An Investment Analysis Of Apple Inc
[3] Thus the outlook of the US’s economy is significant important for the future of the company. This part will focus on the discussion of the country’s GDP growth and monthly CPI change to understand the future economic prospect.
The global and U.S. economies correlations between each other are very strong. In most of the cases, it is the U.S. economy is driving the global growth. Chart 2.3 is a US GDP annual percentage change; it shows that the US economy was suffering a continuous slow down since 2005. It is estimated by IMF that the US GDP growth in 2008 is only 0.5 percent, down 77.3% compared with 2007.
Source: Bureau of Economic Analysis (U.S. Department of Commerce), IMF
To make things even worse, the economists believe that the U.S. economy has entered into a recession period considering its fourth-quarter GDP growth of only 0.6 percent in the last year and an unnerving job loss in January, the biggest since 2003.[4] The reason for such slow down is not only because of the financial market crisis but also the growing inflation. From chart 2.4, it can be seen that the US CPI month percent change has increased from 4.3% in January 2008 to 5% in July this year.
Source: Bureau of Labour Statistics (U.S. Department of Labour)
In conclusion, it is reasonable to predict that the U.S. market will shrink under the shadow of a great recession. Such circumstances will make a mountainous negative influence on both computer sales and other investment which the company is about to produce this year.
2.3 Euro Area and UK Economy
The gather sales of Apple in Euro zone contain 22.74% of its total in 2007. Traditionally, Apple’s products are welcomed by most of the Europeans by its unique innovation and product features. The Euro Area GDP growth, however, is expected by IMF to go down to 1.4 percent in year 2008[5]. The reason for such decrease is believed to be mainly affected by the US economy since there is a immense tie between the two economies. Besides, the increasing inflation in these Europe countries is also affecting its growth.
UK is one of the major economies in the Euro zone and it is also a very distinguished market for Apple Inc. Like any other major European countries, Britain’s economy is closely related to the United States. The tiring, down of US economy in the recent years is already making Britain suffers from a low rate of growth. Besides, UK’s internal market’s demand is also decreasing. Studies found by IMF suggests that Britain’s GDP growth is expected to go down from 3.1 in 2007 to 1.6 in 2008 as it is showing in chart 2.5.
Source: IMF World Economic Outlook 2008, PP242
At the same time, the UK’s CPI has gone up sharply this year. Chart 2.6 shows that the CPI monthly percent change has increased from 2.2% at the beginning of this year to 3.8% in June. Along with the impact of global credit crisis, it is reported that the bursting of UK’s housing bubble has also caused many internal problem of its economy. According to Halifax, Britain’s housing price has dropped by 9 percent since August 2007.[6] Since the UK’s retail businesses are going down and consumer confidence is falling, it is difficult to image how consumers will be likely to spend for their recent iPod this year.
Source: Office for National Statistics (UK Statistics Authority)
2.4 Japanese Economy
Japan has only taken 5% of Apple’s 2007 total net revenues; it may have dinky influence on the company. Here the discussion on this country is exiguous since the country’s economy condition has been kept going worse for a long period of time. According to IMF, the Japanese GDP will continue to go down from 2.1 in 2007 to 1.4 in 2008.[7] Under the global economy influence and the domestic low consumption needs. The Japanese economy is still far from recover.
To Apple, the Japanese market, unlike any others, has a much more competitive market situation along with a reducing demand. The local company, such as Sony, has already launched similar products, such as carefully designed PC, portable music device and mobile phone, in compete with Apple. The company will be difficult to increase its sales in Japan this year.
2.6 Conclusion
The above macro economy analysis shows that the world economy is depressed and facing a tall recession in year 2008. These facts will lead consumers find themselves with less disposable or discretionary income which will eventually cause them not to employ worthy consumption on luxury products[8]. Companies such as Apple will be largely influenced by the reluctant consumption needs. However, Apple has better positioned itself in the market; the introduction of new iPhone with a relatively cheap price is reflecting a very good sales strategy to accelerate consumption. Apple has successfully sustained a better profit rate in the last three years despite global economy slow down. We beget it may continue to do so in this year. However, there is no company can always increase its profit while the national GDP is decreasing.
Chapter 3 Industry Analysis
3.1 Introduction
Apple has expanded its products range from computer to software, portable music scheme and mobile phone since it changed its name from Apple Computer Inc to Apple Inc. However, chart 3.1 shows that Apple’s Mac computer takes up 42% of the company’s 2007 net sales. This indicates that the computer hardware manufacture business is dominating Apple’s business.
Source: Apple 10K FY2007 Annual Relate PP 42
Further more, iPod is almost a monopoly in the portable music device market and iPhone only takes up 1% of the total net sales in 2007. For analyse purpose, the industry analysis share will be focused on the computer industry. Only companies which are doing computer business will be discussed in both the industry overview and Porter’s five analyses. It is believed that such narrow in analysing the company’s industry is more accurate and effective by the author.
3.2 Industry Overview
According to a technology research firm Gartner Inc, it forecasted that the PC sales will reach 297 million units in 2008 while the 2007 sales figure are 264 million units[9]. Despite the global economic recession, global PC sales growth is in a marvelous rate. Compared with last year, it is a 12.5% growth. The growth is believed to be a combination of improvements in both technology and design for the laptops, and the laptops are becoming the driving forces of PC sales, according to Market Watch.
However, the global computer industry’s competition is also very intensifying. According to another market research firm, IDC, the world’s top five PC vendors are including HP, Dell, Acer, Lenovo and Toshiba.[10] Although Apple did not step into either of the vast five, it has successfully gained a third place in the U.S. PC vendor market in the second quarter of 2008. From chart 3.2, it can be found that Apple’s market share is 8.5% in US. This result is even higher than two of the top five world players rated in 2007.
Source: ExtremeTech.com ‘Apple Climbs Into Third Place in U.S. PC Market’,
July 17, 2008
3.3 Porters’ Five Forces Analysis
The Five forces analysis can be used to identify the most essential aspects of competition in the consumer electronic industry; it was first developed by Michael Porter at the Harvard Business School (Porter 1980). It consists five parts of major forces to explain the structure of competition in an industry, which are the intensity of rivalry among existing firms, the threat of new entry, the threat of substitutes, the power of buyers, the power of suppliers.
3.3.1 Rivalry among existing firms
The PC and portable music player markets are two most important market segments for Apple Inc. These are all well developed and highly competitive markets. Firms enthusiastic in this market are all big names, such as Dell, HP Compaq, Gateway, and Apple. The competition has driven the PC ticket down which eventually hurt the profit of everyone in this market. However, Apple has sustained a better market position by continuing invest in R&D. Its name and innovative construct has long been attracting customers which helped Apple to gain a higher trace for its product.
Apple’s portable music player is facing very little competition since it is controlling the most innovative design and technology in its product. Their products are now almost dominating this market. It is reported that iPod and its related products take up 58 percent of market shares compared with Sony Walkman’s 23 percent market share even in the Japanese market.[11]
3.3.2 Threat of Modern Entrants
The personal computer market is a very well established market with very large companies in it, such as Dell, HP Compaq, and Lenovo. There are basically two considerable barriers for new entries which are extremely difficult to obtain. First, the begin up of such a company requires an enormous capital investment. The large economies of scale and price war in the personal computer market require new firms to hold a massive investment to keep itself active in comparing heed and technology strength with others. Second, the giant firms in the PC market are all having its own copyright for patents and technologies which made new entries difficult to follow.
The big names either protect them from others or asked the new entries to pay a copy right fee to do so. If they don’t want to buy it from the exiting firms, the company needs to invest in Research and Development to develop their own. However, such technology reach requires not only a great capital investment but also a long time period.
3.3.3 Threat of Substitute Products
Apple’s products are full of competition. Its computer and iPod player are a rapidly growing industry among the market. Companies like Lenovo, Thinkpad uses different series of its product to hide different kinds of needs towards customers. For example, the R Series of ThinkPad is for everyday computing, T series has a premier performance, X series has a Thinnest and lightest feature for business travellers.[12] Dell also specified its product for different user purpose, such as solutions for Home, Small & Medium Business, Sizable Business, Public Sector, Partners.[13] All this can be seen as a substitute of Apple’s computer products since it almost section the same feature with Apple’s product range.
However, Apple has sustained a better state by offering consumers a different operating system, OSX Operating Systems, while others rely on Microsoft Windows Operating Systems. The OSX Operating Systems is wholly owned by Apple. It means Apple can differ the software packages and overall functionality from the other companies. The unique feature of its product also helped Apple to obtain a greater valid from users. It enables Apple’s product stay in an innovative and brand conscious among various competitors. In the other face, such unique operating system has diminutive Apple with some other targeting consumers who are familiar with Microsoft’s Windows operating system. These customers may found it is unnecessary for them to give up a well established habit to follow another note modern system.
For the portable music market, Apple’s iPod, which is based on hard-disk, is inevitably facing a massive competition. There are many alternatives for consumers to choose, such as Sony’s mp3 and other flash memory featured is an alternative for iPod. However, Apple’s product has a better storage and design compared with the Sony’s mp3. Other portable music procedure such as radio, CD player is not in comparable with iPod, because iPod is the leading technology and brand in the current market. But these products are always cheap and easy to be found in the market while iPod is only available in some big town or over internet, which is quite limited to cover the majority of potential customers.
Since iPod is taking a big section of the portable music market, it can be concluded that it faces little competition compared with the computer piece. However, Apple may experience difficulties in keeping its unique feature in the market without a spacious price advantage in the future.
3.3.4 Bargaining Power of Buyer
Apple’s OSX Operating System is the only alternative operating systems available for spend if consumers want to avoid using Microsoft products. This enables Apple to nick the bargaining power of buyers, since there are no other options for the buyers if they prefer to use the products from Apple. At the same time, Apple had actually restrained itself from opening the system to other PC manufactures. It is still argued by some analyst that the reason for Apple not to be as big as Microsoft is mainly because they did not give the copyright of their operating systems to other firms.[14]
All the products of Apple have been retailed by many ways to the whole world market at the same time with almost an identical price. By adopting such marketing strategy, the number of products sold during the new products launch is always pretty high. For example, Apple had sold 270,000 units of the newly launched iPhone 3G in its first week.[15] It is estimated that Apple will sell 5.1 million units in its fiscal fourth quarter, according to Mike Abramsky, of RBC Capital Markets. The popularity of Apple’s products will effectively affect the buying volume of its products and leave very little bargaining power of buyer. Especially the Online store and dispute stores worldwide have consistently helped Apple to earn sale in an efficient time manner.
3.3.5 Bargaining Power of Suppliers
Apple has been obtaining supplies from a large number of vendors to assemble its products[16]. In most of the cases, Apple does not only use a single supplier but a number of them. For example, Apple’s computer storage devices including brands like Hitachi Global Storage Technologies, Western Digital, and Seagate. By having a verity of choices to decide which components to chose, Apple is able to negotiate the product more efficiently. This strategy will also enable Apple away from a sudden short of certain components.
However, some key components are always difficult to maintain if manufactures decided to produce the common products instead of the customized one. The Intel® microprocessors are an example of how Apple is trying to keep this customized supply.[17] Based on efficient communication with the vendor, Apple uses product introduction plans, strategic inventories, coordinated product introductions, internal and external manufacturing schedules and levels to ensure the availability of such components.[18] It has been proved to be an efficient method for both sides. By customizing key components, Apple’s products are more flexible in terms of size and weight which gives them a better position in the market place.
3.4 Conclusion
There are certain limitations for five forces analysis. It can not give a certain prediction of sure industry but a record of it. Because the assumption is focusing mainly on computer industry, products like iPhone are not considered during the analysis. This might be giving an inaccurate explain of the competition picture of Apple Inc.
Nevertheless, the above analysis showed that the computer industry is very competitive. Besides, due to the expect recession of world economy and inflation across the world, the performance of the business can be worse this year. Both of the bargaining power of buyers and suppliers are comparatively strong despite Apple’s inconvenience to increase its bargaining power. The constant price war and quick innovation in the personal computer industry has made companies become more and more difficult to get abnormal earnings. Apple is not likely to keep its high profits due to this constrain in the advance future.
Chapter 4 Brand Valuation
4.1 Introduction
“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you”[19]
John Stewart (Former CEO of Quaker)
Trace value is an intellectual property that every business holds. It is regarded almost the same as the value of plant and machinery today. However, the values of such ‘intangible assets’ are very unstable compared with the above normal physically existed. Today, there are many arguments on the impact of brand valuation to a High-Tech firm’s value. Apple’s imagination, innovation and differentiation brand name and other trade marks have produced far more value for the company. According to chart 4.1, Apple’s brand value has increased from 9,130 million US dollars to 11,037 US million dollars, and has been listed in the top 100 price name companies in 2007 by Interbrand. It is a 21% increase in such intangible assets to Apple Inc.
Chart 4.1 Apple’s Imprint Value
Source: Interbrand, Best Global Brands 2007
At the same time, Apple’s intangible asset has more than doubled from year 2006 to 2007 according to their balance sheet. Thus it is valuable to understand the valuation process of such brand name. This literature review is dilapidated to get to know the various ways to measure a firm’s brand value in order to get a clearer represent of Apple’s trace value.
4.2 Literature Review
4.2.1 Background of Notice Valuation
Although impress valuation has been studied by John Murphy since 1989, but there is relatively few studies can be found in this area. Because the valuation of brand is not an exact science, it usually involves some exercising of so called professional judgment. The judgment is dependent on three very separate areas, including the law, accountancy and finance, and Marketing. Ideally, According to John Murphy (1989), any brand valuation methodology must have fervent the following three concepts:
* “follow fundamental accounting concepts
* allow for revaluation on a regular basis
* be estimable for both own-developed and acquired brands”[20]
The most celebrated brand valuation methodology till now was developed by a brand consultancy firm, named Interbrand. The company had published the first of its study for brands valuation in 1990; the book is named
World’s Top Brands. Interbrand’s scrutinize on brand valuation is very popular in the US, Europe and Australia. It is often applied when dealing with mergers and acquisitions, brand strategy development and brand licensing, fund-raising in these geographic areas.[21]
Interbrand believes that the value of a brand is mainly dependent on its economic assist. They use five steps to approach the intrinsic value of a brand. As it can be found on graph 4.2, this valuation methodology is including segmentation, financial analysis, demand analysis, price strength analysis, and the calculation of net present value of the brand earnings respectively.[22]
Graph 4.2 Interbrand’s Tag Valuation Steps
Sources: www.interbrand.com
The segmentation of the brand step is the first step, it is to put the sign into a product category and then geographically separate the product by different features. Graph 4.3 shows an example of how brand segmentation works. During the step in financial analysis, the map is focusing on the brand earning and uses Economic Value Added (EVA)[23] to determine it. The role of brand index (RBI)[24] and Brand Strength Score (BSS) [25]will then be calculated in the following two steps. Based on a five years earning forecast, the final NPV value will be calculated by assuming a discount factor. An example can be found in appendix 3. This final value will show the intrinsic value of a brand.
Graph 4.3 Brand Segmentation
Sources: www.interbrand.com
Generally speaking, there are three methods in valuing an ‘intangible asset’, which is including cost, earnings and market advance. The Interbrand’s valuation methodology can be considered as an earning arrive in valuing notice names. Economically, the value of a sign name or trade sign would be related to the loss in profit when such name is not allowed to be in spend for the current holder.[26] This method can be considered as a cost based method to value a note. Market value of a brand is through reference to market transactions involving similar brand names.[27]
4.2.2 Are Brand Valuation Matter When Valuing High-Tech Companies?
High-Tech companies often have a higher value for its designate name, such as Microsoft, Apple and Dell. These are all among the top 100 brand name of 2007 according to Interbrand’s report. A proper valuation model is important to understand why the values of such companies are so high.
The Interbrand’s valuation methodology is the most practical one as it has already adopted by industries. It measures the impress by its earning ability rather than a pure assumption. As long as the brand and trade marks are providing an extra income to the company, it is reasonable to recognize a value on the price.
However, many companies are quite reluctant while listing their brand values to their balance sheet. Even more, most of the accounting regulations in the world does not recognize brand name and trade marks as an asset in the balance sheet. Another reason is due to the unstable of brand value. For example, an air service company’s brand value can be simply destroyed by one single air atomize.
4.3 Conclusion
Although a company’s brand value can be measured according to the above mentioned three methods. There are mild some obstacles in these brand valuation. The most distinct one is that it has quite different results when applying with different valuation methods.[28] Second, all of the measurements are based on some assumptions stated by those professional rather than industry standards. For example, the Interbrand’s valuation is dependent on a assumption that the company will grow forever with a ratio sometimes even higher than the national GDP growth. Thrid, stamp value is a very unstable value, once the products of the company are found unhealthy to human beings, like the iPod case (mentioned in the company analysis), the value of the price and trade marks will become a nightmare for business.
Chapter 5 Company Analysis
5.1 Introduction
This chapter is a business study of Apple Inc itself. It will be started by a brief discussion of the company’s corporate governance and business strategy. Then, the PEST and SWOT analysis will be added to derive an opinion of the company’s business environment and future growing opportunity. In the last part, Apple’s financial situation, such as profitability, cash flow management, investment ratio will be discussed.
5.2 Corporate Governance
According from Apple’s webpage, the corporate governance fragment, Apple said, it conducts its business with ethically, honestly manner and in full compliance with all laws and regulations.[29] Apple requires not only all the member of its staff but also the business partner it deals with to have a high ethical standards. This business attitude is considered to be a key component to the success of Apple Inc.
There are currently seven members in the company’s Board of Directors. Their paramount duty is to oversee the CEO and other senior management staff’s operation. The Board of Directors consists of three committees, which are including Nominating and Governance Committee, Audit and Finance Committee, Compensation Committee. The existing of these three committees will help to ensure the company’s daily management. All of its members have met with the criteria for independence established by the NASDAQ Stock market. This is quite typical as a public listed corporation in the United States. It can be found from the company’s competitors who fraction some identical committees.
Michael Bush (2008) has wrote that the connection between Apple and Steve Jobs is unlike any other brand and CEO relationship in the US or even the whole world, Apple’s success is mainly contributed from this man’s wisdom and technological innovation.[30] Steven P. Jobs is one of the directors and Chief Executive Officer of the company. He is also a co-founder of Apple Inc. Mr. Jobs re-joined Apple in 1997 and his continued leadership is considered to be critical to Apple. Since he re-joined Apple, Mr. Jobs entire compensation is only $1 annual salary. However, Apple has awarded him with a grant of 5 million shares of restricted stock in March 2003 and an aircraft as an executive bonus in 1999. Apple’s Mix of Equity, Cash Incentives and Salary compensation policy is effective in attracting entrepreneurial, creative executives and promoting the management’s long-term commitment to Apple.
5.3 Business Strategy Analysis
5.3.1 General Business Analysis
Apple is a leading company in the personal computer industry. It is the only company which controls both the operating system and hardware of personal computer. Now it has expanded its market to not only personal computing, portable digital music but also mobile communication equipment and its related computer software. This business strategy has enabled Apple to have greater economies of scale to compete with other companies. William J. Baumol, Alan S. Blinder (2005) said in its economics book that the production relationships with economies of scale lead to long-run average cost curves that decline as output expands.[31] Apple has been constantly invested in research and development to deliver its unique innovative products and technologies with a rapid update.
The company is aimed to bring the best available digital life to students, educators, creative professionals, business, government agencies, and consumers.[32] Digital lifestyle is a new concept built just after computer came into our society. It brings an ease and comfort lifestyle to consumers.[33] Apple sells its product via several distribution methods, including but not limited to retail stores, online stores and exclusive contractors worldwide. The company has been increasing the number of its retail stores year on year worldwide. According sources from its company’s webpage, it has over 200 retail stores worldwide now. All of these are located in the traffic centre and give Apple a greater image to publics. It believes that such direct contact with targeted customers is an efficient way to communicate with.
The author also paid a visit to one of Apple’s Stores in Edinburgh. Unlike other computer store, Apple’s store enable a greater function to consumers, it brings not only the real product but also the all the necessary function to its potential customers. For example, the author has tried to watch Youtube[34] from iPhone in Apple’s Edinburgh store while others do not normally enable internet function with its products in stores. The author believes such experience helped him to finally purchase one of their products in the store.
5.3.2 Competitive Business Analysis
Apple’s competitive strategy is, however, not focused on the cost-leadership as most of its competitors are all trying to reduce both the cost and price. The company paid more attention on the differentiation strategy since the market is tubby of identical products. Its unique operating system, Mac OS X, accompanied with powerful graphics and audio technologies, plus the customized components, it enables Apple to give its customers a completely different experience compared with other low-cost computer.
More important, Apple has created itself with an image as the industry leader in technology innovation, and had technology fans all over the world. The name of its brand, a multi-colour apple logo, has became an unmistakable icon and famous for its innovative products and popular designs. Further more, the recent introduced mobile device, iPhone, is believed to be the next generation of its kind. This is an example of how innovation changed the way business organized. All the other companies are all seem busy to catch up with the path of Apple.
5.4 PEST Analysis
5.4.1 Introduction
With the help of PEST analysis, it is possible to gain an understanding of Apple’s business potential, future market situation and the direction of its operation. The political, economic, social and technological factors are four components of PEST analysis. Considering the PEST analysis is powerful and covering lots of factors in identifying SWOT factors, the SWOT analysis will be simplified in the next part to show a graph recount of the list of factors involved in both of the above analysis.
5.4.2 Political Factors
Apple’s business operation is currently performed all over the world. According to Chart 2.2 (it can be found from page 8 of this dissertation), there are around 52% of the company’s net sales in 2007 coming from countries outside America.[35] War, terrorism, geopolitical uncertainties, public health issues may affect the company’s business greatly. All these events are far beyond the company’s ability to control.
Further more, Apple has outsourced its components, product manufacturing, transportation and logistics management to many third-party manufactures to lower operating costs. Many of these third-party manufactures are located outside the U.S.A. For example, the final assembly of the company’s products is being performed in countries such as Cork, Ireland, Korea, China and Czech Republic.[36] The manufacturing or logistics in these countries might be interrupted by political events. Once it is delayed by such political events, Apple may not be able to deliver its products to its customers on time. Such events will damage the credit image of the company to both consumers and retailers.
5.4.3 Economic Factors
The overall global economy outlook is not as good for this and the following. The raise of oil and food prices has lead inflation to the world economy while the consumers’ income has not been much reduced. Since consumers are also facing a greater risk of being unemployed, it will push them to exhaust less in consuming luxuries goods, like update their current computer or to buy a current iPhone. This will have a quite big influence on Apple’s retail business.
The exchange rate between dollars and other currencies like euro and pounds sterling has fallen sharply since the credit crunch and the housing market problem in the US. The following chart 5.1 tells the weakening of the dollars against the euro as of 4-July-2008.
Chart 5.1: USD to EUR
Source: yahoo.com
Considering the US economy will continue going down this year, the exchange rate might be falling further down. However, Apple has used foreign exchange forward and option positions to hedge the currency movement’s risk. The forward and option position means Apple has purchased its foreign currency in a fixed price well ahead they actually receive such income. The adverse effect of the exchange movements can be minimized by such financial instruments. Indeed, the continual depreciation of the US currency had increased Apple’s revenue and other receivables in the overseas market so far.
5.4.4 Social Factors
Health safety and environmental protection are becoming more and more an important issue in countries which the company is operating its business. A variety of regulations and laws may adversely affect the company’s financial condition and operating results by requiring a great disposal or recycling of Apple’s products. Particularly, there are now various countries within Europe and Asia, certain Canadian provinces and clear states within the U.S adopting such regulations to against companies like Apple Inc.[37] Certain products of the company is actually face health issues because of the invent scrape. It is reported that the improper expend of iPod may lead to hearing loss for users.[38]
5.4.5Technology Factors
The market for PC, portable music player, mobile phone and other consumer electronic products are subject to not only huge competition but also fast technological changes. The short product life, frequent introduction of new products and the continual improvement in product performance and design requires the company to continue invest in the research and development in order to stay in the top of the industry. Apple’s control over the entire production procedures of personal computer and the continual innovation on iPod and iPhone is a clear advantage over its competitors. Others have to simply follow its path. In the other hands, the increasing cost on R&D causes Apple to spend its capital reserve compared with its competitors. For example, Dell uses Microsoft’s operating system in all of its products while Apple installs its own brand operating system. But as a leading company in the industry, it might be worth to keep its advantage in such cases.
5.5 SWOT Analysis[39]
The SWOT analysis is simplified in this table and details of each discussion can be found from 5.4 PEST analysis.
Strengths
- Customer Loyalties
- Innovation
- Product Diversification and Differentiation
- Current Mac OS X operating system
- World market capacity
Weakness
- Awful Product Quality Control
- High Price
- Lack of market consideration when launching new product
- Zero Dividends Policy
Opportunities
- Novel stake in the mobile phone industry
- Entry to the emerging economy
Threat
- Strong competition in the technology market
- Substitute products are widely available in the market
5.6 Financial Analysis
5.6.1 Capital Structure and Liquidity Analysis
There are 882 million shares outstanding for Apple Inc, the majority of the outstanding shares are owned by institutional investors, which takes up 65% of the total. Large institution ownership helps the company to maintain a smaller risk of being taken over, at least in a short run basis. It also means the company will be continue growing without fare for stock market change, as these big institutions don’t usually sell their stocks once the market goes down, and they are always being referred to long term investors.
Apple’s debt to equity ratio is being kept zero in the most recent three years. Debt to equity ratio is the percentage of the proportion of all borrowing, such as long-term loan, bank overdrafts to total capital employed or the amount of equity, it also known as gearing ratio.[40] The zero rate of such ratio means that the company prefers to use its own money instead of borrowing to invest in its business. Thus the company’s interest coverage is also zero as it is shown in table 5.2. Interest coverage is an important ratio to measure Apple’s ability to meet required interest obligations.[41] The zero rate of its kind has minimized the risk in borrowing a high debt to finance its business, but the company may lose the advantage of financial leverage.[42] Alternatively, the zero gearing ratios or debt to equity ratio can help the company to net long term debt with more flexibility in the future. Zero long term debt also means the company has a solid financial reserve to facilitate its risk. As it is shown in table 5.2, Apple’s current ratio and hastily ratio are kept higher than two in the most recent three years. Thus the company is considered to have a solid short-term financial strength. It is reasonable to occupy that Apple’s ability to meet its financial obligation is high and it can easily find debt to finance its business with, probably a lower borrowing cost.
Table 5.2 Financial Health
Year:
2005
2006
2007
Financial Strength
Gearing Ratio
0.00
0.00
0.00
Interest Coverage
0.00
0.00
0.00
Current Ratio
2.96
2.25
2.36
Quick Ratio
2.91
2.21
2.34
Source: Apple Inc FY 10K Annual Report
5.6.2 Cash Flow Analysis
It can be found from the chart 5.3 that Apple’s net sales have been continuously increasing in the last three years. However, the revenue of this company is increasing in a decreasing rate, as it is shown in table 5.6; such growth rate has decreased from 38.7% in 2006 to 24.3% in 2007 according statistics from Apple’s financial represent.
Source: Apple Inc 2007 10K FY Annual Report PP 56
At the same time, Apple’s net income has increased from 1,328 million USD in 2005 to 3,496 million USD in 2007. Chart 5.4 shows that the net income is more than doubled in just three years. Moreover, the rate of increase of such net income is 75.8% in between 2006 and 2007. The increased net income is largely contributed by a good cash management skill since the company is suffering from a continual slowing rate of sales growth
Source: Apple Inc 2007 10K FY Annual Represent PP 56
According to table 5.5, Apple’s cash and cash equivalents growth, end of each year, is fairly stable. Despite a negative results from investing activities, both of Apple’s cash generated by operating activities and financing activities have more than doubled. More than half of Apple’s changes in operating activities are contributed by changes in operating assets and liabilities while the other half is from increased net income.
Table 5.5 Apple’s Cash Flow Activities (USD in Million)
Year:
2005
2006
2007
Cash generated by operating activities
Cash generated by investing activities
Cash generated by financing activities
Cash and cash equivalents, end of the year
Source: Apple Inc 2007 10K FY Annual Characterize PP58
As it is shown in Apple’s consolidated cash flow statements in 2007, the most significant change is in purchasing assets; such activity’s cash flow has increased from a negative 1,040 million USD in 2006 to a positive 81 million in 2007. Most of the reason in explaining the increased cash creep in financing activities is the continual excess tax benefits from stock-based compensation and fewer repurchases of common stock compared with 2006. The company’s stock bonus paid to its management is an indispensable factor here.
Since Apple is an aggressive company in producing leading technology in the IT industry. Apple’s last year’s investment in purchases of short-term investments and some payment for acquisition of intangible assets are both largely increased. The growth in such investment leads the cash generated by investing activities made a loss of total 3,249 million USD in 2007.
Despite the increasing investment for technology and other intangible assets, Apple has maintained a continuing increase of cash and cash equivalents at the end of every year. This is quite helpful in keeping a superb financial health of this company. Because the zero gearing ratio and high current ratio has kept the company away from liquidity risk and sufficient fund left in every year is obedient for further investment needs. This financial management strategy has enabled the company a greater ability in investing new technology and borrowing debt as well.
5.6.3 Key Financial Ratio Analysis
The revenue growth of Apple has been increasing in a decreasing rate since it hits a 10 years high in 2005, dropped to 24.3% in 2007. However, the company’s 5-Year annual average sales growth rate is calm as high as 33.12% while the industry is only 28.13%. Table 5.6 shows Apple’s gross margin has increased from 29.0% in 2006 to 34.0% in 2007, it is reasonable to expect the company’s sales to be increased in this year. Indeed, the latest financial quarter shown that the company has achieved 42.7% of sales growth while the industry only did 34.90% in the same period. This is believed to be resulted from the surging Macintosh revenues.[43] The introduction of iPhone 3G in July this year will also help sales to grow in the remaining financial periods.
Table 5.6 Profitability and Management Efficiency
Year:
2005
2006
2007
5 Yr.Avg
5 Yr.Avg (Industry)
Management Effectiveness
Return on Equity (%)
17.9
19.9
24.1 ↑
19.84
10.90
Return on Assets (%)
11.5
11.6
13.8 ↑
12.03
5.82
Growth Rates
Sales Growth (%)
68.3
38.7
24.3 ↓
33.12
11.23
Growth Margin (%)
29.0
29.0
34.0 ↑
30.33
29.48
Net Profit Margin (%)
9.5
10.3
14.6 ↑
9.96
4.80
Source: Thomson Reuters
Further more, Apple’s management efficiency has slightly improved in the last three years, as it is shown in table 5.3, both of the ROE and ROA has increased to a new high. Table 5.3 also suggests that the five year average industry management effectiveness figures are only half of what Apple has made.
Table 5.7 shows that both of Apple’s P/E (price to earning) ratio and EPS (earning per share) have done a very good result in 2007 compared with its major competitors. The price earning ratio for Apple is 50.5 while the same earning on S&P 500 is only 16.5. Apple’s P/E ratio is also higher than the major competitor, such as HP and Dell, which can be found from table 5.4. The company’s earning per share is also higher than the competitors did in 2007. High P/E and EPS ratio might indicate Apple’s stock return will be better compared with others.
Table 5.7 Valuation Ratio
Year:
2005
2006
2007
Apple Inc
[46]
4.13%
Cost of Equity (5 Year Avg. Industry)[47]
10.90%
Market Premium
6.77%
Beta (Bloomberg)
1.11081
Cost of Equity/WACC
11.65%
Source: Bloomberg.com
Formula 6.2
Cost of Equity=Risk Free Rate + Beta × Market Premium[48]
6.2.1 Limitations of DCF Model
There are certain limitations on the result of DCF model. The model is based on several key assumptions, such as the cost of equity, beta, market rate of return and the future growth rate. These ratios are all pre-determined in an industry average basis. It may execute different results by changing the value of the assumptions. Second, the model ignores the potential risk associate with the company once they failed to accomplish such results or even over perform in the future earning. Thus the result of this model may be imprecise under these circumstances.
6.3 P/E Multiple Model
Price earning multiple business valuation models can provide a benchmark for business valuation. As table 6.3 indicated, The P/E multiple is from YAHOO technology industry average PE ratio, EPS was calculated by the estimated net income of 2008 financial year dividing the number of shares showed in Apple’s most unique financial report. The estimated share value is equal to the industry average PE ratio multiplied by the estimated earning per share.
Table 6.3 P/E Multiple Model
P/E Multiple Model
P/E Multiple (Industry Avg.)
19.49
885.875706
Fraction Value
US$96.12
Source: yahoo.com
According to the formula 6.4, Apple’s target share value is equal to USD 96.12 while its current share price is USD 162.12 (as of 25/07/2008). This result shows that Apple’s present share sign might be over valued based on P/E multiple model.
Formula 6.4
Allotment Value=P/E Multiple × Estimated EPS[49]
6.3.1 Limitations on P/E Multiple Model
There are two important factors in this model were being estimated, including PE multiple and earning per share. The estimated EPS was calculated by dividing the 2008 estimated net income with total shares outstanding. Both of the variables in formula 6.4 might be imprecise since it is based on a series of assumption which can be found in appendix 1. Investors should beware that the price arrived by this model is only marvelous for being an additional consideration of the previous model.
6.4 Important factors which may influence the results of the above calculated
Although this dissertation does not include much discussion on the mobile industry, and Apple’s iPhone business section is only taking a small scale of Apple’s overall sales performance in 2007, the new iPhone 3G product’s sales performance is quite grand when it is launched this year. There can be a significant change in Apple’s overall revenue based on iPhone 3G’s sales results and share brand can be significantly increased in this case. While there are a lot of expectations over iPhone’s business results, it also should be noted that the product has several complaints. The new iPhone 3G does not seem to fulfil its promised performance and network connectivity expectations.[50]
Chapter 7 Conclusion and Recommendation
7.1 Introduction
According to the investment analysis of Apple Inc, it is very risky to invest or hold Apple’s shares. Both of the discount cash pace and P/E multiple models have proved that the company is overvalued by the market. Further more, the US economy is running into a recession period. Such slow down will not be changed in year 2008.
The technical analysis is also suggesting that Apple’s stock price will go down. As chart 7.1 indicated, Apple’s most unique stock effect and the ten weeks moving average price are both moving like a double top pattern.
Chart 7.1 Apple’s Stock Mark Change
Price as of July 25, 2008 USD 162.12
Source: yahoo.com
This is a very typical technical pattern which suggesting the price will soon move down by creating an “M” pattern. The 30 week appealing average price, as shown in chart 7.1 is also suggesting that the price has kept itself for the same trend for more than two months.
Chart 7.2 shows that both the S&P500 and Apple’s stock price are moving in a downward trend. Based on the above analysis and the evidence collected in the whole witness, the final recommendation on this company is to SELL!
Chart 7.2 Apple’s two years stock price compared with the S&P 500
Source: yahoo.com
7.2 Limitations of the Study
It is always difficult to tell what will happen exactly in the future. Although a comprehensive eye has been done on this company, there are still some limitations in it, such as time constraints on the research and the unavoidable bias estimate of the model itself. Thus it is important to know each valuation model or fundamental model’s advantage and disadvantage, which will be clearly stated in each chapter. Readers should then be aware of the study results are actually based on many assumptions, for example, the cost of equity in analysis the future share price of the company is an estimate using average industry cost of equity ratio.
Appendices
Appendix 1
Apple Inc
Estimation USD in Million
Fiscal Years Ending 9/30
13931
19315
24006
31207.8
37449.36
43066.76
49526.78
56955.8
EBIT
Operating Profit Margin
13.03%
14.59%
20.86%
20%
15%
15%
15%
15%
480
829
1512
1872.468
1685.221
1938.004
2228.705
2563.011
26.45%
29.42%
30.19%
30%
30%
30%
30%
30%
2008E
2009E
2010E
2011E
2012E
Terminal
DCF Model
Free Cash Flow
4369.092
3932.183
4522.01
5200.312
5980.359
5980.36
PV (Free Cash Flow)
3913.20
3154.40
3249.04
3346.53
3446.94
119607.17
Total
136717.2795
Shares Outstanding
Source: www.interbrand.com
Bibliography
Apple’s Website, News Piece ‘
Apple to Use Intel Microprocessors Beginning in 2006′:
http://www.apple.com/pr/library/2005/jun/06intel.html
Apple Inc
10K 2007 Annual Report
Apple’s Corporate Web Page: www.apple.com 25 July, 2008
Abratt, Russell, Bick, Geoffrey (2003), ‘Valuing Brands and Brand Equity: Methods and Processes’ Journal of Applied Management and Entrepreneurship
Business week, ‘
Economists say UK economy in trouble’, July 15, 2008
Brad Miser (2002), Mac OS X and the Digital Lifestyle, Thomson Course Technology PP268
Catherine Tremblay, (2008) ‘A How-To Guide to Assessing Brand Value’, brandchannel.com
Dell Corporate Website: http://www.dell.com/ 25 July, 2008
David Logan Scott (2003), ‘Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investors’, Houghton Mifflin Reference Books PP192
Financial Times (London, England) Thursday London Edition2 “
Macs surge shields Apple from recession fears” April 24, 2008
Graham Mott (2008), ‘Accounting for Non-Accountants: A Manual for Managers and Students’, Kogan Page Polishers PP102
Geoffrey A. Hirt, Stanley B. Block (2004), ‘Managing Investments’, Mc Graw-Hill Professional, PP149
Interbrand www.interbrand.com 25 July, 2008
IMF,
World Economic Outlook, APR 08, PP241
John McCormick (2007), Cio Zone, ‘
The Top 5 PC Vendors For 2007′, http://www.ciozone.com/index.php/Server-Technology-Zone/The-Top-5-PC-Vendors-For-2007.html
Judy Mottl, (2008), ‘iPhone Lawsuit: Woes Ahead for Apple, Carriers? ‘, Internetnews.com
John Murphy (1989), Brand Valuation, Establishing a true and fair view, Hutchinson Business Books, PP32
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Market Watch: ‘
Gartner raises 2008 outlook for PC sales’ http://www.marketwatch.com/
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Not Made In Japan; once upon a time, the country was a leader in technology. Now it’s struggling to find its place in the digital age. Can an entrenched corporate culture change? ‘ February 25, 2008 U.S. Edition
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Simon Benninga, Benjamin Czaczkes (2000), ‘Financial Modeling’, MIT Press PP35
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No need for Slit wrists, it’s objective a cycle’, August 03, 2008 Business Times Edition
Nasdaq Finance, Nasdaq.com 25 July, 2008
The Econommic Times, ‘
iPods leading to a new generation of deaf young adults’, http://economictimes.indiatimes.com/
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Analysis and Evaluation: Analysis And Evaluation”, Butterworth-Heinemann, PP55
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[1] From Reuters.com
[2] IMF, World Economic Outlook, APR 08, P241
[3] Apple Inc 10K 2007 Annual Report PP42
[4] THE KOREA HERALD,
‘Recoupling’ Could slither down global economy’ February 22, 2008 Friday
[5] IMF, World Economic Outlook, APR 08, P241
[6] Businessweek, ‘Economists say UK economy in trouble’, July 15, 2008
[7] IMF, World Economic Outlook, APR 08, P241
[8] Sunday Times (South Africa) ‘No need for Slit wrists, it’s just a cycle’, August 03, 2008 Business Times Edition
[9] Market Watch: ‘Gartner raises 2008 outlook for PC sales’ http://www.marketwatch.com/
[10] From: http://www.ciozone.com ‘The Top 5 PC Vendors For 2007′,
[11] Newsweek, ‘Not Made In Japan; once upon a time, the country was a leader in technology. Now it’s struggling to score its place in the digital age. Can an entrenched corporate culture change? February 25, 2008 U.S. Edition
[12] Lenovo Website: http://www.pc.ibm.com/uk/thinkpad/
[13] Dell Website: http://www1.euro.dell.com/content/default.aspx? c=uk&l=en&s=gen
[14] Matt Haig (2006),
Brand Royalty: How the World’s Top 100 Brands Thrive $ Survie, Kogan Page Publisher, PP107-112
[15] Market Watch, ‘More excitement greets Apple’s new iPhone’, July 11, 2008 Friday
[16] Apple’s 10K FY07 PP 11
[17] Apple’s Website, News Portion ‘Apple to Use Intel Microprocessors Beginning in 2006′: http://www.apple.com/pr/library/2005/jun/06intel.html
[18] Op. cit PP 11
[19] Wendy Lomax, Adam Raman (2006), ‘Analysis and Evaluation: Analysis And Evaluation”, Btterworth-Heinemann, PP55
[20] John Murphy (1989),
Brand Valuation, Establishing a true and comely view, Hutchinson Business Books, PP32
[21] From www.interbrand.com
[22] From www.interbrand.com, Sign Related Services, The Key to unlock the benefits from your brand assets
[23] Economic Value Added or EVA is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital.
[24] The role of brand index or RBI is multiplied with the EVA, yields the heed earnings
[25] Brand Strength Score or BSS explains how strong the effect is compared with its competitors on the basis of seven factors (i.e. market, stability, mark leadership, trend, brand support, diversification, and protection)
[26] Jeffrey A. Dubin (2006) ‘
Valuing intangible assets with a nested logit market allotment model’ PP 24
[27] Catherine Tremblay, (2008) ‘
A How-To Guide to Assessing Brand Value’, brandchannel.com
[28] Abratt, Russell, Bick, Geoffrey (2003), ‘
Valuing Brands and Brand Equity: Methods and Processes’ Journal of Applied Management and Entrepreneurship PP2
[29] From Apple’s Corporate Web Page: www.apple.com
[30] Michael Bush, ‘
Why Apple must tell its story; With fortunes so tied to Jobs, marketer needs to lay out succession plan’, from Advertising Age, July 28, 2008
[31] William J. Baumol, Alan S. Blinder (2005),
Economics: Principles and Policy, Thomson South-Western, PP 135
[32] From Apple’s website, company introduction, www.apple.com
[33] Brad Miser (2002),
Mac OS X and the Digital Lifestyle, Thomson Course Technology PP268
[34] Youtube is a online video sharing website, detail can be found from youtube.com
[35] Apple 10k FY: PP 12
[36] opt cit PP 17
[37] Apple 10K FY07 PP23
[38] The Econommic Times, ‘iPods leading to a new generation of deaf young adults’, http://economictimes.indiatimes.com/
[39] SWOT analysis is primitive to resolve a company’s ability to compete against other businesses that sell similar products or services in the same marketplace and to the same target customers.
[40] Graham Mott (2008), ‘
Accounting for Non-Accountants: A Manual for Managers and Students’, Kogan Page Polishers PP102
[41] David Logan Scott (2003), ‘
Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investors’, Houghton Mifflin Reference Books PP192
[42] Financial leverage is the extent to which a company finances the acquisition of its assets by means of debt: that is, a company that borrows money to acquire assets engages financial leverage.
[43] Financial Times (London, England) April 24, 2008 Thursday London Edition2 “Macs surge shields Apple from recession fears”
[44] TTM=Trailing 12 Months
[45] Appendix 2
[46] U.S. Department of Treasury, http://www.ustreas.gov/, 10 Year Treasury Bond Rate, July 25, 2008
[47] From Yahoo Finance www.yahoo.com
[48] Simon Benninga, Benjamin Czaczkes (2000), ‘
Financial Modeling’, MIT Press PP35
[49] Geoffrey A. Hirt, Stanley B. Block (2004), ‘
Managing Investments’, Mc Graw-Hill Professional, PP149
[50] Judy Mottl, (2008), ‘
iPhone Lawsuit: Woes Ahead for Apple, Carriers? ‘, Internetnews.com
[51] July 27, 2008 Stock Price, from Nasdaq.com
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