Apple: Buy, Hold, Sell Analysis. -and key ratios analysis- Lead Analysts: Chase Webb, Christian Lutschaunig, Troy Merigliano, Frederick Steimling

Transcription

1 Apple: Buy, Hold, Sell Analysis -and key ratios analysis- Lead Analysts: Chase Webb, Christian Lutschaunig, Troy Merigliano, Frederick Steimling 1

2 Introduction...3 Industry Overview 7 Financial Analysis...9 Liquidity Ratios..9 Profitability Ratios...12 Long Term Solvency Ratios..14 Cash Flow Adequacy Ratios.15 Market Strength Ratios..17 Comparative Industry Analysis.18 Profitability...18 Valuation Operations...20 Financial...21 Growth..22 Stock Recommendation..23 Bibliography

3 Chief Executive Officer Timothy Donald Cook Company Headquarters Apple, Inc. 1 Infinite Loop Cupertino, California HQ Tel. (408) Ending Date of Last Fiscal Year September 28, 2013 Products and Services Apple Incorporate and its subsidiaries design and manufacture a wide range of electronic devices including portable music players, mobile phones, desktop computers, laptops, tablets, and digital media players as well as the Mac OS X software associated with those products. Apple possesses a portfolio of software products and peripherals that provide tools for education, creativity, and consumer and business solutions, which explains its repeated success in a number of demographics. In addition to this, Apple products offer full immersion into the Apple ecosystem with access to the App Store, itunes, and a devoted network of stores across the United States and the world. Specific Product Breakdowns: 1) iphone: The iphone is a device presented by Apple Inc. that performs the function of a mobile phone, MP3 player (ipod), and Instant Messenger (as it has been described by Apple Inc). Apple announced a strong response to its new operating system ios7, with over 80 of ios devices running ios 7, compared to a single digit download response from competitor Android s latest operating system upgrade. 3

4 2) ipad: A handheld tablet computing device from Apple Inc. that was first launched in January The ipad is designed for consumers who want a mobile device that is bigger than a smartphone but smaller than a laptop for entertainment multimedia. The ipad s sales were led by the models ipad Air and ipad Mini Retina, with the ipad in general producing a 97 customer satisfaction rating. Apple announced strong use of ipad in schools, with over 750K units sold to elementary schools. In addition to elementary education, Apple is seeing growth in use on college campuses, with Ohio State University having over 20K ipads on campus as part of their itunes U courses. 3) Mac: The MacBook is a popular model of computer made by Apple Computer. Introduced in 1984, the Macintosh features a graphical user interface (GUI) that utilizes windows, icons, and a mouse to make it relatively easy for novices to use it productively. A recent increase in Mac sales was led by imac as well as MacBook Air, with strong results from the MacBook Pro as well. Apple began selling a new Mac Pro last month, as well as a free upgrade to OS X Mavericks for Mac users, with both having strong responses thus far. 4) itunes and App Store: itunes is a media player, media library, and mobile device management application developed by Apple Inc. It is used to play, download, and organize digital audio and video on personal computers running the OS X and Microsoft Windows operating systems. The itunes Store is also available on the ipod Touch, iphone, and ipad. Apple continued its growth from the itunes store and services with revenue coming in at $4.4 billion. Apple announced positive feedback from customers after offering iphoto, imovie, Pages, Numbers, and Keynote free with new ios devices. The App Store now offers more than a million apps in 24 categories, with downloads surpassing 65 billion of which Apple is entitled a 30 commission per download. The mean revenue per application is estimated to be $8,700, although data is not publicly available. As of May 2011, Apple approved its 500,000 th app, and 37 percent of all apps are free with the average price $3.64. Brief History Apple originated as a small homegrown company selling the Apple I computer, which was sold as simple circuit board, but was on the cutting edge of technology when it was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in By 1977, demand convinced Jobs that there was a market for personal computers, and Wozniak proceeded to add a keyboard, color monitor, and device slots. These changes led to an increase in sales from 7.8 million dollars in 1978 to 117 million in 1980, the year Apple began publicly issuing stock. In 1984, Apple launched the Macintosh, which became widely successful with the introduction of the first advanced publishing software. Management instability and lackluster products led to an earnings crash which left the company scrambling to gather capital by issuing clones of the Macintosh XL software, further diluting the beaten brand. Apple s board rehired Steve Jobs in Jobs immediately formed a relationship with Microsoft to release a Mac version of Microsoft 4

5 Office. In the following two years, Apple released a lineup of imacs, server software, Mac OS X, and the ibook laptop. By 2002, five years after the return of Jobs, Apple began to turn respectable profits stemming from the introduction of the newest redesign of the imac and emac. The next eight years were a period of explosive growth for the tech giant with the introduction of the ipod, ipad, and Apple s most successful product, the iphone in In 2011, Jobs took a leave, with Tim Cook stepping in as acting CEO. Steve Jobs died later that year and Cook was named CEO of Apple. At present, Apple is the largest publicly traded corporation in the world by market capitalization, estimated at $446 billion. In the last quarter of 2013, Apple posted its strongest earnings report to date, with a quarterly profit of $13.1 billion. Locations As of the last quarter of 2013, Apple had 416 stores across fourteen countries with 162 of those locations being outside the United States. In 2014, Apple plans to open thirty new stores, twenty of which will be in markets outside the United States as well as remodeling twenty locations within the U.S. During 2013, Apple logged 395 million visitors to retail stores, representing a 6.4 increase from As well as retail locations, Apple has production lines in the US, India, Japan, and China as well as subcontracting to various other companies. Independent Auditor s Report The following is an excerpt from Ernst & Young s Report in the latest 10-K: We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple Inc. at September 28, 2013 and September 29, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 28, 2013, in conformity with U.S. generally accepted accounting principles. 5

6 Self-Stated Accounting Practices The preparation of financial statements and related disclosures of Apple Incorporated is in full accordance with U.S. generally accepted accounting principles (GAAP). The company s analysis of its financial condition and operations requires that Apple s management officials make decisions, within reason, that may be the assumption or estimate of some of the amounts reported in their financial statements under necessary circumstances. This means that the actual results may differ from the estimated values of assets and liabilities determined by management. Apple s net sales are made from the sale of products (hardware, software, and peripherals) and extended warranties and support contracts that are offered to consumers in the event that their purchase is damaged or malfunctioning. According to the company s 10-K, Apple will recognize sales revenue when evidence of an arrangement exist between Apple and its individual customers or 3 rd party wholesalers, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Apple s accounting policy also requires that the company uses Free on Board (FOB) Shipping point, which means that as soon as the product is shipped from the warehouse, the shipment becomes the responsibility of the purchaser(s). This means that Apple will not take the cost of shipping into consideration in Financial Statements. Apple s goods are stated at the lower of cost or market value and provisions are made currently for the difference between the cost and the market value. The company applies FIFO (first in, first out) to its inventory. 6

7 The Electronics Industry The worldwide personal electronics industry is a multi-billion dollar industry that produces a wide spectrum of consumer electronics for home and mobile computing. Products include music players, desktops, mobile phones, tablets, and media consumption aids as well as applications and software to run the aforementioned hardware. Along with Apple, the companies Microsoft, Hewlett Packard, Google, and Samsung dominate the industry. Profitable companies within the industry are characterized by rapid product innovations, often releasing several improvements in the same product category within a span of only a few years. The appeal of personal computing spans a wide variety of demographics although it is typically associated with younger consumers. In recent years, the demand for advanced mobile computing, such as the iphone 5S and Galaxy S4, has skyrocketed, leading to higher revenues and wider profit margins. Many media outlets have been proclaiming that the market for these high-end mobile devices is reaching saturation given that growth in sales is still accelerating but at a slightly slower pace than before. Over time, as with all electronics, the prices of these products are expected to fall with some estimates saying that the average selling price of a smartphone will fall from $335 in 2013 to $260 in Despite all of the expert projections on the performance of the industry, it continues to grow, with Apple commanding a respectable share of the market for smart phones and dominating the markets for tablets, ipods, and other personal computing devices. 7

8 By market capitalization, Apple is the largest publicly-traded company in the world, easily besting all of its closest competitors in the electronics industry with a capitalization of $428.7 billion 1. This is compared to Hewlett-Packard with $46.5 billion, Google, who developed Android Software, with $ billion, and BlackBerry, fading into the background with only $5.26 billion. Sales (pictured left) is a similar story with Apple leading at $170.9 billion with Hewlett- Packard, Google, and Blackberry following at $112.3, $59.83, and $6.81 billion respectively. Although HP seems to be close to Apple in sales, a quick analysis of the net profit margins shows anything but that. Apple boasts one of the highest profit margins among its major competitors at while HP trails at 4.73 and Blackberry posts in the negatives. Only Google bests Apple at 21.6, however both handedly beat the industry median of As of September 2013, Apple controlled approximately 45 of the U.S. smartphone market. Even more impressive is the success of Apple s ipad tablet that makes up almost 50 of the entire tablet market in the United States. Overall, Apple already holds a huge portion of the major electronics markets and has now turned to increasing the profit margins associated with those sales. Due to this, Apple is not expected to make major forays into the low-end market after the iphone 5C s lackluster sales. According to Tim Cook, Apple Inc. s current CEO, The mobile industry is not a race to a bottom...there s always a large junk part of the market, we are not in the junk business. In the upper end of the industry, Apple is able to justify its higher prices with greater value. Despite these higher prices, consumers will continue to buy Apple products because of their unique exclusivity techniques in advertising as well as the expectation of the sleek and efficient products that Apple delivers to consumers. In 2013, Apple spent approximately $4.74 billion on research and development, a 39 increase from In the company s 10-K is it is noted that there is a strong correlation between Apple s R&D expenses and their net sales in the past 4 years. According to their 10-K, "The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company's core business strategy. As such, the Company expects to make further investments in R&D to remain competitive." With Apple s largest competitor, Google, spending less than half of Apple ($2.11 B), it is fair to speculate that it will be Apple who is providing consumers with the most innovative and high quality technologies in the coming years. 8 Apple faces multiple competitors in an array of markets as a result of diversified

9 product line. Over the years, Apple has been able to capture market share by repeatedly innovating and setting the standard within the field of consumer electronics and communications. With the advent of the more powerful iphone 5, imac, MacBook, and other Apple products, the company has branded itself on the forefront of personal computing. By continually improving, Apple has steadily increased its revenues and profits, making it one of the largest and most profitable companies in the world. Liquidity Ratios Ratios Formula Working Capital ($millions) Current Assets- Current Liabilities 29,628 19,111 17,018 20, ,049 Current Ratio Acid Test Accounts Receivable Turnover (times) Days Sales Uncollecte d (days)

10 Inventory Turnover (times) Days Sales in Inventory (days) Payables Turnover (times) Days Payable (days) Operating Cycle (days) +Financing Period or Days Sales in inventory + Days Sales uncollected Financing Period (days) Days Sales in Inventory -Days Payable +Days Sales Uncollected As a whole, the liquidity ratios are used to describe a company s capabilities regarding paying off its debt obligations that are short-term. A general rule that can be followed is that higher ratio values correspond to a higher likelihood that the company can cover its short-term debts. The first value that should be analyzed is working capital, which corresponds to a company s efficiency and is a measure of that company s financial health in the short-term. This is calculated by subtracting current liabilities from current assets. Companies desire a positive number because it shows that they are capable of handling short-term debt. Apple has generally increased its working capital over the last five years even though it experienced a drop in Its working capital in 2009 was $20,049 million while in 2013 it was $29,628 million. The sharpest increase occurred from 2012 to 2013 when it increased by more than $10,000 million. This was a result of Apple s large increase in current assets during 2013 while its current liabilities only increased a slight amount. These working capital amounts must also be looked at in conjunction with the current ratio that depicts current assets divided by current liabilities. Companies would want this value to be high because a high number signifies a company s ability to pay short-term debt. Values below 1 would represent an alarm for a company like Apple because its current liabilities would exceed its current assets. It should also be noted that a value above 2 would show that the company is deciding to not invest any of its excess assets. As for Apple, it only experienced one year of a current ratio significantly over 2 (2.742 in 2009). Therefore, we are not worried about Apple failing to re-invest its excess assets. Apple has also showed a decrease in current ratios every year except 2013 when it increased to from Because Apple has been in a good range for the last couple of years, we feel comfortable with this parameter. 10

11 The next ratio to analyze is the acid-test ratio, which is similar to the current ratio but does not include the current assets that have trouble being converted into cash quickly, such as prepaid expense and inventories. This ratio will tell if the company can handle short-term liabilities using its short-term assets without being forced to sell inventory. This ratio followed the trend of the current ratio in that it decreased every year until 2013 when it increased to Because these values are greater than 1, it means that Apple has a strong ability to cover its short-term liabilities with assets that are more liquid. Accounts receivable turnover is another liquidity ratio. It shows the number of times each year that receivables are converted into cash, which also depicts the efficiency in which a company utilizes assets. Companies would want a high ratio because that shows that they are collecting cash more frequently. Apple has a receivables turnover ratio that has ranged from 14 to 19 and is good compared to its industry. There was a spike in 2011 to but it fell in 2013 to Still, these numbers represent a strong foundation for Apple even though the most current drop is a little disconcerting. Days sales uncollected is similar to receivables turnover in that it depicts the company s frequency of collecting its accounts receivable. For this ratio, a lower number shows that the company can collect cash more quickly. The trend is generally the same as receivables turnover, while it is important to note the increase from to in This shows a slower collection of money in the most recent year even though Apple has generally been collecting money faster as the years progressed earlier. Inventory is another parameter that is important to look at. There are two primary ratios that exhibit information regarding inventory. Those ratios are days sales in inventory and inventory turnover. In companies like Apple, it is very important that they move inventory as quickly as possible. Therefore, we see these ratios as being important. Inventory turnover specifically refers to how many times during the year that a company s merchandise is sold and replaced. Apple has done a very good job of increasing its inventory turnover the last five years from to a high of in Even though it fell to in 2012, Apple still has an extremely strong inventory turnover. As for days sales in inventory, the ratio measures the amount of time it takes for the company to sell its inventory, or the inventory liquidity. Therefore, a lower number would be more desirable as its correlates to moving inventory faster. Once again, Apple has done a good job of increasing this ratio value over the years before experiencing an increase to from in These inventory values show us that Apple has had more trouble in its most recent year moving inventory after multiple years of success, but even in its bad year, it still has very good inventory numbers. In addition to inventory, we must look at payables to assess a company s financial situation. These ratios provide information as to a company s ability to cover its accounts payable. There are also two ratios involved in this parameter: payables turnover and days payable. Payables turnover shows the rate that companies can pay the suppliers that provide the supplies needed for operation. It is a measure of the number of times that Apple would pay its payables amount. A trend here shows that Apple has generally increased its payable turnover value since 2009 but did suffer a greater decrease in 2013 when it dropped from to 11

12 8.953, which is the greatest decrease over the last five years. Furthermore, days payable also deals with accounts payable. It can be looked at as the number of days Apple takes to pay suppliers, which means that a lower number would be more beneficial. Unsurprisingly, this trend mimics that of payables turnover. This means that Apple has done a good job of generally decreasing this number until is spiked to days from days in was not a comparatively good year for Apple involving inventory, but it still displayed strong fundamentals as of its most recent report. Profitability Ratios Ratios Formula Profit Margin Gross Margin Asset Turnover (times) Return on Assets Return on Equity

13 Profitability ratios are ratios used to look at how well a business is able to produce profits compared to the expenses and other costs it incurs over a specific time period. The profitability ratios we will be using are profit margin, gross margin, asset turnover, return on assets, and return on equity. There are some external factors that can have an effect on these ratios, such as seasonality, which states that earnings will be affected by the time of year in which they are measured. For example, department stores will notice a high increase in sales around Christmas time. Therefore, comparing quarterly ratios across a year could yield inconsistent results. However, this seasonality is similar from year to year, so these ratios at year s end even out. Profit margin is calculated simply by taking net income and dividing it by net sales. What this percentage is showing is how much of every dollar of sales a company actually retains. A higher profit margin percentage is always better for the company because it shows the company is keeping what it earns. For Apple, the profit margin percentage in 2009 was This means that for every dollar of sales Apple actually kept about 19 cents as income. The next year in 2010, the profit margin increased to Over the next two years, it continued this trend as it rose to and respectively. However, in 2013 the profit margin fell for the first time, dropping down to Overall, Apple still has an above average profit margin ratio, but they would like to regain the recent downturn that was seen in Gross margin is calculated by subtracting cost of goods sold from revenue, and then dividing this value by net sales. This ratio is somewhat similar to profit margin. Its value represents the total amount of net sales that the company keeps AFTER it pays all direct expenses associated with company products. Again, the higher this number is the better it is for the company. In 2009, Apple had a 40.1 gross margin. In the following year it dropped slightly to 39.4, but rebounded over the next two years to 40.5 and 43.9, respectively. However, in 2013 it dropped significantly from that 43.9 to just Again, Apple s gross margin percentage is still very good, but they would prefer that it at least maintained or increased in the coming years. Total asset turnover is calculated by taking net sales and dividing it by average total assets. Another way to look at this is that it is the amount of sales a company can generate per each dollar of assets it haves. As with the first two ratios, the higher this ratio generally is, the better. If this ratio is high, it is saying that the company is being efficient and getting a lot out of its assets. For Apple, in 2009 its asset turnover ratio was Over the next two years, it continued to increase, up to in 2010 and in However, in 2012 it fell back to and fell even further in 2013 to.892. These numbers are still higher than the industry average, but are not as impressive as some of Apple s other ratio measures. Return on assets suggests how profitable a company is in comparison to its total assets. It is calculated by taking net income divided by average total assets. In 2009, Apple had a return on assets percentage of This means that for every dollar of assets Apple has, it generates almost 20 cents of net income. Over the next three years, it steadily increased to in 2010, in 2011, and in However, as we have seen with 13

14 many of the previous ratios, this trend ended in 2013 when the return on assets took a dive all the way down to , which was lower than the 2009 value. Apple s return on asset values are very good, but the sharp downturn in the past year is slightly unsettling. Long Term Solvency Ratios Ratios Formula Liability to Equity Debt to Equity * * * * Interest Coverage * * * * Long-term solvency ratios are used to measure a company s ability to meet its debt and other obligations. Key solvency ratios include liability to equity, debt to equity, and interest coverage. Together, these three ratios form the backbone of our analysis for Apple s ability to remain functioning and solvent in the long run. Liability to equity is total liabilities divided by total equity and indicates the company s ability to meet all current and long-term liabilities. This compares to debt to equity, which measures the company s ability to pay its long term debts. Both ratios are an effective measure of a company s financial leveraging as compared to its total equity. While the former two ratios measure ability to meet outstanding liabilities, interest coverage is used to evaluate how burdened a company is by the interest payments on its outstanding debts. The first of these ratios in our table is total liabilities to total equity. Over the period that we analyzed from , Apple has seen a general rise in its total liabilities. In 2009, Apple began at a 0.501, this proceeded to grow to before temporarily dipping to and in In 2013, the number rebounded to Although Apple s ratios in this area indicate solid company performance, the slight upward trend indicates that liabilities are rising faster than total equity, raising the degree of financial leveraging that Apple has undertaken. With that said, investors should not be concerned as Apple holds over $100 billion in cash reserves. With regards to long-term debt, Apple held zero long term debts until While for some companies this could be cause for alarm, in this case it is a wise financial choice on Apple s part as they are using $17 billion in issued debt to partly finance an aggressive stock buyback program instead of using the cash reserves it has stored overseas. Even at an estimated 4 borrowing cost, this saves the company from having to pay 35 corporate income tax should it 14

15 choose to bring cash back into the US. As previously mentioned, Apple had no debt until 2013 and thus had no interest coverage ratio until 2013 and the interest incurred has no measurable effect on Apple s ability to cover its debts or interest payments due to its stockpile of cash. *Apple had no debt or interest expense until 2013, which is what the asterisk represents. Cash Flow Adequacy Ratios Ratios Formula Cash Flow Yield Cash Flows to Sales Cash Flows to Assets Free Cash Flow (millions) 36,102 38,068 32,929 15, The Cash Flow Adequacy ratios indicate a company s ability to cover all annual payments of long-term annual debt, reinvest in operating activities, and make distributions to owners. This is important to a company so that it may cover its debt as it takes on more and more debt to fund expansion or handle emergencies that the company may not have on hand or is financially viable to pay for with cash all at once. If a company accumulates too much debt and does not have the inflow of cash to support its long-term debt payments, dividend payout and reinvestments, then the company will have a difficult time paying off debts in the future. The cash flow adequacy ratios provide insight to investors and creditors into the company s ability to generate cash and ensure that cash is not in short supply, both of which are strong indicators of the company s overall health and longevity. Apple s cash flow yield remained between 1.2 and 1.45 from the year 2009 to Because this ratio was consistent throughout the 4 year span, it is fair to say that Apple has 15

16 proven that it can, and will, continue to generate cash flow from its income. It is worth noting that between 2009 and 2013 Apple was able to increase both net income and cash flows from operations by approximately fivefold. This shows that Apple s management is using its net income efficiently in a way that allows it to maintain a steady growth in cash flow from year to year. The difference between the cash yield ratio and the cash flows to sales ratio is that the cash yield ratio takes expenses into account, meaning that cash flows to sales represents the amount of Apple s operating revenue that is directly transformed into cash and is determined by the cash flows to sales ratio. Apple has experienced a slight decline in cash flows to sales ratio since 2011, falling by approximately 1 each year from 34 in 2011 to 31 in These ratios indicate that Apple s net sales are gradually outpacing its cash flows from operating activities. While the 31 in 2013 indicates a far more efficient use of sales revenue than the 24 in 2009, the recent trend indicates that the decline in the ratio may continue beyond 2013 as sales continue to outpace cash flows from operations. 31 still far exceeds the industry average and the issue here is that Apple had been using cash so efficiently that it would have been difficult to maintain at that 34 level for an extended period. Anywhere near 31 should still be considered impressive, regardless of trend indications. Apple s dividends increased by approximately $8,000 million between 2012 and 2013, which resulted in a $2,000 million decrease in the Free Cash Flows (FCF). Despite this decrease, Apple was still able to generate over $36 billion in cash from its operating activities. The recent decline in the Free Cash Flows is not a fair estimate of the company s ability to pursue activities that will enhance shareholder value. Between 2010 and 2013, the free cash flows had increased by $20,107 million. The fact that the company was still able to maintain $36 billion in free cash flows should be of particular interest to an investor. The first thing to consider is that dividends paid out to its shareholders have increased dramatically in the last year. The second thing to keep in the mind is that the $36 billion in free cash flows after expensing expenditures and dividends can be used to engage in opportunities that will eventually enhance shareholder value. 16

17 Market Strength Ratios Ratios Formula Earnings Per Share Price Earnings Per Share $40.03 $44.64 $28.05 $15.41 $ Dividends Yield Per Share** Within the market strength ratios category, we used three key indicators to assess the true value of Apple s stock as compared to its stock price. Earnings per share outstanding, Price to Earnings per share, and Dividend Yield per share were looked at. As a general note, for all calculations, our analysts used basic total shares outstanding. With regards to earnings per share, Apple stands out in the industry at around forty dollars in earnings per share outstanding, with only Google able to even come close to that number. Unfortunately for Apple, this analysis comes with a caveat. From the early 2000s until 2012, Apple saw explosive growth in earnings per share, but in 2013, the lack of new explosive products that had sustained those increases for the last decade brought reality to Apple and earnings per share decreased for the first time in recent years. As for price earnings per share, Apple has maintained a steady value, which we are comfortable with since it shows that Apple is not being overvalued in our opinion. With respect to dividends, Apple has not been a stock that pays valuable dividends compared to many other companies. In fact, the company never paid investors a dividend under the leadership of the late Steve Jobs, who opposed dividends. Under the leadership of Tim Cook, Apple has begun to pay modest dividends that increased from 2012 to 2013, but that is not enough to speculate where this trend will lead. 17

18 When analyzing Apple, it is important that we compare its financials to other competitors in the industry. This is essential because it provides us a comparison that we can use to measure Apple s financial situation since many ratio values will vary depending on the industry. Looking at competitors and industry averages for these values will give us a better understanding of how Apple is performing and where it sits in its industry. *Industry data obtained from Hoovers* 2013 Profitability A major measure of how a company is performing is profitability because it measures how efficiently the company is being run and how effective that company is in producing earnings in comparison to expenses and costs. After all, a company wants to make a profit, and these ratios are helpful in assessing the company s standing when compared to competitors in the industry since each industry has different values for each parameter. When looking at profit margin ratios, such as gross profit margin and gross margin, it becomes clear that Apple dominates the industry average and its competitors other than Google. Even though Google may have an advantage over Apple in this field, Apple still performs much better than its other competitors. For example, Apple s gross profit margin of 37.6 is lower than Google s of but is higher than the industry average of This means that Apple does an excellent job with its profit margins, which is reassuring for us because this demonstrates efficiency and effectiveness that is among the best in the industry. We also analyzed the profitability ratios that involve returns, which are return on equity and return on assets. A comparison of values shows that Apple far exceeds its competitors and the industry average in these areas. For instance, Apple s return on assets value is , while the next highest value is that of Google at and the industry average is These large differences show that Apple really does dominate the competition on making returns, which speaks once again to its efficiency. As for its return on equity, Apple shows a commanding lead on both its competitors and the industry. We find this to be of very high value because it shows that Apple generates a high amount of net income in comparison to its stockholder s equity, which is important for those looking to invest. Apple Hewlett-Packard Google Industry Average Gross Profit Margin Return on Equity Return on Assets Valuation 18

19 For this section, we analyzed Apple s price earnings per share in comparison to the industry because this would provide us with an understanding of Apple s stock price relative to its peers. A high price earnings per share means that there is expected growth in the future. Apple s value of is in line with the industry average of Google has the highest value among Apple s competitors at 31.06, which would mean that it is highly valued. Because Apple s P/E is not high, we believe that it is not over-valued. We feel comfortable with the fact that the value is relatively low since we also do not expect significant growth in the near future. Apple Hewlett-Packard Google Industry Average Price to Earnings Operations 19

20 These ratios are useful because they provide insight into a company s efficiency at turning sales into cash and assets into revenue. Another way to look at them is by using the values to determine how successful a company is at utilizing resources to produce sales. A point that sticks out the most with Apple is its effectiveness in managing inventory. Apple s inventory turnover ratio of is much higher than the industry average of Google competes with a value of 55.55, but Apple still possesses the best turnover. This means that Apple is the most effective company at moving inventory, which is very important for a company that relies on selling electronics. In addition, its low days sales in inventory value of is much lower than the industry average of This is a definite high point of Apple s operations, and we are very pleased with it. Apple also displays strength in its accounts receivable turnover ratio value. This is important because it shows that Apple can collect receivables. Its value of is much higher than the next-best value in Hewlett-Packard and is even higher than the industry average of Any company has to collect receivables to be successful, so it is a good sign that Apple is so good at it. Furthermore, a days sales uncollected analysis shows even more signs of strength in collecting receivables. Apple shows a low value of compared to the average of and Hewlett Packard s As for asset turnover, Apple is still effective in utilizing its assets, but it does not command as much of a lead in this area. Its value of.892 is still better than the industry average of.74, but it is pretty in line with its competitors. We would have liked a high value, but are not worried about a slightly lower comparative number. Apple Hewlett-Packard Google Industry Average Inventory Turnover Days Sales in Inventory Receivables Turnover Days Sales Uncollected Asset Turnover Financial 20

21 The financial ratio section deals primarily with assessing assets in comparison to liabilities, which is a measure of financial health and ability to remain financially viable. Google tends to lead in this area of financials, but Apple still shows a strength that is a good sign. Apple s current ratio of is good in comparison to an industry average of 1.29, but it fails in comparison to Google s Furthermore, Apple s acid test ratio of beats the average of.94 but is not strong in comparison to competitors. These values still show strength for Apple, but they also show that Apple is not in as good of a position compared to competitors when comparing assets to liabilities. Another measure is the debt to equity ratio, which is a measure of liabilities strength. Apple s. 137 is worse than Google s.06 but is also better than its other competitors and the industry value of.26. We find this encouraging because it shows that Apple is handling its liabilities well and will not be suffocated by them. A final parameter that we looked at as important is interest coverage. Apple s interest coverage is very good being at compared to the average of We find this to be very important because it shows that Apple is not burdened by debt, which is a good sign for its stability. Google also shows a high value of , but Apple is easily in the best position here. We consider this to be another high point of Apple because it can function without being suffocated by debt. Apple Hewlett-Packard Google Industry Average Current Ratio Acid Test Ratio Debt to Equity Ratio Interest Coverage N/A Growth 21

22 The final evaluation we made dealt with Apple s growth over the past twelve months and thirtysix months. We valued this information highly because it shows how Apple is doing in comparison to its past performances. We also looked at other competitors and the industry to see if any performance or lack thereof can be attributed to the state of the industry. The table below shows growth. We like that Apple s thirty-six month values are all above the industry average and its competitors, but we are concerned with how its twelve-month net income growth and EPS growth are negative. This makes us very nervous and is a reason for the recommendation that we will offer. 12-month Revenue Growth 12-month net income Growth 12-month EPS Growth 36-month Revenue Growth 36-month net income growth 36-month EPS growth Apple Hewlett-Packard Google Industry Average 9.20 (6.70) (0.23) (11.25) N/A (9.95) N/A 7.86 N/A (3.77) (16.43) (10.79) N/A After a careful examination of Apple's financial statements as well as past, current, and predicted performance our analysts feel that the stock is in a hold position. Overall, the strength of Apple as a company cannot be disputed and with its position at the top of the electronics industry, the company maintains a prestigious and lucrative position. A simple examination of net income and profit margins shows that Apple is well above the industry average. Liquidity is also excellent, showing that Apple is in a strong position to pay any debt that it has incurred and has only accrued long-term debt when it was beneficial to do so for tax purposes (explained above). Cash flows are very strong, with a high percentage of Apple's sales generating cash within acceptable time frames. Apple is also far outspending the industry on research and development, with appropriations over four billion dollars, potentially uncovering new trends and improving old ones, in consumer electronics. Furthermore, we find Apple s current P/E ratio is at a satisfactory level. It is right around industry average and is much lower than that of Apple s competitor Google (refer to chart below). We take Apple s low P/E as meaning that it is not currently overvalued and that it should be owned because its growth is better than the P/E shows. Finally, 22

23 Apple s earnings per share has been steadily increasing since 2008 (refer to chart below). This is important because it shows that the company is making more and more money, which is crucial to the stock price. Due to the positives noted above, it would seem logical to pitch a buy, however there are several caveats to this analysis. In the past several years, Apple has failed to live up to consumer expectations by introducing expected products and lacking breakthrough innovation despite spending record amounts on development. This lack of innovation is beginning to show in Apple's bottom line, with 2013 showing declines in performance in nearly every category for the first time in nearly a decade. Using the DuPont analysis, it is easy to see that Apple's Return-on-Equity has declined from 2012 to 2013 while leveraging and asset turnover have also decreased, signaling a lessening in the overall health of the company. Even during this period the stock price has continued to hold most of its value, with the exception of a correction in late 2012, in part due to an aggressive treasury stock buyback program holding the price above 500 dollars. This has led to what we feel is an inflated stock price that exceeds the actual investment potential of the company. Due to this, our analysts noted that Apple has become increasingly volatile after the departure of Steve Jobs as the company appears to have a leadership vacuum and may be lacking someone to drive the innovation. Some firms may recommend a buy, however we feel that this is highly speculative based upon whether or not Apple can continue its pattern of innovation without Jobs at the helm. So far, it appears that Apple may stagnate in the short-term; however, the overall strength of the company as well as its robust cash supply leads us to recommend a hold as opposed to a sell rating. *Views expressed are the opinions of WMSL Financial Services analysts. The Company stands behind the views of our analysts, but in no way insures the findings of this analysis or the information contained.* 23

24 "AAPL: Summary for Apple Inc.- Yahoo! Finance." Yahoo! Finance. N.p., n.d. Web. 04 Apr "Apple EPS Diluted (Quarterly):." YCharts. N.p., n.d. Web. 07 Apr Apple, Inc. (2013). Form 10-K Retrieved from Hoover s online database. Apple, Inc. (2013). Form 10-K Retrieved from Hoover s online database. Apple, Inc. (2013). Form 10-K Retrieved from Hoover s online database. Apple, Inc. (2013). Form 10-K Retrieved from Hoover s online database. 24

25 Apple, Inc. (2013). Form 10-K Retrieved from Hoover s online database. Apple, Inc. (2013). Form 10-K Retrieved from Hoover s online database. "Apple Inc.: NASDAQ:AAPL Quotes & News - Google Finance." Apple Inc.: NASDAQ:AAPL Quotes & News - Google Finance. N.p., n.d. Web. 01 Apr "Apple Inc. - Overview." Apple Inc. - Overview. N.p., n.d. Web. 07 Apr "Apple Incorporated." (AAPL) News. N.p., n.d. Web. 06 Apr "Apple Now Biggest-Ever U.S. Company." The Wall Street Journal. Dow Jones & Company, 20 Aug Web. 07 Apr "Apple P/E Ratio (Quarterly):." YCharts. N.p., n.d. Web. 07 Apr Hoover s, Inc. (2013). Apple. [company profile]. Retrieved April 5, 2014, from Hoover s database "Liquidity Ratios." Investopedia. N.p., n.d. Web. 02 Apr "Operating Ratios." Investopedia. N.p., n.d. Web. 03 Apr "Profitability Ratios." Investopedia. N.p., n.d. Web. 01 Apr