abhishreshthaa
Abhijeet S
Apple Inc. (NASDAQ: AAPL; previously Apple Computer, Inc.) is an American multinational corporation that designs and markets consumer electronics, computer software, and personal computers. The company's best-known hardware products include the Macintosh line of computers, the iPod, the iPhone and the iPad. Apple software includes the Mac OS X operating system; the iTunes media browser; the iLife suite of multimedia and creativity software; the iWork suite of productivity software; Aperture, a professional photography package; Final Cut Studio, a suite of professional audio and film-industry software products; Logic Studio, a suite of music production tools; the Safari internet browser; and iOS, a mobile operating system. As of August 2010, the company operates 301 retail stores[5] in ten countries,[6] and an online store where hardware and software products are sold. As of May 2010, Apple is one of the largest companies in the world and the most valuable technology company in the world, having surpassed Microsoft.[7]
Established on April 1, 1976 in Cupertino, California, and incorporated January 3, 1977,[8] the company was previously named Apple Computer, Inc., for its first 30 years, but removed the word "Computer" on January 9, 2007,[9] to reflect the company's ongoing expansion into the consumer electronics market in addition to its traditional focus on personal computers.[10] As of September 2010, Apple had 46,600 full time employees and 2,800 temporary full time employees worldwide[4] and had worldwide annual sales of $65.23 billion.[4]
For reasons as various as its philosophy of comprehensive aesthetic design to its distinctive advertising campaigns, Apple has established a unique reputation in the consumer electronics industry. This includes a customer base that is devoted to the company and its brand, particularly in the United States.[11] Fortune magazine named Apple the most admired company in the United States in 2008, and in the world in 2008, 2009, and 2010.[12][13][14] The company has also received widespread criticism for its contractors' labor, environmental, and business practices
Financial Analysis 2nd Quarter Apple’s financial performance continued to strengthen over the last several quarters.In the most recent earnings announcement, Apple reported significant growth in net revenues driven Page 36 of 54
by the strong performance of its iPod product line.Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2nd quarter 2005 results.Net income increased by 41% to $410 million. (Apple Reports) The iPod product line continues to drive the financial performance of the company.In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase over the 5.3 million units sold in the 2nd quarter of the prior year.Mac sales showed slight growth of only 4%. (Apple Reports) Apple’s year-to-date revenues total just over $10 billion and earnings total just under $1 billion.For the 3rd quarter, CFO Peter Oppenheimer stated, “…we expect revenue of about $4.2 to $4.4 billion” which will push total sales above last term’s annual numbers. (Apple Reports) Historical Performance Although sales remained stagnant during 1998-2002, sales more than doubled since .This dramatic shift in performance is primarily due to the increase in sales from the iPod product line.
Another interesting way to consider the financial performance is to evaluate how Apple’s stock price performed against the market and against its main competitors.As we see from the chart above, Apple’s performance has been inconsistent over the last 20 years compared to the S&P 500.It also has not performed at the same level as its main competitors, Dell and Microsoft.However, performance improved since 2003. Profitability Measures Apple substantially improved in its key measures of profitability in the last few fiscal years.In terms of return on assets, return on equity and profit margin, Apple strengthened financially and now has similar ratios to that of its competitors and the overall computer
In reviewing Apple’s 1st and 2nd quarter 2006 earnings releases, gross margins dropped slightly.Apple attributes this decline primarily to price pressures, especially in the iPod product line. (1st Quarter 10Q)This will continue to affect performance over time.However, Apple’s ability to maintain the momentum it built in the marketplace will control the speed with which erosion will occur. Liquidity and Leverage Measures Apple historically held very little long-term debt.The table below compares Apple’s liquidity measures to their competitors, their industry, and the general market.During the period of strong financial performance, Apple accumulated cash.This strengthens Apple’s position should they choose to access the capital markets.
Product Unit Sales In the last several years, there have been dramatic changes to Apple’s product sales by category.Apple breaks its unit sales into four primary categories:desktops, notebooks, iPods, and peripherals.The graph below shows the product mix for Apple in 2002.Note the domination by desktops and notebooks and the small contribution by iPods. (Apple Computer)
When you compare the same graph for 2005, you see dramatic differences in the product mix for Apple.The iPod sales now account for 32.5% compared to 2.5% for 2002.The combined sales of computers (desktop/notebook) lost share, dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s product mix, not their global computer market share (which remains stable in the 2-3% range).Meanwhile, sales of peripherals (including wireless connectivity and networking solutions), remained stable. (Hoover’s) Operating Segments Apple breaks its sales into five “operating segments”.The chart below shows the sales by segment for each year 2002-2005.On a percentage basis, only the retail segment appears to be outperforming the others. (Apple Computer, Hoover’s)
year).This increase was due to growth in the number of stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q) Although the retail segment was the only segment to realize growth as a percentage of total sales, all of the segments had solid growth.In the Americas, sales increased 65% and continued to represent approximately 47% of total worldwide sales.Sales in Japan and Europe grew by 92% and 47%, respectively. (1st Quarter 10Q) Market Value Analysis We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity value of Apple.To complete this analysis, we developed a pro-forma income statement and extracted free cash flow. We then discounted these cash flows using a calculated Weighted Average Cost of Capital (WACC).Apple’s WACC equaled their cost of equity since they carry no long-term debt.We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity. CAPM consists of a risk-free rate, a market risk premium, and a company Beta.The yield on the 10-year Treasury is the standard for a risk-free rate.To determine the market risk premium, we used the average return that an investor would require for an investment with average risk. (Higgins)We used data available online to determine Apple’s Beta, projected to be 1.46. (Google, 4/21/06)The below chart summarizes Apple’s cost of equity.
Pro-Forma Income Statement We made several key assumptions in compiling a pro-forma income statement.First, to complete the estimate for the 2006 data, we merely annualized the earnings for the first two quarters.We then projected a declining rate of growth in sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively.We do not believe that the growth in iPods is sustainable for the long-term.We also used the percent-of-sales method to calculate cost of goods sold, research & development, SG&A, and interest.We applied the 2005 tax rate for all future periods.As the table below shows, the mid-term earnings growth is positive.
Projected Free Cash Flow and Equity Valuation We assume that Apple will continue without long-term debt.We also assume that there will be no significant changes in capital expenditures and net working capital.Thus, free cash flow will equal net income plus depreciation.Given WACC, we are able to discount cash flows back using half-year PV factors (we are through the first half of 2006).We calculated our terminal value using a perpetual annual growth rate of 7%, which is slightly above the industry growth rate of 5.6%. (Datamonitor)
Established on April 1, 1976 in Cupertino, California, and incorporated January 3, 1977,[8] the company was previously named Apple Computer, Inc., for its first 30 years, but removed the word "Computer" on January 9, 2007,[9] to reflect the company's ongoing expansion into the consumer electronics market in addition to its traditional focus on personal computers.[10] As of September 2010, Apple had 46,600 full time employees and 2,800 temporary full time employees worldwide[4] and had worldwide annual sales of $65.23 billion.[4]
For reasons as various as its philosophy of comprehensive aesthetic design to its distinctive advertising campaigns, Apple has established a unique reputation in the consumer electronics industry. This includes a customer base that is devoted to the company and its brand, particularly in the United States.[11] Fortune magazine named Apple the most admired company in the United States in 2008, and in the world in 2008, 2009, and 2010.[12][13][14] The company has also received widespread criticism for its contractors' labor, environmental, and business practices
Financial Analysis 2nd Quarter Apple’s financial performance continued to strengthen over the last several quarters.In the most recent earnings announcement, Apple reported significant growth in net revenues driven Page 36 of 54
by the strong performance of its iPod product line.Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2nd quarter 2005 results.Net income increased by 41% to $410 million. (Apple Reports) The iPod product line continues to drive the financial performance of the company.In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase over the 5.3 million units sold in the 2nd quarter of the prior year.Mac sales showed slight growth of only 4%. (Apple Reports) Apple’s year-to-date revenues total just over $10 billion and earnings total just under $1 billion.For the 3rd quarter, CFO Peter Oppenheimer stated, “…we expect revenue of about $4.2 to $4.4 billion” which will push total sales above last term’s annual numbers. (Apple Reports) Historical Performance Although sales remained stagnant during 1998-2002, sales more than doubled since .This dramatic shift in performance is primarily due to the increase in sales from the iPod product line.
Another interesting way to consider the financial performance is to evaluate how Apple’s stock price performed against the market and against its main competitors.As we see from the chart above, Apple’s performance has been inconsistent over the last 20 years compared to the S&P 500.It also has not performed at the same level as its main competitors, Dell and Microsoft.However, performance improved since 2003. Profitability Measures Apple substantially improved in its key measures of profitability in the last few fiscal years.In terms of return on assets, return on equity and profit margin, Apple strengthened financially and now has similar ratios to that of its competitors and the overall computer
In reviewing Apple’s 1st and 2nd quarter 2006 earnings releases, gross margins dropped slightly.Apple attributes this decline primarily to price pressures, especially in the iPod product line. (1st Quarter 10Q)This will continue to affect performance over time.However, Apple’s ability to maintain the momentum it built in the marketplace will control the speed with which erosion will occur. Liquidity and Leverage Measures Apple historically held very little long-term debt.The table below compares Apple’s liquidity measures to their competitors, their industry, and the general market.During the period of strong financial performance, Apple accumulated cash.This strengthens Apple’s position should they choose to access the capital markets.
Product Unit Sales In the last several years, there have been dramatic changes to Apple’s product sales by category.Apple breaks its unit sales into four primary categories:desktops, notebooks, iPods, and peripherals.The graph below shows the product mix for Apple in 2002.Note the domination by desktops and notebooks and the small contribution by iPods. (Apple Computer)
When you compare the same graph for 2005, you see dramatic differences in the product mix for Apple.The iPod sales now account for 32.5% compared to 2.5% for 2002.The combined sales of computers (desktop/notebook) lost share, dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s product mix, not their global computer market share (which remains stable in the 2-3% range).Meanwhile, sales of peripherals (including wireless connectivity and networking solutions), remained stable. (Hoover’s) Operating Segments Apple breaks its sales into five “operating segments”.The chart below shows the sales by segment for each year 2002-2005.On a percentage basis, only the retail segment appears to be outperforming the others. (Apple Computer, Hoover’s)
year).This increase was due to growth in the number of stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q) Although the retail segment was the only segment to realize growth as a percentage of total sales, all of the segments had solid growth.In the Americas, sales increased 65% and continued to represent approximately 47% of total worldwide sales.Sales in Japan and Europe grew by 92% and 47%, respectively. (1st Quarter 10Q) Market Value Analysis We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity value of Apple.To complete this analysis, we developed a pro-forma income statement and extracted free cash flow. We then discounted these cash flows using a calculated Weighted Average Cost of Capital (WACC).Apple’s WACC equaled their cost of equity since they carry no long-term debt.We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity. CAPM consists of a risk-free rate, a market risk premium, and a company Beta.The yield on the 10-year Treasury is the standard for a risk-free rate.To determine the market risk premium, we used the average return that an investor would require for an investment with average risk. (Higgins)We used data available online to determine Apple’s Beta, projected to be 1.46. (Google, 4/21/06)The below chart summarizes Apple’s cost of equity.
Pro-Forma Income Statement We made several key assumptions in compiling a pro-forma income statement.First, to complete the estimate for the 2006 data, we merely annualized the earnings for the first two quarters.We then projected a declining rate of growth in sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively.We do not believe that the growth in iPods is sustainable for the long-term.We also used the percent-of-sales method to calculate cost of goods sold, research & development, SG&A, and interest.We applied the 2005 tax rate for all future periods.As the table below shows, the mid-term earnings growth is positive.
Projected Free Cash Flow and Equity Valuation We assume that Apple will continue without long-term debt.We also assume that there will be no significant changes in capital expenditures and net working capital.Thus, free cash flow will equal net income plus depreciation.Given WACC, we are able to discount cash flows back using half-year PV factors (we are through the first half of 2006).We calculated our terminal value using a perpetual annual growth rate of 7%, which is slightly above the industry growth rate of 5.6%. (Datamonitor)