88,414 93,719 95,594 100,373 102,381

Gross Margin (% of sales) 40.5% 43.9% 37.6% 38.6% 40.1% 40.1% Gross Margin (% of sales) 39.0% 39.0% 39.0% 39.0% 39.0%


Operating Margin (% of sales) 31.2% 35.3% 28.7% 28.7% 30.5% 30.9% Operating Margin (% of sales) 28.0% 28.0% 29.0% 29.5% 30.0%

Earnings Before Tax 34,205 55,763 50,155 53,483 72,515

Income Tax Expense 8,283 14,030 13,118 13,973 19,121 Forecasted Effective Tax Rate 25.6% 25.6% 25.6% 25.6% 25.6%

Effective Tax Rate 24.2% 25.2% 26.2% 26.1% 26.4% 25.6% Effective Tax Rate Adjustment 25.6% 25.6% 25.6% 25.6% 25.6%

Net Income 25,922 41,733 37,037 39,510 53,394 Net Income 52,822 55,991 57,111 59,967 61,166

Net Margin (% of sales) 23.9% 26.7% 21.7% 21.6% 22.8% 23.3% Net Margin (% of sales) 23.3% 23.3% 23.3% 23.3% 23.3%

Total Common Shares 6,470 6,544 6,477 6,086 5,753 Total Common Shares 5,466 5,220 5,011 4,836 4,691

% growth N/A 1.1% ‐1.0% ‐6.0% ‐5.5% ‐2.9% % growth ‐5.0% ‐4.5% ‐4.0% ‐3.5% ‐3.0%

Earnings per Share $4.01 $6.38 $5.72 $6.49 $9.28 Earnings per Share $9.66 $10.73 $11.40 $12.40 $13.04

Dividends per Share $0.00 $0.38 $1.64 $1.82 $1.98 Dividends per Share $2.08 $2.22 $2.40 $2.61 $2.74

% growth N/A N/A 331.6% 11.0% 8.8% 0.0% % growth 5.0% 7.0% 8.0% 8.8% 5.0%

Year‐end Stock Price $57.76 $95.30 $68.96 $100.75 $114.71996 997 998 999 1000 996 997 998 999 1000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash + ST Investments 25,952 29,129 40,590 25,158 41,995 Cash + ST Investments 44,434 48,061 50,248 54,047 56,441

% of sales 24.0% 18.6% 23.7% 13.8% 18.0% 19.6% % of sales 19.6% 20.0% 20.5% 21.0% 21.5%

Total Receivables 11,717 18,692 20,641 27,219 30,343 Total Receivables 28,338 30,038 30,639 32,171 32,814

% of sales 10.8% 11.9% 12.1% 14.9% 13.0% 12.5% % of sales 12.5% 12.5% 12.5% 12.5% 12.5%

Inventory 776 791 1,764 2,111 2,349 Inventory 2,267 2,403 2,451 2,574 2,625

% of sales 0.7% 0.5% 1.0% 1.2% 1.0% 0.9% % of sales 1.0% 1.0% 1.0% 1.0% 1.0%

Net PPE 7,777 15,452 16,597 20,624 22,471 Net PPE 22,670 24,031 24,511 25,737 26,251

% of sales 7.2% 9.9% 9.7% 11.3% 9.6% 9.5% % of sales 10.0% 10.0% 10.0% 10.0% 10.0%

Total Assets 116,371 176,064 207,000 231,839 290,479 Total Assets 292,448 293,173 294,134 295,973 296,642

% of sales 107.5% 112.5% 121.1% 126.8% 124.3% 118.4% % of sales 129.0% 122.0% 120.0% 115.0% 113.0%

Payables and Accruals 19,461 27,924 30,794 48,568 59,659 Payables and Accruals 56,676 58,875 58,827 60,481 60,378

% of sales 18.0% 17.8% 18.0% 26.6% 25.5% 21.2% % of sales 25.0% 24.5% 24.0% 23.5% 23.0%

ST Debt plus LT Debt 0 0 16,960 35,295 61,962 ST Debt plus LT Debt 62,343 63,681 63,729 64,342 65,629

% of sales 0.0% 0.0% 9.9% 19.3% 26.5% 11.1% % of sales 27.5% 26.5% 26.0% 25.0% 25.0%

Total Equity 76,615 118,210 123,549 111,547 119,355 Total Equity 115,619 115,347 115,203 115,815 115,507

% of sales 70.8% 75.5% 72.3% 61.0% 51.1% 66.1% % of sales 51.0% 48.0% 47.0% 45.0% 44.0%

April 18, 2016

Forecasted Income Statement Drivers

Forecasted Balance Sheet Drivers

Historical Income Statement Drivers

Historical Balance Sheet Drivers

Analyst Comments: Revenue is expected to decline slightly in 2016 as the launch of the iPhone 7 and 7 Plus will be released shortly before the fiscal year ends and the majority of revenue growth from the launch will be realized in 2017. IPhone sales have been slowing with each new launch, and AAPL has made efforts to earn positive revenue growth in non‐new iPhone release years. Gross margins are projected to remain at the 39% mark as AAPL has greater influence over suppliers, though AAPL is simultaneously lowing product prices, which results in steady margins. Operating margins are projected to remain low due to high investment in R&D and falling SG&A expenses. AAPL will continue its $140B buyback program, which will require a large capital base and consistently high debt levels to finance. Investors have also demanded dividend growth, which will be fueled by low‐interest debt and high free cash flow.

4. Forecasting and Valuation AAPL, of 22 Copyright Robert A. Weigand, Ph.D., 2016

Apple Inc. Apple Inc.

Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2016E 2017E 2018E 2019E 2020E

Cash and ST Investments 25,952 29,129 40,590 25,158 41,995 Cash and ST Investments 44,434 48,061 50,248 54,047 56,441

+ Receivables 11,717 18,692 20,641 27,219 30,343 + Receivable 28,338 30,038 30,639 32,171 32,814

+ Inventory 776 791 1,764 2,111 2,349 + Inventory 2,267 2,403 2,451 2,574 2,625

− Payables and Accruals 19,461 27,924 30,794 48,568 59,659 − Payables and Accruals 56,676 58,875 58,827 60,481 60,378

= Net Oper. Working Capital 18,984 20,688 32,201 5,920 15,028 = Net Oper. Working Capital 18,363 21,628 24,511 28,310 31,502

+ Net Property, Plant & Equip. 7,777 15,452 16,597 20,624 22,471 + Net Property, Plant & Equip. 22,670 24,031 24,511 25,737 26,251

= Total Invested Capital 26,761 36,140 48,798 26,544 37,499 = Total Invested Capital 41,033 45,658 49,022 54,047 57,753

÷ Total Common Shares 6,470 6,544 6,477 6,086 5,753 ÷ Total Common Shares 5,466 5,220 5,011 4,836 4,691

= Total Invested Capital/Share $4.14 $5.52 $7.53 $4.36 $6.52 = Total Invested Capital/Share $7.51 $8.75 $9.78 $11.18 $12.31


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E


× (1−Effective Tax Rate) 24.2% 25.2% 26.2% 26.1% 26.4% × (1−Effective Tax Rate) 25.6% 25.6% 25.6% 25.6% 25.6%

= Net Oper. Profit After Tax 25,607 41,342 36,183 38,786 52,448 = Net Oper. Profit After Tax 47,227 50,060 52,885 56,487 58,593

− ∆ Total Invested Capital N/A 9,379 12,658 (22,254) 10,955 − ∆ Total Invested Capital 3,534 4,625 3,364 5,025 3,706

= Free Cash Flow N/A 31,963 23,525 61,040 41,493 = Free Cash Flow 43,693 45,436 49,521 51,462 54,887

NOPAT per Share $3.96 $6.32 $5.59 $6.37 $9.12 NOPAT per Share $8.64 $9.59 $10.55 $11.68 $12.49

Free Cash Flow per Share N/A $4.88 $3.63 $10.03 $7.21 Free Cash Flow per Share $7.99 $8.70 $9.88 $10.64 $11.70

Historical Performance Forecasted Performance


Analyst Comments: Invested capital is projected to increase steadily through 2020 as AAPL maintains its commitment to cutting‐edge products, and the increase is driven by the increase in NOWC while net fixed assets are projected to remain at current levels. The slowing in yoy invested capital is not a concern as the R&D to sales ratio is increasing, indicating AAPL's investment in its future. Though invested capital has slowed, it is projected to remain at consistent levels as AAPL has attained and is projected to maintain its current market leader position.

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Apple Inc.

Cost of Capital 2015 Weight % Cost Weighted % Apple Inc.

Equity Capitalization $659,975 91.4% 9.064% 8.286%

+ Total Debt $61,962 8.6% 5.000% 0.319% Year 2016E 2017E 2018E 2019E 2020E

= Value of All Securities $721,937 100.0% Dividend Growth Rates 5.0% 7.0% 8.0% 8.8% 5.0%

Expected Future Dividends $2.08 $2.22 $2.40 $2.61 $2.74

Effective Tax Rate 25.60% Alternative RF Rate:

Risk‐Free Rate 1.924% 10‐year Yield: 1.924% PV Dividends 1‐4 $7.48 Dividend Yield 2.0%

Beta (default = 5‐Yr) 1.020 Alternative Beta: 5‐year Beta: 0.932 PV Perpetual Div. $47.73

Market Risk Premium 7.0% 1.020 2‐year Beta: 1.190 Intrinsic Value $55.21 If Purchased For: $105.67

CAPM Cost of Equity 9.064% Current Price $105.67 Expected Return = ‐7.9%

Weighted Average Cost of Capital: 8.605% ($105.67) $2.08 $2.22 $2.40 $70.15 $67.538.605% 8.605% 8.605% 8.605% 8.605% 8.605% 8.605% 8.605% 8.605% 8.605%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E

Return on Invested Capital 95.7% 114.4% 74.1% 146.1% 139.9% Return on Invested Capital 115.1% 109.6% 107.9% 104.5% 101.5%

Economic Value‐Added 23,305 38,232 31,984 36,502 49,221 Economic Value‐Added 43,696 46,131 48,667 51,836 53,623

Market Valued‐Added 297,062 505,412 323,155 501,574 540,620 Market Valued‐Added 467,686 662,749 683,813 704,842 722,877

EVA per Share $3.60 $5.84 $4.94 $6.00 $8.56 EVA per Share $7.99 $8.84 $9.71 $10.72 $11.43

MVA per Share $45.92 $77.24 $49.89 $82.42 $93.96 MVA per Share $85.57 $126.97 $136.46 $145.76 $154.11

Perpetual Growth Rate: 2.0%


DCF Intrinsic Value Model 2011 2012 2013 2014 2015 DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E

PV of Future FCFs 667,134 692,580 728,654 730,317 751,670 PV of Future FCFs 772,661 793,716 812,497 830,952 847,571

+ Cash and ST Investments 25,952 29,129 40,590 25,158 41,995 + Cash and ST Investments 44,434 48,061 50,248 54,047 56,441

= Total Intrinsic Firm Value 693,086 721,709 769,244 755,475 793,665 = Total Intrinsic Firm Value 817,095 841,777 862,744 885,000 904,012

− Total Debt 0 0 16,960 35,295 61,962 − Total Debt 62,343 63,681 63,729 64,342 65,629

= Intrinsic Value of Equity 693,086 721,709 752,284 720,180 731,703 = Intrinsic Value of Equity 754,752 778,096 799,015 820,658 838,383

÷ Total Common Shares 6,470 6,544 6,477 6,086 5,753 ÷ Total Common Shares 5,466 5,220 5,011 4,836 4,691

= Per Share Intrinsic Value $107.13 $110.29 $116.14 $118.34 $127.18 = Per Share Intrinsic Value $138.09 $149.07 $159.45 $169.71 $178.74

vs. Year‐End Stock Price $57.76 $95.30 $68.96 $100.75 $114.71 vs. Most Recent Stock Price $106.72

Over (Under) Valuation/Share ($49.37) ($14.99) ($47.18) ($17.59) ($12.47) Over (Under) Valuation/Share ($31.37)

% Over (Under) Valued ‐46.1% ‐13.6% ‐40.6% ‐14.9% ‐9.8% % Over (Under) Valued ‐22.7%



Dividend Discount Valuation Model

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Analyst Comments: AAPL is significantly undervalued, while year end stock prices and intrinsic value have been appreciating. AAPL's undervaluation is in a critical range, which could be realized by the market with the proper catalyst. ROIC is significantly higher than the WACC, resulting in large EVA. Free cash flow is projected to rise, generating more cash available to investors.

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Relative Valuation 2011 2012 2013 2014 2015 Relative Valuation 2016E 2017E 2018E 2019E 2020E

Price to Earnings 14.4 14.9 12.1 15.5 12.4 Price to Earnings 11.0 13.9 14.0 13.7 13.7

Price to Free Cash Flow N/A 19.5 19.0 10.0 15.9 Price to Free Cash Flow 13.4 17.1 16.1 15.9 15.3

Price to Sales 3.5 4.0 2.6 3.4 2.8 Price to Sales 2.6 3.2 3.3 3.2 3.2

Price to Book 3.2 3.5 2.2 2.6 2.3 Price to Book 2.0 2.7 2.7 2.8 2.8

Earnings Yield 6.9% 6.7% 8.3% 6.4% 8.1% Earnings Yield 9.1% 7.2% 7.1% 7.3% 7.3%

Dividend Yield 0.0% 0.4% 2.4% 1.8% 1.7% Dividend Yield 1.9% 1.5% 1.5% 1.5% 1.5%


Analyst Comments: P/E ratios are forecasted to return to historical levels prior to 2015, while P/FCF and price to book is expected to fall slightly lower than historical averages. Earnings and dividend yields are expected to remain consistent.

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Price to Sales Price to Book (right axis)


aapl apple inc. sector: information technology hold · sectors. apple operates in a highly...

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