Apple Inc.
Written by John Smith

August 2011

Table of Contents
Abstract 3
Company History 4
Current Financial Health 5
Stock Performance 7
Bonds 11
Conclusions 12
Works Cited 13
APPENDIX I: APPLE’S SELECTED FINANCIAL DATA 15
APPENDIX II: APPLE’S CONSOLIDATED STATEMENTS OF OPERATIONS 16

Abstract

Apple Inc. (Apple) is an American corporation that specializes in consumer electronics and software. Founded in 1976, it is difficult not to see their products anywhere in the world; they have revolutionized customer purchasing with chic products, outstanding customer service and phenomenal marketing. In August 2011, Apple surpassed Exxon Mobile as the largest company in the U.S. As a leader in its industry, Apple has had many successes that present excellent investment opportunities in the short, medium and long term. While impossible to predict future pop culture and trends, Apple has been leading the way for the past decade and shows no immediate signs of slowing down. Keywords: Apple, electronics, financial analysis, stocks Company History

Founded in Cupertino, CA in 1976, and incorporated in 1977, Apple has a storied history in the computer industry. Though founded by three entrepreneurs, Steve Jobs stands out as the most famous and currently asks as CEO. In the first fours years, Apple’s goal was to break into the personal computer market; though successful, it was difficult to compete with nationally known brands as a start up. In December of 1980, Apple went public which provided the company millions of dollars in capital to expand operations. Through 1985, Apple struggled to determine which product path to take; after failed models, low sales and a power struggle, Steve Jobs was pushed out of Apple. A steady rise followed by a steep declined characterized the next 12 years as management tried to create new products in a world that was becoming more and more dependent on technology. One important product, The Newton, was Apple’s first attempt at a handheld tablet device, which would pave the way to the creation of the iPhone and iPod (Wikipedia, Apple Inc., 2011). In 1997, Steve Jobs was elected to interim CEO to save the company after three straight years of crippling losses. Jobs would lead Apple from that point on with a focus on user-friendly software and chic, practical products. While other brands were primarily focusing on business applications, Apple was trying to break through with a product that interact and connect with people (Linzmayer, 1999). Though Apple was profitable since Jobs’ second term, many people agree that 2001 was a watershed year; the year that the iPod was invented. Over the next six years, 100 millions units would be sold. In 2006, Apple’s market cap surpassed Dell; nine years prior, Dell’s CEO said that Apple should “shut down and give the money back to the shareholders” (Singh, 1997). Another product was released in 2007 that changed the telecommunications market: the iPhone. This would lead to the creation of the iPad in 2010. As of the writing of this paper, Apple is one of the most successful companies operating in the world: it has more cash reserves than the U.S. Federal Government (Griggs, 2011) and surpassed Exxon Mobile as the U.S.’s largest company (Ortutay, 2011).
Current Financial Health
It can easily be argued that Apple is in great financial health and the strongest company in its sector, if not on the entire stock market. Below, an analysis of certain performance benchmarks will show Apple’s dominance. As an aside, no one measure can capture the health of any one company; this requires an overview view of several factors to get a clear picture (Loth).

Price to Earnings Ratio (P/E)
Table 1 shows the P/E ratios of Apple and two of its bigger competitors, Dell and Microsoft. Table 2 shows the P/E ratios for the same three companies normalized over the past 12 months.
Table 1. Current P/E Ratios (Forbes Finance, 2011) Apple Dell Microsoft
Share ($) $376.99 $14.87 $25.10
EPS ($) 25.28 1.67 2.7
P/E 14.9 8.9 9.3

Table 2. Five-Year P/E Ratio Average (Forbes Finance, 2011) Apple Dell Microsoft
P/E 14.9 8.9 9.3

Comparatively, Apple out performs its competitors – more earnings have been seen per share. Additionally, Apple’s P/E ratio is within a range (10-17) that shows the company isn’t over or undervalued and, more importantly, that earnings are above recent trends (Anderson & Brooks, 2005).

Return on Equity (ROI and ROE)
Table 3 shows the ROE (from total operations) of Apple, Dell and Microsoft, both the current percentage and the 5-year average.
Table 3. ROE Stats (Forbes Finance, 2011) Apple Dell Microsoft
ROE 34.0% 38.7% 40.6%
ROE (5yr.) 26.1% 46.9% 42.0%

The ROE of all three companies show that the technology sector is profitable, which is a fact that non-investors could figure out by observation. In today’s society, technology is the driving force in ever facet of life and products are becoming more sophisticated and varied. For example, a typical Apple customer may have an iPod for working out, an iPhone to make calls, an iPod to surf the web, a MacBook as a desktop computer to conduct business and a Time Capsule to link all products together wirelessly. Customers need and want electronics to make their professional and social life more efficient. Apple’s ROE is especially positive since it has a 0.0 Debt/Equity ratio and carries a large cash reserve ($76.2B); which means the ROE is not skewed by accounting and business practices. Additionally telling is that the Technology Sector’s ROE is 14.3%, showing that Apple is a “tier one” company. Investors should feel positive about this. As a note on the large cash reserve: as seen in the 1980s, companies with large cash reserves can be put in danger of leveraged buyouts since they appear attractive to investors; However, a unique quality of Apple’s cash reserves is that it’s too big for anyone to try to buy Apple out. Therefore, investors should not fear a corporate buyout.
Stock Performance Given the up and down history of Apple and major world events in the past three decades, it would be impossible to make an accurate conclusion as to whether or not to make an investment today based on the entire stock chart. However, it is impressive to note that an investment made on the first day of trading (31 years ago) would have resulted in a 10,390% gain today; a $10,000 investment would be worth $1,039,000 (Google Finance, 2011). Comparatively, investing in the Dow Jones Index in the same time period would have only resulted in a 1,102% gain, a tenth of Apple’s gain (Google Finance, 2011). Looking at a tighter window of history, it can be seen that Apple stock has performed especially well over the past 5 years (see Figure 1). Figure 1. Apple’s Stock Performance of the Past Five Years Compared to the Standard & Poor’s (S&P)500, the S&P Computer Hardware and the Dow Jones Index (Apple Inc., 2011)

Comparing any stock to market and sector indices is important because it can help explain fluctuations in the market that results from uncontrollable circumstances (e.g. September 11 attacks, natural disasters, political strife, recessions).
As with previous indicators, Apple out performs comparable markers and trends suggest that this momentum will continue in the future. Apple’s market share in personal computers (PCs; see Figure 2), smartphones and tablets are either rapidly increasing or capped at dominating levels. Per Change Wave, 27% of consumers will purchase a tablet in 2011; 82% of those will be the iPad 2 (Epstein, 2011). As of Q4, 2010, the iPhone commands 17.3% of the smart phone market share (see Figure 3).
Steve Jobs’ business model is working. Though an increase in market share and sales doesn’t guarantee a profitable business, it does in the case of Apple since its sales outweigh its expenses. Per the latest annual report, net sales equaled $65,225M and cost of sales equaled $39,541M, which correlates to a gross margin of $25,684M (39.4% gross margin percent) (Apple Inc., 2011). Compared to the industry average of 38.3%, Apple is making the reasonable and attractive amount of profit.
Currently, the average broker rating (ABR) is 1.22; A 1.0 means that 44 brokers recommend the stock as a “strong buy” (ING Direct Bank, 2011). Given that these are the players that analyze all the data and simplify it into a 1 – 5 rating, it shows that Apple is a leader in the industry and has the management to keep them on track in the future.
Regarding dividends: Apple paid dividends from 1987 – 1995 and has not paid dividends since. The lack of dividends should not scare investors from Apple stock specifically because the high ROE compensates for it (i.e. since the value of the stock is rising and expected to rise in the future at relatively high rates, an additional payout is not necessary to ensure investor profitability). Additionally, Apple’s business strategy includes maintaining a large cash reserve in the event a major technological event occurs that would require an unforeseen, enormous capital investment or if Apple needs to buyout an existing company to further their business (e.g. rumors are circulating that Hula may be bought by Apple for billions of USD).
Lastly, forecasts predict that the stock will hit high $400s to low $500s in the next 12 months (Mallory, 2011). Though this is speculative, this would correlate to a 25 - 35% return on investment. Figure 2. Apple’s PC Market Share (Slivka, 2011)

Figure 3. Apple’s iPhone Market share (iPhone Market Share: 17.25% of Smartphones, 4.2% of all phones, 2011)
Bonds

Currently, Apple has no outstanding bonds and raises capital directly from profits and stocks. This is a unique position to be in for any global company. Based on supply, demand and current manufacturing practices, Apple is in a position where they are not dependent on debt. Most components are made at one of the largest factories in the world: Falcon City in Longhua, Shenzhen, China (Wikipedia, Foxconn, 2011), so facilities and machinery aren’t expected to be needed. Since every facet of this company is already world-class, there isn’t a need to sell bonds to raise capital; especially since the market for Apple stock is so strong.
That isn’t to say Apple has never release bonds in the past. Per Emergent Online, Apple had two bond offers from the 1990’s that matured in 2001 and 2004. In 1999, the S&P rating was “B-” and in 2000, that rating was improved to a “BB” (Apple Inc (NMS: AAPL), 2011). Currently, since Apple has no debt, credit agencies have no assigned a rating; however, given that ratings improved in the early 2000s (before the invention of the iPhone and iPad that skyrocketed sales) and Apple currently has a larger cash reserve than the U.S. Federal Government, it is reasonable to suggest that Apple’s rating would be “A” or higher. Theoretically, given the positive sales trends, Apple would have no concerns honoring the interest and principle obligation in a timely manner on a bond it issued. This is assuming a realistic offer; it would need to be an extreme case for Apple to have difficulties, but nothing in the business model suggest that management is willing to take such as risk or that a new product line would require such an investment. As a comparison, Microsoft (similar sales as Apple) has a credit rating of “AAA” and Dell has an “A+” per S&P (Catts & Maheshwari, 2010) (Smith, 2011).
Conclusions

Apple has always been a company that focuses on the wants of the consumer, not just in terms of processing power, but also in design and function. It took several years and many product failures, but Apple is now in a position where demand is high and is rising every year with the launch of a new or updated product line or software package. But having an idea or product, doesn’t ensure success; any company needs a skilled team of managers and officers to guide the company forward. It is this team that has marketed Apples products in such a way that customers are willing to purchase the products at a premium. Even as competitors create similar products at lower prices, Apple has become a benchmark to elevate status and increase function. As such, Apple is subject to significantly less pricing pressure than others, though the laws of supply and demand slightly cut into Apple’s sales. Based on rising profits, rising market share and zero debt, it is strongly recommended to buy Apple shares. Additionally, if Apple ever offered bonds for a major capital project (see Microsoft $3.75B bond in 2009/ (CNN Money, 2009)), it would have no problem paying it back in a timely manner. Recent performance and financial markers show that the stock is trending up and deserves it. The long term is difficult to predict since it is impossible to predict technological innovations; however, Apple has shown that it can adapt and revolutionize, therefore, if trends continue as they have in the past 10 years and Apple keeps debt low or at zero, then there isn’t anything standing in Apple’s domination of its industry. Works Cited

Anderson, K. P., & Brooks, C. (2005, May 01). Social Science Research Network. Retrieved 08 01, 2011, from Social Science Research Network: http://ssrn.com/abstract=739664

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Wikipedia. (2011, August 12). Apple Inc. Retrieved August 12, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Apple_Inc.

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APPENDIX I: APPLE’S SELECTED FINANCIAL DATA

(Apple Inc., 2011) APPENDIX II: APPLE’S CONSOLIDATED STATEMENTS OF OPERATIONS

(Apple Inc., 2011)