Krause Fund Research Spring 2015
Information Technology Apple Inc. (NASDAQ: AAPL)
Recommendation: BUY Target Price: $149.37 April 17th, 2015 Analysts 52-Week Stock Performance Xiwen Liu Neil Zhang [email protected] [email protected] John Sheeley Chenyu Zhao [email protected] [email protected]
Key Financials: Price: Current Price $ 124.75 Consensus 1yr Target $ 141.57 52 week Low $ 74.85 52 week High $ 133.60 Stock: Source: Google Finance Marget Cap (B) $ 726.64 Investment Thesis and Key Factors Shares Outstanding (B) 5.82 • AAPL outperformed both the NASDAQ index and its Liquidity: competitors including IBM, MSFT, and HPQ. AAPL’s stock Total Cash (B) $ 32.66 price has increased by approximately 70% over the past Current Ratio 1.13 year, as shown in the chart above. Asset Management: • This robust growth was strengthened by AAPL’s A/P Turnover Ratio 0.08 continuous research and development. NI over R&D Profitability: expenses for AAPL was 6.54 during FY2014, much higher Profit Margin 22.25% than MSFT’s 1.94, and HPQ’s 1.45. Return on R&D 6.54 x • The newly-released Apple Watch and the new MacBook ROA 15.22% are expected to contribute to AAPL’s revenue growth. Unit ROE 35.15% sales of the Apple Watch is expected to grow by 250% in Financial Leverage: the upcoming year, as discussed in the “Revenue L-T D/E Ratio 0.26 Decomposition” section. Interest Coverage Ratio 53.67 • Seeking technological integration has allowed AAPL to Payout Policy: continuously expand its market. Apple Car Play, an auto Dividend Payout Ratio 28.68% entertainment system platform is regarded as an initial Forward Annual Dividend Yield 1.50% step to enter the automobile industry. Apple Watch was Forward Annual Dividend Rate 1.88 developed with various integrated functions. AAPL’s Earnings Estimates recent acquisition of LinX, an Israeli superior sensor Ye ar 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E technology provider, also proves this. EPS $6.49 $6.87 $7.71$ 8.12 $ 8.19 $ 8.39 $ 8.44 $ 8.52 Key Risk Factors Company Overview • Interest risk affects AAPL’s interest income and expense. Apple Inc. designs, manufactures, and markets mobile It also affects AAPL’s investments. 100 basis point parallel communication and media devices, personal shift in the yield curve would result in a $3.4 billion computers, portable devices, in addition to related incremental decline in the fair market value of AAPL’s software, services, and accessories. The company investment portfolio. offers a range of products and services including • Foreign currency risk not only affects AAPL’s foreign iPhone, iPad, Mac, iTunes, Apple Watch, and so on. exchange futures and options, but also determines the revenue and expenses for AAPL’s global operation.
Important disclosures appear on the last page of this report. 1 shown no significant negative effect. Since China does Executive Summary not disclose job reports like most countries, we drew a similar comparison using the ratio of job advertisements- to-applicants. Even though the growth of the Chinese We recommend Apple, Inc. (NASDAQ: AAPL) as a economy was slowing in the fourth quarter of 2014, the BUY. AAPL’s current stock price is $124.75, and we job advertisements-to-applicants ratio rose to 1.15, up valued a weighted average target price of $149.37. It is from 1.09 last quarter.XIX The ratio indicates the hiring is common that a professional investor requires a 10% to still strong when the growth in the job market been 15% potential growth when he or she makes investment declining. Meanwhile, urban disposable income in 2014 decision. Since Technology sector is exposed to dropped 0.7% from 2013’s reading.XX A slight decline relatively high volatility and Apple faces significant of disposable income also indicates labor market has not interest rate risk and foreign currency risk. It is suffered from any major disturbances. reasonable for a sophisticated investor to demand a more than 15% potential growth in the stock price. Our We expect that the Chinese labor market will have an estimated intrinsic value is at $149.37, which is 19.74% abundant talent supply in the next 10 years. According higher than the current stock price. 19.74% would be to the 2010 population consensus report from Chinese convincing enough to issue a BUY rating. national Census Bureau, in 2020, 13.11% of the 2010 population will enter into the labor force while 12.01% Economic Outlook of the 2010 population will retire.XXI As the upcoming Chinese labor forces represent well-educated and open- minded young generation, we believe the next 10 year GDP will be the transition period of China. OBAOR is the One Belt and One Road project, a trans-Eurasian Since the technology sector has a very price-sensitive economic project aimed to improve the connection consumer base, we believe suitable economic conditions among Middle East, North Africa, Europe, and Europe will facilitate consumer electronics upgrades, leading to through building infrastructures that facilitate the trades higher sales of Apple product. Because the United States and creation of partnerships that enlist cooperation and China are two major markets that use Apple between nations. As Asian Infrastructure Investment products, we would like to analyze the future GDP for Bank gained support from 57 perspective founding the two areas. countries, we are confident about the future of the project, and we expect the project will improve We believe the United States economy will sustain its multinational trades and begin benefiting Chinese in current recovery over the next two years with an annual 2018. We project Chinese GDP will gradually slowed to GDP growth rate slightly below 3%. Surprising non- 6.2% in 2017 and will have an era of above 6.5% growth farm payroll improvements at the end of last year, raised again in the following 8 years. economists’ hopes for the future outlook of the U.S. economy, but the strong trend does not last. Although economies continued to lower non-farm payroll expectations and had a forecast of 247,000 in March, they were shocked again as the report showed only a job increase of 126,000, almost half of what was expected. We has seen softening in hiring. Even though a strong US dollar is considered as weather effect, as the global economic conditions are problematic, we do not believe U.S. will have strong GDP improvement in the near terms.XVIII We believe GDP goes through cycles and therefore expect the global economic condition will recovers in 2017, leading to GDP an era of above 3% growth. XXIV
Unemployment Rate Because of the steadily escalating level of economic reform, continued work force expansion and We believe the U.S. unemployment rate will be the key improvement, and the OBAOR (aka One Belt and one factor to drive U.S. consumer electronics consumption. Even Road) project in addition to China’s imitative on the though U.S. reports show improvements in labor markets, AIIB (Asia Infrastructure Investment Bank), our optimistic growth in real disposable income on a monthly sentiment on China’s real GDP growth over the next 10 basis, and a 50% decline in oil prices since last year, real years remains positive. While Chinese government has personal consumption has not increased as expected. We worked on policies for economic reform, reports have believe that paranoia from the 2008 recession led individuals
Important disclosures appear on the last page of this report. 2 to repay their debts and save rather spending on discretionary In a Financial Times interview with China’s Premier goods and services. We expect that the unemployment rate Keqiang Li, Premier Li mentioned he is satisfied with the will be a strong indicator in determining consumer current value of Chinese Yuan relating to U.S. dollar, and confidence. If the U.S. unemployment rate continues to would not devalue Chinese Yuan to boost exports.XXIII improve, we believe individuals will be more comfortable Therefore, our 2 year projection of the CNY/ USD rate is borrowing capital and spending on luxury items, benefiting stable at around 6.2CNY/ USD. Apple. Consumer Confidence Interval As shown in the graph below, the Chinese unemployment rate in March of 2015 was 5.5 percent. Professional and As China and U.S. are two major markets for Apple’s business services, health care, and retail trade, are the major product sales, consumer confidence in both countries is drivers of employment.XXII Job cuts in the mining industry pivotal to Apple’s overall sales. The Consumer Sentiment offset the positive drivers. As non-farm jobs have shown Index, created by the University of Michigan, shows improving trends in the last 3 months, we believe that consumer optimism rebounded in the beginning of April. The employers will continue to create higher paying jobs in the average of the first four months of 2015 showed consumer next 3 months. Therefore, we expect the unemployment will sentiment significantly higher than the average of 2013 and decrease to 5.4% in April. Historically, the unemployment 2014. We believe that, as the U.S. economy continues to rate went as low as 5% in 2005, and continued to decrease as improve, the U.S. consumer confidence will continue to low as 4.4% in October of 2006. We project the improve. We expect the index to reach 98 index points in unemployment rate will continue to improve in the next two 2017. year and will remain as low as 5%.
XXIV
XXIV
The Chinese consumer confidence is developed by China Exchange Rate National Bureau of Statistics. Consumer sentiment in China
has a history of staying above 100 basis points. As a Currency fluctuations influence Apple’s future product sales, developing country with high growth, Chinese citizens are as it affects the company’s ability to collect receivables at the enjoying the benefit of growing productivity. Based on the U.S. dollar cost of products. We expect that declines in analysis of historical relationship between the Shanghai currency value in some foreign countries may make those Stock Exchange Index and Chinese consumer confidence markets less competitive for revenue generation for Apple. Index, the Chinese consumer confidence interval tend to be a Displayed in the graph below, the CNY to USD exchange lagging indicator of the Chinese stock market. rate has traditionally decreased, but has increased in late
2014. As most Chinese investors are uneducated retail investors
(usually do not have a college degree) who are usually
influenced by group conformity, they tend to invest
significant amount of capital when the market is performing
well. Therefore, we believe the correlation between market
performance and consumer confidence is highly correlated.
We believe the recent upwards trend in consumer confidence
was driven by a strong Chinese stock market. We expect the
stock market to cool down by the end of 2015, hurting
Chinese consumers’ confidence in their future investments.
We also expect the amount of per capita discretionary
income to increase. The combination of these two factors XXIV should cause consumer confidence to stagnate.
Important disclosures appear on the last page of this report. 3 The relationship between movements in the technology sector and the S&P 500 in the last 20 years is shown in the graph below. The heavy sector weight of technology in the S&P influences the way the market moves.
XXIV
II Industry Analysis Sub-Industry
Industry Overview The Consumer Electronic Goods, Global Hardware Manufacturing, and Computer and Computer-Relate Apple’s operates in multiple different industries within Stores industries manufacture and distributes telephones, the technology sector, including: DVD and MP3 players, retail desktop computers, laptop computers, tablets, and software, as well as accessories • Electronic Consumer Goods – electronic audio like printers, scanners and keyboards and video equipment for home entertainment, personal entertainment devices, motor vehicle, Consumer Electronic Goods – Individuals in emerging public address, musical instrument amplifiers. economies typically have less access to high-level technology and electronics because of a lack of per • Global Computer Hardware Manufacturing – capita disposable income. We expect that per capita manufacturing and assembly of desktop and income will continue to grow in developing nations, and laptop computers, computer storage devices a decline in unemployment will cause a subsequent rise and computer terminals. in per capita disposable income in America, which will • The Computer and Computer-Related Goods lead to sales revenue growth for consumer electronic industry – retail desktop computers, laptop devices on a national and international scale. As shown computers, tablets, and software, accessories in the graph below, per capita disposable income has like printers, scanners and keyboards. grown every year since 2010 and is expected to produce 2.4% compound growth from 2015 – 2020IV. The Technology Sector strongly influences the overall economy. Technology accounts for the largest sector weighting of the S&P 500; therefore, when demand is high for products and services, the overall economy experiences growth. As shown in the graph below, the Technology Sector holds the highest weight of the S&P 500; 19.70% as of April 19, 2015.
S&P 500 Sector Weightings (%)
Technology Financials Health Care Consumer Discretionary IV Industrials Consumer Staples Global Computer Hardware Manufacturing – The fastest Energy growing economies in the world are in developing Materials nations. Specifically, we expect that the BRIC nations, Utilities composed of Brazil, Russia, India and China, will have Telecom substantial GDP growth in 2015 and beyond. With the rapidly rising income levels mentioned above, the 0% 5% 10% 15% 20% 25% demand for consumer electronics in these countries is I
Important disclosures appear on the last page of this report. 4 growing strongly. This relates directly to the Company Mkt Revenue EPS P/E manufacturing of computer hardware, as GDP levels are Cap (B) (ttm) (ttm) (B) directly correlated to demand for computer hardware and Apple 734.79 199.80 7.39 17.08 are expected to grow substantially in 2015. Inc. Google 362.30 66.00 20.99 25.36 Computer and Computer–Related Stores – The demand Inc. for computers and computer-related products from price- Microsoft 346.20 93.46 2.48 17.02 Corp. sensitive customers is determined almost purely from the Intel 155.01 55.87 2.31 14.71 price of product in stores. With recent technological Corp. developments, computer manufacturers have been Cisco 144.80 48.08 1.67 16.94 successful in developing more powerful chips at a Systems Inc. cheaper price. This decline in price directly affects the Hewlett- 60.27 110.14 2.61 12.72 price of computers; therefore, demand will increase. We Packard expect that companies will continue to decrease costs Company through technological advancements and that the prices Nokia 27.91 13.58 0.91 8.42 Corp will continue to fall. This will positively benefit Motorola 13.26 5.88 5.29 11.58 companies who manufacture and sell computers. Solutions Inc. Recent Developments and Industry Trends • The Price-to-Earnings Ratio average in the While recent breakthrough in foreign economies are technology sector is 23.70V. Apple, as well as expected to, in one sense, help companies in the all competition aside from Google, trade at a Consumer Electronic Goods, Global Hardware low multiple relative to the entire sector. Manufacturing, and Computer and Computer-Relate Among its competition, Apple has the worst Stores industries, foreign growth also opens P/E ratio aside from Google, while Nokia has opportunities for foreign competition. the strongest P/E ratio. • Leading the competition, as listed by market We expect that improving foreign economies, combined capitalization, Apple Inc. is the largest with a foreign market, will create a large number of company in the world. Google and Microsoft competitors in the global computer and consumer follow Apple in market capitalization at electronic goods markets. approximately 49% and 47% of Apple’s size, respectively. Markets and Competition • Google has the strongest earnings per share of any of its competitors, but it is important to Whether looking at the technology sector as a whole or account for its current share price of $524.05, as subindustries, Apple tends to compete with the largest when comparing the company to its peers. companies in the world. The company is so large, with such a diversified product line, that there are virtually no Porter’s Five Forces Analysis direct competitors to Apple. 1. Industry Competition – Strong: Consumer Industry Leaders Comparison Electronic Goods, Global Hardware The table below lists industry leaders within the Manufacturing, and Computer and Computer- Consumer Electronic Goods, Global Hardware Relate Stores industries can be defined as Manufacturing, and Computer and Computer-Relate highly concentrated and competitive. This high Stores industries sub-industry with key operating and level of competition is driven by a number of financial metrics. companies competing for price-sensitive consumers. Because of the price conscious nature of consumers in these industries, they will check with multiple retailers before making a decision to buy a product. These pricing wars make the industry very competitive.
2. Threat of new entrants – Weak: Strong barriers to entry caused by the difficulty of access to the latest technology and intellectual property, the capital intensive nature of the consumer electronics industry, limited access to skilled
Important disclosures appear on the last page of this report. 5 employees and the supremacy of existing company revenues. These products include the iPhone, players in the market currently holdV. iPad, Mac computer, iTunes, iPod, Apple Watch and accessories. 3. Threat of substitutes – Strong: Existing competitors developing new products to match Apple is headquartered in Cupertino, California and sells Apple’s pose a major threat to the company, as its products on an international scale through its retail shown by Samsung’s and Google’s smartphone stores, online stores and direct sales force. The company and tablet lines. Strong intellectual property also sells and delivers digital content through the iTunes rights have played a major role in Apple’s Store, App Store, iBooks Store, and Mac App Store, and success, making it difficult for competitors to sells product through a number of third-party retailers. copy their productsVII. Corporate Strategy 4. Bargaining power of suppliers – Medium: Apple has a few key suppliers who can Apple’s defines their corporate strategy as follows: “the leverage their status to their benefit, while company leverages its unique ability to design and Apple controls a significant portion of their develop its own exclusive operating systems, hardware, suppliers revenue, which the company can use application software and services to provide its customer their advantage. products and solutions with innovative design, superior ease-of-use and seamless integration.” 5. Bargaining power of consumers – Strong: The Consumer Electronic Goods, Global Hardware The company also continues to explore opportunities Manufacturing, and Computer and Computer- with a platform that promotes the creation of digital Relate Stores industries are so competitive and content. The App Store, iBooks Store, iTunes Store and have such a variety of similar products that they Mac App Store supports a community of developers, typically make decisions based on price- who create third-party software and hardware products sensitivity. Apple has an advantage because of that benefit both Apple and third-parties. such strong brand loyalty, so Apple fanatics have little bargaining power. Apple is striving to create a higher-quality sales experience for customers by hiring knowledgeable Catalysts for Growth/Change employees who can work as a strong resource for Apple buyers. We expect consumers will continue to buy more expensive consumer electronics because of improving Life Cycle unemployment in America and an increase in consumer discretionary income in emerging markets. This will The industry in which Apple operates is currently in the lead to growth in the Consumer Electronic Goods, middle range of maturity. There are large barriers to Global Hardware Manufacturing, and Computer and entry for new companies, but current competitors are Computer-Relate Stores Industries as we expect the consistently creating products that compete with economy to continue improving in the United States and Apple’s. Generally, when companies are reaching a abroad. Finally, we expect to see revenue grow slowly as mature stage, there is a leveling off of revenues. The the decrease in consumer electronic prices offset the chart below creates a nice comparison to Apple’s net increase in sales volume. sales revenue.
Company-Specific Analysis
Overview and Business Description
Apple operates in the technology sector and is the largest company in the world as ranked by market capitalization. Apple takes an all-encompassing approach to the sale of mobile communication and Sources: Dr. Jann Suurkula media devices, personal desktop and laptop computers, portable digital music players, and software and services When comparing Apple’s net sales revenue and our by controlling product design, manufacturing, and predicted net sales revenue from 2005 through 2024 to marketing. Apple has seven major product lines that the average lifecycle of a business, Apple shows to be have or are expected to contribute significantly to getting closer to a mature stage.
Important disclosures appear on the last page of this report. 6
Net Sales Revenue In 2014, revenue of the iPod dropped by 50%. Given the 300000 development of new iPhone 6, iPhone 6 Plus, updates on
250000 iPad, and integration of Apple Watch, it is reasonable to
200000 see a continuously decreasing trend on the revenue of this product. 150000 100000 Starting with the first quarter of 2015, Apple Inc. no 50000 longer reports revenue from iPod sales in the company’s XXV 0 revenue decomposition. This further indicates that 2000 2005 2010 2015 2020 2025 Apple Inc. will eventually drop this product line.
Financial Summary and Selected Financial Data We predict that iPod sales will continue to decrease with a rate of roughly 50%, and Apple will eventually drop Apple Watch the iPod product line by 2020.
Historically, when Apple introduces a new product line Product Lines revenue growth rates increase substantially in the Apple’s product lines as of September 2014 are as products second year. For instance, one year after Apple follows: introduced the iPhone, sales revenue for that product line grew 970% in its second year, followed by an 83% – • iPhone 93% growth rate during the following three years. • iPad • Mac The iPad followed the same pattern, with sales growth of • iTunes 287% in the products second year and 61% for the third • iPod year. Similar trends proved to be true with the iPod. • Accessories and Other Products Sales grew 248% the year after its introduction, and 69% the following year. iPhone:
We believe this trends will endure due to Apple’s Apple’s line of smartphones, iPhone, functions on continuous innovation and successful marketing Apple’s iOS operating system. The iPhone combines approaches. Consequently, we forecasted a 114% sales internet surfing and mobile application capabilities with growth rate for Apple Watch after its pre-order on April phone and mp3 player functionality. The first iPhone 10, 2015. was released in 2007 and the most recent versions, the iPhone 6 and 6+, were released in late 2014. Meanwhile, traditional product line sales growth also experienced a sharp decrease to a relatively reasonable We expect that iPhone sales will continue to thrive after rate 3 to 4 years after introduction. Sales growth on record setting sales in quarter 1 of 2015.IX With iPhone dropped to 16% in 2013, and 12% in 2014. The estimated growth rates anywhere from 3% – 8% in 2015 iPad product line growth rate dropped to 3% in 2013, and beyond, the iPhone should continue to exhibit strong and -5% sales growth in 2014, not to mention the huge revenues for Apple in the long term. decrease in iPod’s sales revenue. iPad: Based on historic data, we predict that sales of the Apple Watch will rapidly decrease 3 to 4 years after the Apple’s line of tablets, iPad, functions on Apple’s iOS product’s introduction. As a result, we predicted the operating system. The iPad combines internet surfing, growth rate of Apple watch to be 35% one year after its mobile application capabilities and mp3 player introduction. This growth will eventually smooth out, so functionality. The first iPad was released in 2010 and the we used 3% as the future growth rate, and 1% for most recent versions, iPad Air 2 and iPad mini 3 were constant all future years. released in late 2014. iPod Based on extreme decreases in growth rates in the past two years, we expect that iPad revenue growth rates will It is possible that Apple will eventually drop the product continue to decrease going forward and level off at a line of iPod. The iPod product line revenue experienced negative growth rate into the future. noticeable decreases since 2011. Revenue of this product line went down 25% and 21% in 2012 and 2013 respectively.
Important disclosures appear on the last page of this report. 7 Mac: Market Segments USD % of Total (millions) Sales Apple’s line of personal computers, Mac, functions on Americas 65,232 35.6859% Apple’s user-friendly OS X operating system. The Mac Europe 40,929 22.3907% performs typical computer applications, including mail, Greater China 29,846 16.3276% web browsing, calendar, etc. The most recent versions, Japan 14,982 8.1961% 27-inch iMac and an updated Mac mini were introduced Rest of Asia Pacific 10,344 5.6588% in late 2014. While Apple has a strong presence in the United States, The Mac’s past growth rates have been somewhat the majority of sales revenue comes from foreign unpredictable. Going forward, we expect growth rates of markets. We expect sales to continue to increase outside Mac sales should stabilize at a reasonable growth rate of of the United States as per capita discretionary income in 3%. emerging market economies continues to rise through the next five years.IV iTunes: Significant Customers Apple’s application that allows consumer to purchase and download music and videos. The following is a chart containing Apple’s top ten customers in terms of percentage impact to Apple’s We predict that iTunes and Other Software will continue Revenue: steady growth, propelled by Apple Pay and the continuing popularity of Apple products that use iTunes Apple Customer List and other software. Company % of Apple’s Revenue iPod: Verizon 7.27% Communications Apple’s line of mp3 players, iPod, works with the AT&T Inc 5.96% iTunes store to organize music and videos. iPod Touch Best Buy Co Inc 2.83% works with Apple’s iOS operating system. Telefonica SA 2.79%
Sprint Corp 2.72% We expect that iPod revenue growth rates will continue Softbank Corp 2.67% to decrease rapidly. These growth rates will lead to the Vodafone Group PLC 2.52% removal of the iPod product line from Apple’s product Tech Data Corp 2.44% list.X Deutsche Telekom AG 2.37%
KDDI Corp 2.22% New Products XI.
Product innovation has been a key driver in the growth While individual consumers play a major role in Apple’s of the technology sector and technology sub-industries. revenue sources, many of those purchases are made In September 2014, the company announced the Apple through third-party cellular network carriers. The two Watch™, which will be released on April 24, 2015 and customers that account for the largest individual Apple Pay™, which became available in the United percentages of Apple’s revenue are also the largest States in October of 2014.X cellular network carriers in the world.
We predict that revenue growth for these products will Manufacturing Process increase rapidly in the second year of existence, and gradually reduce to a more realistic growth rate over the While the company manufactures most of their Macs in next two years. This fluctuation in growth rates follows the United States, most of Apple’s hardware suit with previously introduced product lines, including manufacturing takes place primarily in Asia. Some of the iPhone in 2008, the iPod in 2005, iTunes in 2005, Apple’s outsourcing partners are the only suppliers of and the iPad in 2011. components and are able to leverage that to their competitive advantage. Product Markets The outsourcing partners must be consistent to keep In 2014, Apple’s major product markets include the Apple’s business. If, for instance, one of Apple’s Americas, Europe, Greater China, and Japan. component suppliers did not meet their production commitments, it would hurt Apple because of stalled
Important disclosures appear on the last page of this report. 8 production, and would likely hurt the supplier because 1. Tim Cook; CEO they would likely lose Apple’s business in the future.X 2. Angela Ahrendts; SVP, Retail & Online Stores 3. Eddy Cue; SVP, Internet Software and Services Distribution 4. Craig Federighi; SVP, Software Engineering 5. Jonathan Ive; SVP, Design Staying consistent with the company’s efforts to provide 6. Luca Maestri; SVP and CFO customers the best possible customer service experience, 7. Dan Riccio; SVP, Hardware Engineering Apple has looked to increase the distribution of 8. Philip W. Schiller; SVP, Worldwide Marketing company product through their own retail stores. By 9. Bruce Sewell; SVP and General Counsel placing retail stores in high-traffic locations and 10. Jeff Williams; SVP, Operations emphasizing the presentation of Apple products and the 11. Paul Deneve; VP, Special Products training of Apple employees, the company will look to 12. Lisa Jackson; VP, Environmental Initiatives provide an experience that will create long-lasting 13. Joel Podolny; VP, Dean, Apple University customer relationships in both domestic and 14. Johny Srouji; VP, Hardware Technologies international markets.X 15. Denise Young Smith; VP, Worldwide HR
Materials and Suppliers Board of Directors
Apple’s cost structure is sensitive to price change in a Apple’s Board of Directors includes 9 different number of different raw materials. As prices increase for members, all of which are independent of the firm with the raw materials used in the company’s products, the exception of the company CEO and CFO. Each Apple’s profit margins shrink. Raw materials purchases director was elected on October 27, 2014. The list below include batteries, aluminum, stainless steel, glass, circuit shows the members of the board of directors.X boards, plastic and copper.XII, XIII 1. Timothy D. Cook, CEO and Director 2. Luca Maestri, SVP, CFO The following is a chart containing Apple’s top ten 3. Millard S. Drexler, Director suppliers in terms of percentage impact to Apple’s Cost 4. Al Gore, Director of Goods Sold: 5. Robert A. Iger, Director 6. Andrea Jung, Director Apple Supplier List 7. Arthur D. Levinson, Director 8. Ronald D. Sugar, Director Company % of Apple’s CoGS 9. Susan L. Wagner, Director Hon Hai Precision 32.77% Industry Co Major Stockholders Pegatron Corp 10.39% Intel Corp 5.02% The board of directors and executives do not have a LG Display Co Ltd 3.66% controlling interest in the Apple. The vast majority of Sharp Corp/Japan 3.16% Apple Shares are held by institutional investors. Computer Sciences 2.99% Corp Holder Shares %Out Value Jabil Circuit Inc 2.53% Vanguard 332,239,563 5.70 36,672,602,963 Qualcomm Inc 2.31% Group, Inc. Teradyne Inc 2.19% Flextronics 2.17% (The) International State Street 245,661,655 4.22 27,116,133,478 XI Corporation Apple’s top suppliers account for a particular large FMR, LLC 173,987,606 2.99 17,529,251,304 percentage of Apple’s raw materials for production of BlackRock 154,653,443 2.66 17,070,647,038 their devices. This list shows the dependence that Apple has on just one our two companies, providing those Inc. companies with bargaining power. Bank of 89,007,388 1.53 8,967,494,341
New York Personnel & Key Management Mellon Apple’s Executive team is displayed in the following Corporation list.X
Important disclosures appear on the last page of this report. 9 that brings future free cash flows back at its present Key Investment Positives value. To calculate WACC, we need to decide the cost of equity, cost of debt, tax rate, and weights for both • Customer loyalty and brand recognition with equity and debt. appealing customer service that provides rewarding customer experience Equity value is calculated by multiplying Apple’s current stock price by the amount of shares outstanding. • Outsourcing manufacturing and keeping inventory Debt value is calculated by adding up the value of cost low commercial paper and long-term debt in FY2014. It also includes the Present Value of Operating Leases. After • Constant innovation and diversified product lines to the calculation, we concluded the WACC to be 7.18%. satisfy various and ever-changing customers’ needs COGS & SGA: • Continuous technological integration and great effort on R&D Since Apple is relatively mature, there is no convincing reason for Apple to adjust its COGS and SGA as a • Strong marketing teams and distribution networks percentage of net sales. Historical trends proves that across the globe COGS and SGA has kept at a relatively constant level. Consequently, we fixed COGS at 57.28% of net sales in • High profit margin and contribution margin on the the forecasting years. majority of its products Differences between DCF EP model and DDM • Adequate amount of cash in hand so that there is model:
less risk associated with the rising interest rates and Since Apple pays small amount of dividend, using the company is less dependent on debt Dividend Discounted Model would be relatively
inaccurate in comparison with Discounted Free Cash
Flow. Dividend payout ratio has no obvious trends of Key Investment Negatives increasing, and increase in EPS is no significant. As a • Intensive competition from global competitors with result, future dividend would become a vague measure technology sector being relatively more volatile when deciding the intrinsic price.
• Growing labor costs oversea Sensitivity Analysis • Subject to currency exchange and consumer confidence We tested 7 assumptions in our model in response to • Largely impacted by changing policies and Beta, Estimated Weighted Average Cost of Capital regulations (WACC), 2015 Apple Watch Unit Sale Growth, Normal Cash, CV Growth of NOPLAT, SG&A Cost, and COGS.
Valuation Beta:
CAPM We chose 0.797 as the equity beta. This data was retrieved from Bloomberg Terminal with a weekly We used the 30-Yr U.S. T-bond yield to approximate the return over two-year periods. 0.05 change in beta will th risk free rate. As of Apr.17 , 2015, the U.S. 30-yr T- result in a relatively large move in stock price. If beta bond yield is 2.58%. Beta is retrieved from Bloomberg goes up to 1.00, the DCF stock price would likely to using 5-Yr monthly data, at 0.797. We consulted Prof. drop from $164.62 to $133.06. Damodaran’s research website, and used his estimate of 6.08% as the market risk premium. Using CAPM equation, we calculate the cost of equity to be at 7.43%. Normal Cash:
WACC Given the complexity and scale of Apple Inc. It would be inappropriate to use its 2% of net sales as the normal To employ the DCF approach when reaching the cash. Apple Inc. would need a relatively large amount of intrinsic price, an important factor that needs to be cash for its day-to-day operations. considered is WACC. WACC serves as the discount rate
Important disclosures appear on the last page of this report. 10
We assumed a 37% of net sales as normal cash, and COGS: decided a 5% parallel incremental to test how sensitive the DCF stock price is to the change of normal cash As a relatively mature and sophisticated company in the assumption. If the percentage of normal cash technology industry, Apple will likely to maintain its approximately doubles, and it reaches 62%, the stock COGS level. 0.5% parallel incremental was added to the price will drop $7.82 to $156.80. If we roughly cut the estimate of 57.28% to test the stock price in response to assumption in half, and only assume a 17% of net sales the volatility of COGS. The DCF stock price will likely as normal cash, the stock price will go up to $170.87 to go up by 7.75% to $177.37 when COGS is at 55.28%, respectively. and it will likely to go down to $148.67 when COGS rises to 59.78%.
2015 Apple Watch Unit Sales Growth: SG&A: Usually after Apple’s introduction of a new product line, its revenue will be boosted. The introduction of Apple Same rationale from COGS applies to SG&A. DCF Watch, together with other new products, will play an stock price shows similar response to SG&A as it is to important role in deciding Apple’s future revenues and COGS. its future stock price.
Comparing with the growth rate when iPod and iPad were introduced, we decided a 250% growth for Apple. Since at the time of issuing this report, Apple hasn’t even officially announced the number of unit sales for the first week, everything is under estimation.
Consequently, we would like to see how the volatile changes in 2015 Apple Watch Unit Sales Growth would drive the stock movement.
If the estimate doubles and reaches 500%, which means the unit sale of Apple Watch reaches 40 million, Apple’s stock price will rise to $171.84. In contrast, if this growth rate turns out to be slower, at 125%, the stock price will drop to a place between $160.28 and $161.73. This response to volatility is similar to its response to the change in normal cash.
CV Growth of NOPLAT:
Future cash flows are critical when doing DCF analysis. The growth rate of NOPLAT at constant stage is also decisive. We used an industry average long-term growth rate of 3% as the CV growth of NOPLAT.
However, the performance of technology companies can be volatile in the long-term. If the CV growth of NOPALT goes up to 5.50%, the DCF stock price will rocket to almost double, at $308.51. In the opposite direction where CV Growth of NOPLAT drops to 1.00%, the DCF stock price will go down by 18.98% to $133.38. This shows that DCF stock price is largely driven by the CV growth of NOPLAT.
Important disclosures appear on the last page of this report. 11 Important Disclaimer XXV. Statista Global iPod Revenue (http://www.statista.com/statistics/263404/global-apple-ipod-revenue- since-first-quarter-2006/), This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
I. http://www.spindices.com/indices/equity/sp-500 II. Yahoo! Finance Ticker Comparison, last 20 years: NASDAQ-100 Technology Sector (^NDXT) vs. S&P 500 (^GSPC) (https://finance.yahoo.com) III. MarketLine Consumer Electronics Industry Analysis (http://www.marketline.com/blog/industry-analysis-consumer- electronics/) IV. IBISWorld Business Environment Report: Per capita disposable income V. IBISWorld Global Computer Hardware Manufacturing Industry Analysis VI. biz.yahoo.com VII. Mac World (http://www.macworld.com/article/2013001/apple-and-its-competitors- the-circle-game.html) VIII. IBISWorld Computer Stores Industry Analysis IX. Apple Reports Record First Quarter Results (http://www.apple.com/pr/library/2015/01/27Apple-Reports-Record- First-Quarter-Results.html) X. Apple 2015 10-K XI. Bloomberg Terminal Supply Chain Analysis XII. iPhone 6 Environmental Report (https://www.apple.com/environment/reports/docs/iPhone6_PER_Sept 2014.pdf) XIII. Mac Pro Environmental Report (http://www.apple.com/environment/reports/docs/MacPro_PER_Dec2 013.pdf) XIV. Yahoo! Finance Apple Inc. Competitors (http://finance.yahoo.com/q/co?s=AAPL+Competitors) XV. Apple’s Premium Pricing Strategy (http://finance.yahoo.com/news/apple-premium-pricing-strategy- product-191247308.html) XVI. Apple Executive Bios (https://www.apple.com/pr/bios/) XVII. Yahoo! Finance Apple Major Holders (https://finance.yahoo.com/q/mh?s=AAPL+Major+Holders) XVIII. Economic Growth Slowed in March: (https://www.chicagofed.org/~/media/publications/cfnai/2015/cfnai- april2015-pdf.pdf?la=en) XIX. Bloomberg Terminal CNLMDAR: Ratio of Job Variance to Job Applicants XX. Bloomberg Terminal CHHHH1: Per Capital disposable Income XXI. http://www.stats.gov.cn/tjsj/pcsj/rkpc/6rp/indexch.htm XXII. http://www.bls.gov/news.release/empsit.nr0.htm XXIII. http://www.ft.com/cms/s/0/3a42d156-e288-11e4-aa1d- 00144feab7de.html#axzz3Xp74e7yi XXIV. Data Retrieved from Bloomberg Terminal
Important disclosures appear on the last page of this report. 12 Apple Inc. (AAPL) Revenue Decomposition
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E 2021 E 2022 E 2023 E 2024 E
Revenue of Product Segment (in millions): iPhone $ 78,692 $ 91,279 $ 101,991 $ 110,150 $ 116,759 $ 122,597 $ 128,727 $ 133,876 $ 137,892 $ 140,650 $ 144,870 $ 149,216 $ 153,692 % Changes in Revenue 71% 16% 12% 8% 6% 5% 5% 4% 3% 2% 3% 3% 3% iPad 30,945 31,980 30,283 31,191 31,503 31,188 30,876 30,568 29,956 29,357 28,770 28,195 27,631 % Changes in Revenue 61% 3% -5% 3% 1% -1% -1% -1% -2% -2% -2% -2% -2% Mac 23,221 21,483 24,079 24,801 27,282 28,646 27,213 28,030 27,189 28,548 29,405 30,287 31,195 % Changes in Revenue 7% -7% 12% 3% 10% 5% -5% 3% -3% 5% 3% 3% 3% iTunes, Software and Services 12,890 16,051 18,063 20,772 22,434 24,229 25,440 26,712 28,048 28,890 29,756 30,649 31,568 % Changes in Revenue 38% 25% 13% 15% 8% 8% 5% 5% 5% 3% 3% 3% 3% iPod 5,615 4,411 2,286 1,143 572 271 122 55 - - - - - % Changes in Revenue -25% -21% -48% -50% -50% -53% -55% -55% -100% - - - - Apple Watch - - - 3,390.87 11,274.63 17,624.03 18,152.75 18,697.33 19,071.28 19,452.71 19,647.23 19,843.70 20,042.14 % Changes in Revenue - - - - 233% 56% 3% 3% 2% 2% 1% 1% 1% Accessories and Other Product 5,145 5,706 6,093 6,398 6,654 6,920 7,127 7,341 7,415 7,489 7,564 7,639 7,716 % Changes in Revenue 15% 11% 7% 5% 4% 4% 3% 3% 1% 1% 1% 1% 1% Revenue $ 156,508 $ 170,910 $ 182,795 $ 197,847 $ 216,478 $ 231,475 $ 237,660 $ 245,280 $ 249,572 $ 254,387 $ 260,012 $ 265,829 $ 271,845
Unit Sales (in thousands): iPhone 125,046 150,257 169,219 184,110 196,262 207,056 218,444 228,056 235,581 240,764 248,709 256,917 265,395 % Changes in Unit Sales 71% 20% 13% 9% 7% 6% 6% 4% 3% 2% 3% 3% 3% iPad 58,310 71,033 67,977 70,322 71,131 70,313 69,504 68,705 67,125 65,581 64,073 62,599 61,159 % Changes in Unit Sales 80% 22% -4% 3% 1% -1% -1% -1% -2% -2% -2% -2% -2% Mac 18,158 16,341 18,906 19,530 21,678 22,870 21,613 22,326 21,589 22,776 23,528 24,305 25,107 % Changes in Unit Sales 9% -10% 16% 3% 11% 6% -6% 3% -3% 6% 3% 3% 3% iPod 35,165 26,379 14,377 5,391 2,022 695 217 68 - - - - - % Changes in Unit Sales -17% -25% -45% -63% -63% -66% -69% -69% -100% - - - - Apple Watch - - - 6,667 23,333 38,500 39,655 40,845 41,662 42,495 42,920 43,349 43,782 % Changes in Unit Sales - - - - 250% 65% 3% 3% 2% 2% 1% 1% 1%
Unit Average Price (in dollars): iPhone $ 629.30 $ 607.49 $ 602.72 $ 598.28 $ 594.92 $ 592.10 $ 589.29 $ 587.03 $ 585.33 $ 584.18 $ 582.49 $ 580.79 $ 579.11 % Changes in Unit Sales 0% -3% -1% -1% -1% 0% 0% 0% 0% 0% 0% 0% 0% iPad $ 530.70 $ 450.21 $ 445.49 $ 443.55 $ 442.89 $ 443.57 $ 444.24 $ 444.91 $ 446.28 $ 447.65 $ 449.02 $ 450.40 $ 451.79 % Changes in Unit Sales -10% -15% -1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Mac $ 1,278.83 $ 1,314.67 $ 1,273.62 $ 1,269.92 $ 1,258.48 $ 1,252.51 $ 1,259.14 $ 1,255.48 $ 1,259.38 $ 1,253.41 $ 1,249.77 $ 1,246.14 $ 1,242.52 % Changes in Unit Sales -2% 3% -3% 0% -1% 0% 1% 0% 0% 0% 0% 0% 0% iPod $ 159.68 $ 167.22 $ 159.00 $ 212.01 $ 282.67 $ 390.60 $ 562.47 $ 809.96 $ - $ - $ - $ - $ - % Changes in Unit Sales -9% 5% -5% 33% 33% 38% 44% 44% 0% 0% 0% 0% 0% Apple Watch -$ -$ -$ $ 508.63 $ 483.20 $ 457.77 $ 457.77 $ 457.77 $ 457.77 $ 457.77 $ 457.77 $ 457.77 $ 457.77 % Changes in Unit Sales - - - - -5% -5% 0% 0% 0% 0% 0% 0% 0%
Important disclosures appear on the last page of this report. 13 Apple Inc. (AAPL) Income Statement (in millions)
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Net Sales 156,508$ 170,910$ 182,795$ 197,847$ $ 216,478 $ 231,475 $ 237,660 $ 245,280 $ 249,572 $ 254,387 260,012$ $ 265,829 $ 271,845 Cost of Sales 84,569 99,849 104,312 113,723 124,865 133,978 138,033 142,949 145,949 149,274 153,095 157,052 161,150 Gross margin 71,939 71,061 78,483 84,125 91,614 97,497 99,627 102,331 103,622 105,113 106,917 108,777 110,695 Operating expenses: Depreciation and Amortization 3,277 6,757 7,946 9,874 9,746 10,663 11,402 11,707 12,082 12,294 12,531 12,808 13,094 Research and development 3,381 4,475 6,041 6,779 7,680 8,493 9,008 9,594 10,065 10,568 11,117 11,689 12,283 Selling, general and administrative 10,040 10,830 11,993 13,770 15,067 16,111 16,541 17,071 17,370 17,705 18,097 18,502 18,920 Total Operating Expenses 16,698 22,062 25,980 30,423 32,492 35,267 36,951 38,373 39,518 40,567 41,745 42,998 44,298 Operating Income 55,241 48,999 52,503 53,702 59,121 62,231 62,676 63,958 64,105 64,546 65,172 65,779 66,397 Other income/(expense), net 522 1,156 980 1,020 1,116 1,193 1,225 1,264 1,286 1,311 1,340 1,370 1,401 Income before provision for income taxes 55,763 50,155 53,483 54,721 60,237 63,424 63,900 65,222 65,391 65,857 66,512 67,149 67,798 Provision for income taxes 14,030 13,118 13,973 13,795 15,186 15,989 16,109 16,442 16,485 16,602 16,768 16,928 17,092 Net Income 41,733$ 37,037$ 39,510$ 40,926$ $ 45,051 $ 47,434 $ 47,791 $ 48,780 $ 48,906 $ 49,254 49,744$ $ 50,221 $ 50,706
Share Outstanding 6,544 6477 6086 5957.97 5841.46 5839.46 5832.17 5814.11 5797.31 5781.66 5767.10 5753.54 5740.93 EPS 6.38$ 5.72$ 6.49$ 6.87$ $ 7.71 $ 8.12 $ 8.19 $ 8.39 $ 8.44 $ 8.52 8.63$ $ 8.73 $ 8.83 Dividends Per Share 0.38 1.64 1.82 1.94 2.19 2.33 2.36 2.44 2.47 2.51 2.56 2.60 2.65
Important disclosures appear on the last page of this report. 14 Apple Inc. (AAPL) Balance Sheet
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E ASSETS: Current assets: Cash and cash equivalents $ 10,746 $ 14,259 $ 13,844 $ 23,870 $ 28,973 $ 52,599 $ 81,418 $ 109,269 $ 138,796 $ 168,199 $ 197,444 $ 226,832 $ 256,364 Short‐term marketable securities 18,383 26,287 11,233 27,778 30,394 32,499 33,367 34,437 35,040 35,716 36,506 37,322 38,167 Accounts receivable, net 10,930 13,102 17,460 17,401 19,039 20,358 20,902 21,572 21,950 22,373 22,868 23,380 23,909 Inventories 791 1,764 2,111 2,255 2,468 2,639 2,709 2,796 2,845 2,900 2,964 3,030 3,099 Deferred tax assets 2,583 3,453 4,318 3,755 4,134 4,352 4,385 4,476 4,487 4,519 4,564 4,608 4,652 Vendor non‐trade receivables 7,762 7,539 9,759 10,328 11,300 12,083 12,406 12,804 13,028 13,279 13,573 13,876 14,190 Other Current Assets 6,458 6,882 9,806 9,892 10,824 11,574 11,883 12,264 12,479 12,719 13,001 13,291 13,592 Total Current Assets $ 57,653 $ 73,286 $ 68,531 $ 95,279 $ 107,131 $ 136,104 $ 167,071 $ 197,618 $ 228,625 $ 259,705 $ 290,919 $ 322,340 $ 353,973 Long‐term marketable securities 92,122 106,215 130,162 111,784 122,310 130,784 134,278 138,583 141,008 143,729 146,907 150,194 153,592 Property, plant and equipment, Gross 21,887 28,519 39,015 48,621 60,284 72,490 84,529 97,020 109,544 122,333 135,442 148,849 162,562 Less: Accumulated Deptreciation (6,435) (11,922) (18,391) (28,265) (38,011) (48,674) (60,076) (71,783) (83,866) (96,159) (108,690) (121,498) (134,592) Property, plant and equipment, net 15,452 16,597 20,624 20,356 22,273 23,816 24,452 25,236 25,678 26,173 26,752 27,351 27,970 Goodwill 1,135 1,577 4,616 2,434 2,663 2,847 2,923 3,017 3,070 3,129 3,198 3,270 3,344 Acquired intangible assets, net 4,224 4,179 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 Other assets 5,478 5,146 3,764 6,054 6,624 7,083 7,272 7,506 7,637 7,784 7,956 8,134 8,318 Total Assets $ 176,064 $ 207,000 $ 231,839 $ 240,048.38 $ 265,143.02 $ 304,775.98 $ 340,138.57 $ 376,101.95 $ 410,159.08 $ 444,662.61 $ 479,874.31 $ 515,430.81 $ 551,339.44
LIABILITIES AND SHAREHOLDERS’ EQUITY: Current Liabilities: Accounts payable 21,175 22,367 30,196 29,697 32,493 34,744 35,673 36,816 37,461 38,183 39,028 39,901 40,804 Accrued expenses 11,414 13,856 18,453 16,936 18,531 19,814 20,344 20,996 21,363 21,776 22,257 22,755 23,270 Deferred revenue 5,953 7,435 8,491 8,606 9,417 10,069 10,338 10,670 10,856 11,066 11,311 11,564 11,825 Commercial paper ‐‐ 6,308 6,138 6,716 7,181 7,373 7,609 7,742 7,892 8,066 8,247 8,433 Total current liabilities $ 38,542 $ 43,658 $ 63,448 $ 61,377 $ 67,156 $ 71,809 $ 73,727 $ 76,091 $ 77,423 $ 78,916 $ 80,661 $ 82,466 $ 84,332 Deferred revenue – non‐current 2,648 2,625 3031 3,245 3,550 3,796 3,898 4,023 4,093 4,172 4,264 4,360 4,458 Long‐term debt ‐ 16,960 28987 24,739 26,777 28,416 29,093 29,926 30,395 30,921 31,537 32,173 32,830 Other non‐current liabilities 16,664 20,208 24826 27,542 30,046 32,061 32,892 33,916 34,493 35,140 35,895 36,677 37,485 Total liabilities $ 57,854 $ 83,451 120292 $ 116,902.96 $ 127,528.88 $ 136,082.32 $ 139,609.36 $ 143,955.28 $ 146,403.18 $ 149,149.44 $ 152,357.52 $ 155,675.52 $ 159,106.36
Commitments and contingencies Shareholders’ equity: Common stock and additional paid‐in capital 16,422 19,764 23,313 25,540 27,767 29,994 30,817 30,817 30,817 30,817 30,817 30,817 30,817 Retained earnings 101,289 104,256 87,152 116,524 148,765 182,618 216,630 251,247 285,856 320,614 355,617 390,856 426,334 Accumulated other comprehensive income/(loss) 499 (471) 1,082 1,082 1,082 1,082 1,082 1,082 1,082 1,082 1,082 1,082 1,082 Treasury Stock ‐‐ ‐ (20,000) (40,000) (45,000) (48,000) (51,000) (54,000) (57,000) (60,000) (63,000) (66,000) Total shareholders’ equity $ 118,210 $ 123,549 $ 111,547 $ 123,145 $ 137,614 $ 168,694 $ 200,529 $ 232,147 $ 263,756 $ 295,513 $ 327,517 $ 359,755 $ 392,233 Total liabilities and shareholders’ equity $ 176,064 $ 207,000 $ 231,839 $ 240,048.38 $ 265,143.02 $ 304,775.98 $ 340,138.57 $ 376,101.95 $ 410,159.08 $ 444,662.61 $ 479,874.31 $ 515,430.81 $ 551,339.44
Important disclosures appear on the last page of this report. 15 Apple Inc. (AAPL) Forecasted Cash Flow Statement (Historical data adjusted for 2012‐2014)
Fiscal Years Ending Sept.27th, 2014 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E 2021 E 2022 E 2023 E 2024 E
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 13,844$ 23,870$ 28,973$ 52,599$ 81,418$ 109,269$ 138,796$ 168,199$ 197,444$ 226,832$
Operating activities: Net income 40,926 45,051 47,434 47,791 48,780 48,906 49,254 49,744 50,221 50,706 Adjustments to reconcile net income to cash generated by operating activities: Add: Depreciation and amortization 9,874 9,746 10,663 11,402 11,707 12,082 12,294 12,531 12,808 13,094 Changes (Increase or decreases) in working capital accounts: Increase in Accounts receivable, net 59 (1,639) (1,319) (544) (670) (377) (423) (495) (512) (529) Increase in Inventories (144) (212) (171) (70) (87) (49) (55) (64) (66) (69) Increase in Vendor non‐trade receivables (569) (973) (783) (323) (398) (224) (251) (294) (304) (314) Increase in Other current assets (86) (932) (750) (309) (381) (215) (241) (281) (291) (301) Increase in Accounts payable (499) 2,797 2,251 928 1,144 644 723 844 873 903 Increase in Deferred revenue 115 810 652 269 331 187 209 245 253 262 Increase in Deferred revenue (non‐current) 214 306 246 101 125 70 79 92 95 99 Increase in Accrued Expense (1,517) 1,595 1,284 529 652 367 412 481 498 515 Increase (decrease) in Deferred tax assets 563 (378) (219) (33) (91) (12) (32) (45) (44) (45) Increase (decrease) in other non‐current liabilities 2,716 2,503 2,015 831 1,024 577 647 756 782 808
Net Cash provided by operating activities 51,652 58,674 61,305 60,573 62,136 61,957 62,616 63,515 64,314 65,130
Investing activities: (Increase) decrease in Short‐term marketable securities (16,545) (2,616) (2,106) (868) (1,070) (603) (676) (790) (817) (845) (Increase) decrease in Long‐term marketable securities 18,378 (10,527) (8,473) (3,494) (4,305) (2,425) (2,721) (3,178) (3,287) (3,399) Capital expenditure ‐ (Increase) in PPE, net (9,606) (11,663) (12,207) (12,039) (12,491) (12,524) (12,789) (13,110) (13,406) (13,713) (Increase) in Goodwill 2,182 (229) (184) (76) (94) (53) (59) (69) (72) (74) (Increase) decrease in other assets (2,290) (570) (459) (189) (233) (131) (147) (172) (178) (184)
Net Cash used for investing activities (7,880) (25,604) (23,429) (16,666) (18,193) (15,736) (16,392) (17,319) (17,760) (18,215)
Financing activities: Change in notes payable & long‐term debt, net (4,248) 2,037 1,640 676 833 469 526 615 636 658 Change in commercial paper, net (170) 578 465 192 236 133 149 174 180 187 Payments of dividends and dividend equivalents (11,555) (12,809) (13,582) (13,780) (14,162) (14,297) (14,497) (14,741) (14,982) (15,229) Proceeds from issuance of common stock 2,227 2,227 2,227 824 ‐ ‐ ‐ ‐ ‐ ‐ Repurchase of common stock (20,000) (20,000) (5,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Net cash provided by financing activities (33,746) (27,967) (14,250) (15,088) (16,092) (16,694) (16,821) (16,951) (17,166) (17,384)
NET INCREASE (DECREASE) IN CASH 10,026 5,103 23,626 28,820 27,851 29,527 29,402 29,245 29,388 29,531
CASH AND CASH EQUIVALENTS, END OF THE YEAR 23,870$ 28,973$ 52,599$ 81,418$ 109,269$ 138,796$ 168,199$ 197,444$ 226,832$ 256,364$
Important disclosures appear on the last page of this report. 16 Apple Inc. (AAPL) Historical Cash Flow Statement
Fiscal Years Ending Sept.27th, 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cash and cash equivalents, beginning of the year 3,396$ 2,969$ 3,491$ 6,392$ 9,352$ 11,875$ 5,263$ $ 11,261 $ 9,815 $ 10,746 $ 14,259
Operating activities: Net income 276 1,335 1,989 3,496 4,834 8,235 14,013 25,922 41,733 37,037 39,510 Adjustments to reconcile net income to cash generated by operating activities: Depreciation and amortization 150 179 225 317 473 734 1,027 1,814 3,277 6,757 7,946 Share‐based compensation expense 33 42 163 242 516 710 879 1,168 1,740 2,253 2,863 Deferred income tax expense 20 52 53 78 (368) 1,040 1,440 2,868 4,405 1,141 2,347 Loss on disposition of property, plant, and equipment 7 9 15 12 22 ‐ ‐ ‐ ‐ ‐ ‐ Tax benefit from stock options 99 453 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Changes in operating assets and liabilities: Accounts receivable, net (8) (121) (357) (385) (785) (939) (2,142) 143 (5,551) (2,172) (4,232) Inventories (45) (64) (105) (76) (163) 54 (596) 275 (15) (973) (76) Vendor non‐trade receivables ‐ ‐ (1,040) 81 (492) 586 (2,718) (1,934) (1,414) 223 (2,220) Other current and non‐current assets (215) (211) (1,626) (1,540) (1,958) (713) (1,610) (1,391) (3,162) 1,080 167 Accounts payable 297 328 1,611 1,494 596 92 6,307 2,515 4,467 2,340 5,938 Deferred revenue ‐ ‐ 319 1,139 5,642 521 1,217 1,654 2,824 1,459 1,460 Other current and non‐current liabilities 320 533 973 612 1,279 (161) 778 4,495 2,552 4,521 6,010
Cash generated by operating activities 934 2,535 2,220 5,470 9,596 10,159 18,595 37,529 50,856 53,666 59,713
Investing activities: Purchases of marketable securities (3,270) (11,470) (7,255) (11,719) (22,965) (46,724) (57,793) (102,317) (151,232) (148,489) (217,128) Proceeds from maturities of marketable securities 1,141 8,609 7,226 6,483 11,804 19,790 24,930 20,437 13,035 20,317 18,810 Proceeds from sales of marketable securities 806 586 1,086 2,941 4,439 10,888 21,788 49,416 99,770 104,130 189,301 Purchases of long‐term investments 4 ‐ (25) (17) (38) ‐ ‐ ‐ ‐ ‐ ‐ Payments made in connection with business acquisitions, net (4) ‐ ‐ ‐ (220) ‐ (638) (244) (350) (496) (3,765) Payments for acquisition of property, plant and equipment (176) (260) (657) (735) (1,091) (1,144) (2,005) (4,260) (8,295) (8,165) (9,571) Payments for acquisition of intangible assets ‐ ‐ (28) (251) (108) (69) (116) (3,192) (1,107) (911) (242) Other 11 (21) 10 49 (10) (175) (20) (259) (48) (160) 16
Cash (used)/generated in investing activities (1,488) (2,556) 357 (3,249) (8,189) (17,434) (13,854) (40,419) (48,227) (33,774) (22,579)
Financing activities: Payment of long‐term debt (300) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Proceeds from issuance of common stock 427 543 318 365 483 475 912 831 665 530 730 Excess tax benefits from equity awards ‐ ‐ 361 377 757 270 751 1,133 1,351 701 739 Taxes paid related to net share settlement of equity awards ‐ ‐ ‐ (3) (124) (82) (406) (520) (1,226) (1,082) (1,158) Dividends and dividend equivalents paid ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (2,488) (10,564) (11,126) Repurchase of common stock ‐ ‐ (355) ‐ ‐ ‐ ‐ ‐ ‐ (22,860) (45,000) Proceeds from issuance of long‐term debt, net ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 16,896 11,960 Proceeds from issuance of commercial paper, net ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6,306
Cash (used)/generated in financing activities 127 543 324 739 1,116 663 1,257 1,444 (1,698) (16,379) (37,549)
Increase/(decrease) in cash and cash equivalents (427) 522 2,901 2,960 2,523 (6,612) 5,998 (1,446) 931 3,513 (415)
Cash and cash equivalents, end of the year 2,969$ 3,491$ 6,392$ 9,352$ 11,875$ 5,263$ 11,261$ $ 9,815 $ 10,746 $ 14,259 $ 13,844
Important disclosures appear on the last page of this report. 17 Apple Inc. (AAPL) Common Size Income Statement
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Net Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Sales 54.03% 58.42% 57.07% 57.48% 57.68% 57.88% 58.08% 58.28% 58.48% 58.68% 58.88% 59.08% 59.28% Gross margin 45.97% 41.58% 42.93% 42.52% 42.32% 42.12% 41.92% 41.72% 41.52% 41.32% 41.12% 40.92% 40.72% Operating expenses: Depreciation and Amortization 2.09% 3.95% 4.35% 4.99% 4.50% 4.61% 4.80% 4.77% 4.84% 4.83% 4.82% 4.82% 4.82% Research and development 2.16% 2.62% 3.30% 3.43% 3.55% 3.67% 3.79% 3.91% 4.03% 4.15% 4.28% 4.40% 4.52% Selling, general and administrative 6.42% 6.34% 6.56% 6.96% 6.96% 6.96% 6.96% 6.96% 6.96% 6.96% 6.96% 6.96% 6.96% Total Operating Expenses 10.67% 12.91% 14.21% 15.38% 15.01% 15.24% 15.55% 15.64% 15.83% 15.95% 16.06% 16.18% 16.30% Operating Income 35.30% 28.67% 28.72% 27.14% 27.31% 26.88% 26.37% 26.08% 25.69% 25.37% 25.06% 24.74% 24.42% Other income/(expense), net 0.33% 0.68% 0.54% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% Income before provision for income taxes 35.63% 29.35% 29.26% 27.66% 27.83% 27.40% 26.89% 26.59% 26.20% 25.89% 25.58% 25.26% 24.94% Provision for income taxes 8.96% 7.68% 7.64% 6.97% 7.01% 6.91% 6.78% 6.70% 6.61% 6.53% 6.45% 6.37% 6.29% Net Income 26.67% 21.67% 21.61% 20.69% 20.81% 20.49% 20.11% 19.89% 19.60% 19.36% 19.13% 18.89% 18.65%
Important disclosures appear on the last page of this report. 18 Apple Inc. (AAPL) Common Size Balance Sheet
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E ASSETS: Current assets: Cash and cash equivalents 6.87% 8.34% 7.57% 12.06% 13.38% 22.72% 34.26% 44.55% 55.61% 66.12% 75.94% 85.33% 94.31% Short‐term marketable securities 11.75% 15.38% 6.15% 14.04% 14.04% 14.04% 14.04% 14.04% 14.04% 14.04% 14.04% 14.04% 14.04% Accounts receivable ‐ Trade 6.98% 7.67% 9.55% 8.80% 8.80% 8.80% 8.80% 8.80% 8.80% 8.80% 8.80% 8.80% 8.80% Inventories 0.51% 1.03% 1.15% 1.14% 1.14% 1.14% 1.14% 1.14% 1.14% 1.14% 1.14% 1.14% 1.14% Deferred tax assets 1.65% 2.02% 2.36% 1.90% 1.91% 1.88% 1.85% 1.82% 1.80% 1.78% 1.76% 1.73% 1.71% Vendor non‐trade receivables 4.96% 4.41% 5.34% 5.22% 5.22% 5.22% 5.22% 5.22% 5.22% 5.22% 5.22% 5.22% 5.22% Other Current Assets 4.13% 4.03% 5.36% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Total Current Assets 36.84% 42.88% 37.49% 48.16% 49.49% 58.80% 70.30% 80.57% 91.61% 102.09% 111.89% 121.26% 130.21% Long‐term marketable securities 58.86% 62.15% 71.21% 56.50% 60.41% 56.50% 56.50% 56.50% 56.50% 56.50% 56.50% 56.50% 56.50% Property, plant and equipment, net 9.87% 9.71% 11.28% 10.29% 10.29% 10.29% 10.29% 10.29% 10.29% 10.29% 10.29% 10.29% 10.29% Goodwill 0.73% 0.92% 2.53% 1.23% 1.23% 1.23% 1.23% 1.23% 1.23% 1.23% 1.23% 1.23% 1.23% Acquired intangible assets, net 2.70% 2.45% 2.27% 2.09% 1.91% 1.79% 1.74% 1.69% 1.66% 1.63% 1.59% 1.56% 1.52% Other assets 3.50% 3.01% 2.06% 3.06% 3.06% 3.06% 3.06% 3.06% 3.06% 3.06% 3.06% 3.06% 3.06% Total Assets 112.50% 121.12% 126.83% 121.33% 122.48% 131.67% 143.12% 153.34% 164.35% 174.80% 184.56% 193.90% 202.81%
LIABILITIES AND SHAREHOLDERS’ EQUITY: Current Liabilities: Accounts payable 13.53% 13.09% 16.52% 15.01% 15.01% 15.01% 15.01% 15.01% 15.01% 15.01% 15.01% 15.01% 15.01% Accrued expenses 7.29% 8.11% 10.09% 8.56% 8.56% 8.56% 8.56% 8.56% 8.56% 8.56% 8.56% 8.56% 8.56% Deferred revenue (S/T) 3.80% 4.35% 4.65% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% Commercial paper (S/T borrowing ‐ Debt) 0.00% 0.00% 3.45% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% Total current liabilities 24.63% 25.54% 34.71% 31.02% 31.02% 31.02% 31.02% 31.02% 31.02% 31.02% 31.02% 31.02% 31.02% Deferred revenue – non‐current 1.69% 1.54% 1.66% 1.64% 1.64% 1.64% 1.64% 1.64% 1.64% 1.64% 1.64% 1.64% 1.64% Long‐term debt 0.00% 9.92% 15.86% 12.50% 12.37% 12.28% 12.24% 12.20% 12.18% 12.16% 12.13% 12.10% 12.08% Other non‐current liabilities 10.65% 11.82% 13.58% 13.92% 13.88% 13.85% 13.84% 13.83% 13.82% 13.81% 13.81% 13.80% 13.79% Total liabilities 36.97% 48.83% 65.81% 59.09% 58.91% 58.79% 58.74% 58.69% 58.66% 58.63% 58.60% 58.56% 58.53% Commitments and contingencies Shareholders’ equity: Common stock and additional paid‐in capital 10.49% 11.56% 12.75% 12.91% 12.83% 12.96% 12.97% 12.56% 12.35% 12.11% 11.85% 11.59% 11.34% Retained earnings 64.72% 61.00% 47.68% 58.90% 68.72% 78.89% 91.15% 102.43% 114.54% 126.03% 136.77% 147.03% 156.83% Accumulated other comprehensive income/(loss) 0.32% ‐0.28% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% Total shareholders’ equity 75.53% 72.29% 61.02% 62.24% 63.57% 72.88% 84.38% 94.65% 105.68% 116.17% 125.96% 135.33% 144.29% Total liabilities and shareholders’ equity 112.50% 121.12% 126.83% 121.33% 122.48% 131.67% 143.12% 153.34% 164.35% 174.80% 184.56% 193.90% 202.81%
Important disclosures appear on the last page of this report. 19 Apple Inc. (AAPL) Weighted Average Cost of Capital (WACC) Estimation
Fiscal Years Ending Sept.27th, 2014 Cost of equity: Risk free rate 2.58% + Beta 0.797 * Market Risk Premium 6.08% Cost of equity 7.43%
Cost of debt: 2045 YTM 3.45% $2 Millions 3.45% 2043 YTM 3.85% $3 Millions 3.85% 2044 YTM 4.45% $1 Millions 4.45%
Cost of debt (including PV of Operating Leases) 3.92%
Weights: Debt (in millions) $ 35,295 PV of Operating Leases (in millions) $ 4,208 Equity (in millions) $ 726,045
Estimated weight for equity 94.84% Estimated weight for debt (including PV of Operating Leases) 5.16%
WACC 7.18%
Important disclosures appear on the last page of this report. 20 Apple Inc. (AAPL) Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 3.00% input page CV growth of NOPLAT CV ROIC 60% WACC 7.16% Cost of Equity 7.43%
Fiscal Years Ending Sept.29th 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
DCF Model Period to discount 1 2 3 4 5 6 7899 FCF 32,736 38,486 42,083 45,261 45,739 46,935 47,093 47,311 47,715 48,124 CV 1,139,773 PV of FCF 30,548 33,513 34,196 34,321 32,366 30,992 29,018 27,204 25,603 PC of CV 611,570 Opearting Value 889,331 Excess Cash (53,790) Marketable Securities 141,395 PV of Operating Lease (4,208) PV of ESOP (6,964)
Equity Value 965,763 Number of Outstanding Shares 6,086 Price (1/1/2015) $ 158.70 Target Price (as of 4/17/15) $ 165.12
EP Model Period to discount 1 2 3 4 5 6 7899 Economic Profit 37,056 39,601 41,702 41,905 42,681 42,711 42,934 43,292 43,633 43,976 CV 1,056,575 PV of EP 34,579 34,484 33,887 31,776 30,202 28,203 26,455 24,893 23,412 PV of CV 566,928 Beg. IC 54,511 Operating Value 889,331 Excess Cash (53,790) Marketable Securities 141,395 PV of Operating Lease (4,208) PV of ESOP (6,964)
Equity Value 965,763 Number of Outstanding Shares 6,086 Price (1/1/2015) $ 158.70 Target Price (as of 4/17/15) $ 165.12 s
Today 4/17/2015 Next FYE 9/27/2015 Last FYE 9/27/2014 Days in FY 365 Days to FYE 202 Elapsed Fraction 0.553
Important disclosures appear on the last page of this report. 21 Apple Inc. (AAPL) Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
EPS 6.87$ 7.71$ 8.12$ 8.19$ 8.39$ 8.44$ 8.52$ 8.63$ 8.73$ 8.83$
Key Assumptions CV growth 3.50% CV ROE 0.13 Cost of Equity 7.43% Implied CV Payout Ratio 72.93% Future Cash Flows P/E Multiple (CV Year) 18.56 EPS (CV Year) 8.83 Future Stock Price 163.95 Dividends Per Share 1.94 2.19 2.33 2.36 2.44 2.47 2.51 2.56 2.60 2.65 Period 1234567899 1.81 1.90 1.88 1.77 1.70 1.60 1.52 1.44 1.37 86.02 Discounted Cash Flows
Intrinsic Value 101.01$ Target Price (as of 4/17/15) 103.79$
Important disclosures appear on the last page of this report. 22 Apple Inc. (AAPL) Relative Valuation Models EPS EPS Est. 5yr Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16 GOOGL Google Inc. $541.31 $28.70 $33.34 18.9 16.2 15.90% 118.62 102.11 HPQ Hewlett‐Packard Company $31.40 $3.65 $3.82 8.6 8.2 2.76% 311.69 297.82 INTC Intel Corporation $30.81 $2.14 $2.41 14.4 12.8 8.25% 174.51 154.96 CSCO Cisco Systems Inc. $27.13 $2.16 $2.26 12.6 12.0 8.17% 153.74 146.93 MSFT Microsoft Corporation $40.29 $2.38 $2.88 16.9 14.0 8.13% 208.22 172.07 MSI Motorola Solutions Inc. $62.51 $3.32 $4.06 18.8 15.4 2.00% 941.42 769.83 NOK Nokia Corporation $7.65 $0.36 $0.42 21.3 18.2 16.20% 131.17 112.43 Average 15.9 13.8 291.3 250.9
AAPL Apple Inc. (AAPL) $124.75 $ 6.87 $ 7.71 18.2 16.2 4.19% 432.9 385.6
Implied Value: Relative P/E (EPS15) $ 109.34 Relative P/E (EPS16) $ 106.70 PEG Ratio (EPS15) $ 83.95 PEG Ratio (EPS16) $ 81.16
Important disclosures appear on the last page of this report. 23 APPLE INC. (AAPL) Key Management Ratios
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Liquidity Ratios Currrent Ratio = Current Asset/Current Liabilities 1.50 1.68 1.08 1.55 1.60 1.90 2.27 2.60 2.95 3.29 3.61 3.91 4.20 Quick Ratio = (Current Assets‐Inventory)/Current Liabilities 1.48 1.64 1.05 1.52 1.56 1.86 2.23 2.56 2.92 3.25 3.57 3.87 4.16 Operating Cash Flow‐to‐Current Liabilities Ratio 1.32 1.23 0.94 0.84 0.87 0.85 0.82 0.82 0.80 0.79 0.79 0.78 0.77
Activity or Asset‐Management Ratios Inventory Turnover Ratio= COGS/ Avg. Inventory 107.94 78.16 53.84 52.09 52.87 52.47 51.62 51.93 51.74 51.97 52.21 52.40 52.58 A/P Turnover Ratio = Inventory / Avg. AP 0.04 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 Asset Turnover Ratio = Sales/Avg. Total Assets 1.72 1.61 1.55 1.61 1.59 1.48 1.37 1.28 1.19 1.12 1.07 1.02 0.97
Financial Leverage Ratios L/T Debt‐to‐Shareholder Equity Ratio N/A 0.14 0.26 0.20 0.19 0.17 0.15 0.13 0.12 0.10 0.10 0.09 0.08 L/T Debt‐to‐Total Assets Ratio N/A 0.08 0.13 0.10 0.10 0.09 0.09 0.08 0.07 0.07 0.07 0.06 0.06 Interest Coverage Ratio = EBIT/ Interest expense 105.83 42.39 53.57 52.67 52.99 52.17 51.17 50.60 49.84 49.24 48.64 48.02 47.40
Profitability Ratios Gross Margin = (Sales ‐ COGS)/Sales 45.97% 41.58% 42.93% 42.52% 42.32% 42.12% 41.92% 41.72% 41.52% 41.32% 41.12% 40.92% 40.72% Profit Margin = NI/Sales 26.67% 21.67% 21.61% 20.69% 20.81% 20.49% 20.11% 19.89% 19.60% 19.36% 19.13% 18.89% 18.65% ROA = NI/ Total Asset 23.70% 17.89% 17.04% 17.05% 16.99% 15.56% 14.05% 12.97% 11.92% 11.08% 10.37% 9.74% 9.20% ROE = NI/ SE 35.30% 29.98% 35.42% 33.23% 32.74% 28.12% 23.83% 21.01% 18.54% 16.67% 15.19% 13.96% 12.93% Return on R&D Mutiple = NI/R&D Expenses 12.34 8.28 6.54 6.04 5.87 5.59 5.31 5.08 4.86 4.66 4.47 4.30 4.13
Payout Policy Ratios Dividend Payout Ratio = DPS/EPS 5.96% 28.68% 28.03% 28.23% 28.43% 28.63% 28.83% 29.03% 29.23% 29.43% 29.63% 29.83% 30.03% Total Payout Ratio = (Dividends+Share Repurchases)/NI 5.96% 28.68% 28.03% 77.10% 117.22% 123.50% 129.27% 133.58% 139.65% 145.16% 150.25% 155.28% 160.19%
Important disclosures appear on the last page of this report. 24 COGS $ 164.62 37.28% 42.28% 47.28% 52.28% 57.28% 62.28% 67.28% 72.28% 77.28% 82.28% 8.68% 218.92 195.46 171.99 148.53 125.06 101.60 78.13 54.67 31.20 7.74 8.38% 230.31 205.54 180.76 155.99 131.22 106.44 81.67 56.89 32.12 7.35 8.08% 243.04 216.81 190.57 164.33 138.09 111.85 85.62 59.38 33.14 6.90 7.78% 257.37 229.48 201.60 173.71 145.83 117.94 90.06 62.17 34.29 6.40 WACC 7.48% 273.61 243.86 214.10 184.35 154.60 124.84 95.09 65.33 35.58 5.83 7.18% 292.18 260.29 228.40 196.51 164.62 132.73 100.84 68.95 37.06 5.17 6.88% 313.61 279.25 244.90 210.54 176.18 141.83 107.47 73.12 38.76 4.40
Estimated 6.58% 338.63 301.39 264.16 226.92 189.69 152.45 115.21 77.98 40.74 3.50 6.28% 368.22 327.58 286.94 246.29 205.65 165.01 124.37 83.72 43.08 2.44 5.98% 403.77 359.04 314.30 269.56 224.83 180.09 135.35 90.62 45.88 1.15
SG&A Cost $ 164.62 4.96% 5.46% 5.96% 6.46% 6.96% 7.46% 7.96% 8.46% 8.96% 9.46% 8.68% 134.45 132.10 129.76 127.41 125.06 122.72 120.37 118.02 115.68 113.33 8.38% 141.13 138.65 136.17 133.69 131.22 128.74 126.26 123.78 121.31 118.83 8.08% 148.59 145.96 143.34 140.72 138.09 135.47 132.84 130.22 127.60 124.97 7.78% 156.98 154.19 151.40 148.62 145.83 143.04 140.25 137.46 134.67 131.89 WACC 7.48% 166.50 163.52 160.55 157.57 154.60 151.62 148.64 145.67 142.69 139.72 7.18% 177.37 174.18 171.00 167.81 164.62 161.43 158.24 155.05 151.86 148.67 6.88% 189.93 186.49 183.06 179.62 176.18 172.75 169.31 165.88 162.44 159.01
Estimated 6.58% 204.58 200.86 197.13 193.41 189.69 185.96 182.24 178.51 174.79 171.07 6.28% 221.91 217.84 213.78 209.72 205.65 201.59 197.52 193.46 189.39 185.33 5.98% 242.72 238.25 233.77 229.30 224.83 220.35 215.88 211.41 206.93 202.46
CV Growth of NOPLAT $ 164.62 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 1.05 110.83 114.06 117.78 122.10 127.19 133.29 140.69 149.90 161.66 177.18 1.00 114.62 118.22 122.39 127.27 133.06 140.06 148.67 159.53 173.65 192.77 0.95 118.73 122.75 127.44 132.97 139.60 147.69 157.78 170.72 187.92 211.88 0.90 123.20 127.71 133.00 139.30 146.93 156.35 168.28 183.88 205.15 235.86 0.85 128.06 133.14 139.15 146.37 155.20 166.27 180.53 199.60 226.41 266.87
Beta 0.80 133.38 139.12 145.98 154.30 164.62 177.74 194.99 218.69 253.28 308.51 0.75 139.22 145.75 153.62 163.28 175.43 191.15 212.33 242.38 288.34 367.42 0.70 145.67 153.13 162.22 173.52 187.96 207.06 233.51 272.56 336.01 457.19 0.65 152.83 161.40 171.97 185.31 202.68 226.23 259.96 312.32 404.62 610.72 0.60 160.80 170.73 183.12 199.03 220.20 249.76 293.94 367.13 511.88 933.50
Normal Cash $ 164.62 17.00% 22.00% 27.00% 32.00% 37.00% 42.00% 47.00% 52.00% 57.00% 62.00% 1.05 133.49 131.92 130.34 128.77 127.19 125.62 124.05 122.47 120.90 119.32 1.00 139.35 137.78 136.21 134.64 133.06 131.49 129.92 128.35 126.77 125.20 0.95 145.88 144.31 142.74 141.17 139.60 138.03 136.46 134.89 133.32 131.75 0.90 153.20 151.63 150.06 148.50 146.93 145.36 143.79 142.23 140.66 139.09 0.85 161.46 159.90 158.33 156.77 155.20 153.64 152.07 150.51 148.94 147.38
Beta 0.80 170.87 169.31 167.74 166.18 164.62 163.05 161.49 159.93 158.37 156.80 0.75 181.67 180.11 178.55 176.99 175.43 173.86 172.30 170.74 169.18 167.62 0.70 194.19 192.63 191.08 189.52 187.96 186.40 184.85 183.29 181.73 180.17 0.65 208.90 207.34 205.79 204.23 202.68 201.12 199.57 198.01 196.46 194.90 0.60 226.41 224.86 223.30 221.75 220.20 218.65 217.09 215.54 213.99 212.43
2015 Apple Watch Unit Sale Growth Units (in thousands): 10,000 13,333 16,667 20,000 23,333 26,667 30,000 33,333 36,667 40,000 $ 164.62 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% 1.05 122.99 124.04 125.09 126.14 127.19 128.25 129.30 130.35 131.40 132.46 1.00 128.61 129.72 130.84 131.95 133.06 134.18 135.29 136.40 137.52 138.63 0.95 134.87 136.05 137.24 138.42 139.60 140.78 141.97 143.15 144.33 145.51 0.90 141.89 143.15 144.41 145.67 146.93 148.19 149.45 150.71 151.97 153.23 0.85 149.82 151.16 152.51 153.86 155.20 156.55 157.90 159.24 160.59 161.94
Beta 0.80 158.84 160.28 161.73 163.17 164.62 166.06 167.51 168.95 170.40 171.84 0.75 169.19 170.75 172.31 173.87 175.43 176.98 178.54 180.10 181.66 183.22 0.70 181.20 182.89 184.58 186.27 187.96 189.65 191.34 193.03 194.73 196.42 0.65 195.29 197.14 198.99 200.83 202.68 204.52 206.37 208.22 210.06 211.91 0.60 212.08 214.11 216.14 218.17 220.20 222.23 224.26 226.29 228.32 230.35
Important disclosures appear on the last page of this report. 25 Apple Inc. (AAPL) PV of Operating Leases and Forecast
Fiscal Years Ending Sept.27th, 2014
Fiscal Year Ended 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E 2021 E 2022 E 2023 E 2024 E PV of Minimum Payments 385.3 24.7 118.2 1183.4 164.6 1598.6 1754.5 2521.5 3694.3 3967.5 4208.3 5129.8 5612.8 6001.7 6162.0 6359.6 6470.9 6595.7 6741.6 6892.4 7048.4
Important disclosures appear on the last page of this report. 26 Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating Operating Fiscal Years Ending Sept.27th, Leases (in millions) Fiscal Year Ended Leases (in millions) Fiscal Year Ended Leases (in millions) 2015 662 2014 610 2013 516 2016 676 2015 613 2014 556 2017 645 2016 587 2015 542 2018 593 2017 551 2016 513 2019 534 2018 505 2017 486 Thereafter 1877 Thereafter 1855 Thereafter 1801 Total Minimum Payments 4987 Total Minimum Payments 4721 Total Minimum Payments 4414 Less: Interest 779 Less: Interest 754 Less: Interest 720 PV of Minimum Payments 4208 PV of Minimum Payments 3967 PV of Minimum Payments 3694
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Number Years Implied by Yea 3.5 Number Years Implied by Year 6 Pay 3.7 Number Years Implied by Year 6 Payment 3.7
Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 662 637.0 1 610 587.0 1 516 496.6 2 676 626.0 2 613 567.7 2 556 514.9 3 645 574.8 3 587 523.1 3 542 483.0 4 593 508.5 4 551 472.5 4 513 439.9 5 534 440.7 5 505 416.7 5 486 401.1 6 & beyond 534 1421.3 6 & beyond 505 1400.4 6 & beyond 486 1358.8 PV of Minimum Payments 4208.3 PV of Minimum Payments 3967.5 PV of Minimum Payments 3694.3
Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009)
Operating Operating Operating Fiscal Year Ended Leases (in millions) Fiscal Year Ended Leases (in millions) Fiscal Year Ended Leases (in millions) 2012 338 2011 266 2010 222 2013 365 2012 267 2011 234 2014 362 2013 260 2012 228 2015 345 2014 244 2013 214 2016 320 2015 226 2014 199 Thereafter 1302 Thereafter 826 Thereafter 825 Total Minimum Payments 3032 Total Minimum Payments 2089 Total Minimum Payments 1922 Less: Interest 511 Less: Interest 335 Less: Interest 323 PV of Minimum Payments 2521 PV of Minimum Payments 1754 PV of Minimum Payments 1599
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Number Years Implied by Yea 4.1 Number Years Implied by Year 6 Pay 3.7 Number Years Implied by Year 6 Payment 4.1
Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 338 325.3 1 266 256.0 1 222 213.6 2 365 338.0 2 267 247.3 2 234 216.7 3 362 322.6 3 260 231.7 3 228 203.2 4 345 295.9 4 244 209.2 4 214 183.5 5 320 264.1 5 226 186.5 5 199 164.2 6 & beyond 320 975.7 6 & beyond 226 623.8 6 & beyond 199 617.3 PV of Minimum Payments 2521.5 PV of Minimum Payments 1754.5 PV of Minimum Payments 1598.6
Important disclosures appear on the last page of this report. 27 Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (2007) Present Value of Operating Lease Obligations (2006)
Operating Operating Operating Fiscal Year Ended Leases (in millions) Fiscal Year Ended Leases (in millions) Fiscal Year Ended Leases (in millions) 2009 50 2008 155 2007 24 2010 35 2009 172 2008 21 2011 32 2010 173 2009 18 2012 26 2011 160 2010 14 2013 13 2012 148 2011 13 Thereafter 29 Thereafter 617 Thereafter 49 Total Minimum Payments 185 Total Minimum Payments 1425 Total Minimum Payments 139 Less: Interest 20 Less: Interest 242 Less: Interest 21 PV of Minimum Payments 165 PV of Minimum Payments 1183 PV of Minimum Payments 118
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Number Years Implied by Yea 2.2 Number Years Implied by Year 6 Pay 4.2 Number Years Implied by Year 6 Payment 3.8
Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 50 48.1 1 155 149.2 1 24 23.1 2 35 32.4 2 172 159.3 2 21 19.4 3 32 28.5 3 173 154.2 3 18 16.0 4 26 22.3 4 160 137.2 4 14 12.0 5 13 10.7 5 148 122.1 5 13 10.7 6 & beyond 13 22.5 6 & beyond 148 461.5 6 & beyond 13 36.9 PV of Minimum Payments 164.6 PV of Minimum Payments 1183.4 PV of Minimum Payments 118.2
Present Value of Operating Lease Obligations (2005) Present Value of Operating Lease Obligations (2004)
Operating Operating Fiscal Year Ended Leases (in millions) Fiscal Year Ended Leases (in millions) 2006 10 2005 89 2007 8 2006 91 2008 5 2007 79 2009 1 2008 65 2010 1 2009 61 Thereafter 2 Thereafter 49 Total Minimum Payments 27 Total Minimum Payments 434 Less: Interest 2 Less: Interest 49 PV of Minimum Payments 25 PV of Minimum Payments 385
Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 3.92% Pre‐Tax Cost of Debt 3.92% Number Years Implied by Yea 2.0 Number Years Implied by Year 6 Pay 1.0
Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment 1 10 9.6 1 89 85.6 2 8 7.4 2 91 84.3 3 5 4.5 3 79 70.4 4 1 0.9 4 65 55.7 5 1 0.8 5 61 50.3 6 & beyond 1 1.6 6 & beyond 49 38.9 PV of Minimum Payments 24.7 PV of Minimum Payments 385.3
Important disclosures appear on the last page of this report. 28 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 110,422,000 Average Time to Maturity (years): 3.37 Expected Annual Number of Options Exercised: 32,722,656
Current Average Strike Price: $ 68.05 Cost of Equity: 7.43% Current Stock Price: $124.75
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Increase in Shares Outstanding: 32,722,656 32,722,656 32,722,656 12,107,383 Average Strike Price: $ 68.05 $ 68.05 $ 68.05 $ 68.05 Increase in Common Stock Account: 2,226,836,770 2,226,836,770 2,226,836,770 823,929,605
Change in Treasury Stock 20,000,000,000 20,000,000,000 5,000,000,000 3,000,000,000 3,000,000,000 3,000,000,000 3,000,000,000 3,000,000,000 3,000,000,000 3,000,000,000 Expected Price of Repurchased Shares: $ 124.75 $ 134.02 $ 143.97 $ 154.67 $ 166.16 $ 178.50 $ 191.76 $ 206.01 $ 221.31 $ 237.75 Number of Shares Repurchased: 160,320,641 149,234,378 34,728,684 19,396,305 18,055,040 16,806,523 15,644,343 14,562,528 13,555,520 12,618,149
Shares Outstanding (beginning of the year) 6,085,572,000 5,957,974,015 5,841,462,294 5,839,456,267 5,832,167,344 5,814,112,305 5,797,305,781 5,781,661,438 5,767,098,911 5,753,543,390 Plus: Shares Issued Through ESOP 32,722,656 32,722,656 32,722,656 12,107,383 0 0 0000 Less: Shares Repurchased in Treasury 160,320,641 149,234,378 34,728,684 19,396,305 18,055,040 16,806,523 15,644,343 14,562,528 13,555,520 12,618,149 Shares Outstanding (end of the year) 5,957,974,015 5,841,462,294 5,839,456,267 5,832,167,344 5,814,112,305 5,797,305,781 5,781,661,438 5,767,098,911 5,753,543,390 5,740,925,242
Important disclosures appear on the last page of this report. 29 VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol AAPL Current Stock Price $124.75 Risk Free Rate 2.58% Current Dividend Yield 1.46% Annualized St. Dev. of Stock Returns 38.80%
Average Average B‐S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 6,600,000 21.99 1.40 101.02$ $ 666,726,756 Range 2 103,822,000 70.98 3.50 60.66$ $ 6,297,521,199 Total 110,422,000 68.05$ 3.37 67.64$ $ 6,964,247,956
Important disclosures appear on the last page of this report. 30 Apple Inc. (AAPL) Value Driver Estimation
Fiscal Years Ending Sept.27th, 2014 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E NOPLAT EBITA (t): Operating Revenues 156,508 170,910 182,795 197,847 216,478 231,475 237,660 245,280 249,572 254,387 260,012 265,829 271,845 LESS: COGS (84,569) (99,849) (104,312) (113,723) (124,865) (133,978) (138,033) (142,949) (145,949) (149,274) (153,095) (157,052) (161,150) LESS: SG&A (10,040) (10,830) (11,993) (13,770) (15,067) (16,111) (16,541) (17,071) (17,370) (17,705) (18,097) (18,502) (18,920) LESS: Depreciation & Amortization of Non‐Goodwill intangibles (3,277) (6,757) (7,946) (9,874) (9,746) (10,663) (11,402) (11,707) (12,082) (12,294) (12,531) (12,808) (13,094) LESS: R&D Expenses (3,381) (4,475) (6,041) (6,779) (7,680) (8,493) (9,008) (9,594) (10,065) (10,568) (11,117) (11,689) (12,283) PLUS: Implied interest on PV of operating leases 145 155 165 201 220 235 241 249 253 258 264 270 276 EBITA (t) 55,386 49,154 52,668 53,903 59,341 62,466 62,917 64,207 64,358 64,804 65,436 66,049 66,673
LESS: Adjusted Taxes Provision for income taxes 14,030 13,118 13,973 13,795 15,186 15,989 16,109 16,442 16,485 16,602 16,768 16,928 17,092 LESS: Tax Non‐Operating Income (185) (409) (347) (361) (395) (422) (433) (447) (455) (464) (474) (485) (496) PLUS: Tax on Implied interest on PV of operating leases 51 55 58 71 78 83 85 88 90 91 93 95 98 Total Adjusted Taxes 13,897 12,764 13,685 13,506 14,869 15,650 15,761 16,083 16,120 16,230 16,387 16,539 16,694
PLUS: Change in Deferred Taxes (t, t‐1): t: Deferred Tax Liability (t) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Deferred Tax Asset (t) 2,583 3,453 4,318 3,755 4,134 4,352 4,385 4,476 4,487 4,519 4,564 4,608 4,652 Difference (2,583) (3,453) (4,318) (3,755) (4,134) (4,352) (4,385) (4,476) (4,487) (4,519) (4,564) (4,608) (4,652) t‐1: Deferred Tax Liability (t‐1) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Deferred Tax Asset (t‐1) 2,014 2,583 3,453 4,318 3,755 4,134 4,352 4,385 4,476 4,487 4,519 4,564 4,608 Difference (2,014) (2,583) (3,453) (4,318) (3,755) (4,134) (4,352) (4,385) (4,476) (4,487) (4,519) (4,564) (4,608)
Change in Deferred Taxes (t, t‐1) (569) (870) (865) 563 (378) (219) (33) (91) (12) (32) (45) (44) (45)
NOPLAT Calculation: EBITA (t) 55,386 49,154 52,668 53,903 59,341 62,466 62,917 64,207 64,358 64,804 65,436 66,049 66,673 LESS: Adjusted Taxes (13,897) (12,764) (13,685) (13,506) (14,869) (15,650) (15,761) (16,083) (16,120) (16,230) (16,387) (16,539) (16,694) PLUS: Change in Deferred Taxes (t, t‐1): (569) (870) (865) 563 (378) (219) (33) (91) (12) (32) (45) (44) (45) NOPLAT (t): 40,920 35,520 38,118 40,960 44,094 46,597 47,123 48,033 48,227 48,542 49,004 49,466 49,935
Invested Capital Operating Current Assets: "Normal" Cash 57,908 63,237 67,634 73,203 80,097 85,646 87,934 90,753 92,341 94,123 96,204 98,357 100,583 Account Receivable 18,692 20,641 27,219 27,728 30,339 32,441 33,308 34,376 34,977 35,652 36,441 37,256 38,099 Inventory 791 1,764 2,111 2,255 2,468 2,639 2,709 2,796 2,845 2,900 2,964 3,030 3,099 Other Operating Current Assets 6,458 6,882 9,806 9,892 10,824 11,574 11,883 12,264 12,479 12,719 13,001 13,291 13,592 Total Operating Current Assets 83,849 92,524 106,770 113,080 123,728 132,300 135,834 140,189 142,643 145,395 148,610 151,935 155,373
Operating Current Liabilities: Account Payable 21,175 22,367 30,196 29,697 32,493 34,744 35,673 36,816 37,461 38,183 39,028 39,901 40,804 Accrued Expenses 11,414 13,856 18,453 16,936 18,531 19,814 20,344 20,996 21,363 21,776 22,257 22,755 23,270 Deferred Revenue 5,953 7,435 8,491 8,606 9,417 10,069 10,338 10,670 10,856 11,066 11,311 11,564 11,825 Total Operating Current Liabilities 38,542 43,658 57,140 55,239 60,441 64,628 66,355 68,482 69,680 71,025 72,595 74,220 75,899
Net Operating Working Capital: Total Operating Current Assets 83,849 92,524 106,770 113,080 123,728 132,300 135,834 140,189 142,643 145,395 148,610 151,935 155,373 LESS: Total Operating Current Liabilities (38,542) (43,658) (57,140) (55,239) (60,441) (64,628) (66,355) (68,482) (69,680) (71,025) (72,595) (74,220) (75,899) Net Operating Working Capital 45,307 48,866 49,630 57,841 63,287 67,672 69,480 71,707 72,962 74,370 76,014 77,715 79,474
Net PP&E: Net PP&E 15,452 16,597 20,624 20,356 22,273 23,816 24,452 25,236 25,678 26,173 26,752 27,351 27,970
Other L/T Opearting Assets: Net Intangible Assets (non‐goodwill) 4,224 4,179 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 4,142 PV of Operating Leases 3,694 3,967 4,208 5,130 5,613 6,002 6,162 6,360 6,471 6,596 6,742 6,892 7,048 Other Assets 5,478 5,146 3,764 6,054 6,624 7,083 7,272 7,506 7,637 7,784 7,956 8,134 8,318 Total Other L/T Operating Assets 13,396 13,292 12,114 15,326 16,379 17,227 17,576 18,007 18,250 18,522 18,840 19,169 19,509
Other L/T Operating Liabiliities: Deferred Revenue 2,648 2,625 3,031 3,245 3,550 3,796 3,898 4,023 4,093 4,172 4,264 4,360 4,458 Other (non‐interest bearing) Liabilities 16,664 20,208 24,826 27,542 30,046 32,061 32,892 33,916 34,493 35,140 35,895 36,677 37,485 Total L/T Operating Liabilities 19,312 22,833 27,857 30,787 33,596 35,857 36,790 37,938 38,586 39,312 40,160 41,037 41,944
Invested Capital Calculation: Net Operating Working Capital 45,307 48,866 49,630 57,841 63,287 67,672 69,480 71,707 72,962 74,370 76,014 77,715 79,474 PLUS: Net PP&E 15,452 16,597 20,624 20,356 22,273 23,816 24,452 25,236 25,678 26,173 26,752 27,351 27,970 PLUS: Total Other L/T Operating Assets 13,396 13,292 12,114 15,326 16,379 17,227 17,576 18,007 18,250 18,522 18,840 19,169 19,509 LESS: Total L/T Operating Liabilities (19,312) (22,833) (27,857) (30,787) (33,596) (35,857) (36,790) (37,938) (38,586) (39,312) (40,160) (41,037) (41,944) Invested Capital (IC): 54,843 55,922 54,511 62,736 68,343 72,858 74,719 77,013 78,304 79,754 81,447 83,198 85,009
Return on Invested Capital: NOPLAT (t): 40,920 35,520 38,118 40,960 44,094 46,597 47,123 48,033 48,227 48,542 49,004 49,466 49,935 OVER: Invested Capital (t‐1) 54,843 55,922 54,511 62,736 68,343 72,858 74,719 77,013 78,304 79,754 81,447 83,198 85,009 Return on Invested Capital (ROIC): 118% 65% 68% 75% 70% 68% 65% 64% 63% 62% 61% 61% 60%
Free Cash Flow: NOPLAT (t): 40,920 35,520 38,118 40,960 44,094 46,597 47,123 48,033 48,227 48,542 49,004 49,466 49,935 LESS: Change in Invested Capital 20,135 1,079 (1,411) 8,224 5,608 4,514 1,861 2,294 1,292 1,449 1,693 1,751 1,811 Free Cash Flow (FCF): 20,786 34,441 39,529 32,736 38,486 42,083 45,261 45,739 46,935 47,093 47,311 47,715 48,124
Economic Profit: Invested Capital (IC): 54,843 55,922 54,511 62,736 68,343 72,858 74,719 77,013 78,304 79,754 81,447 83,198 85,009 Return on Invested Capital (ROIC): 117.90% 64.77% 68.16% 75.14% 70.29% 68.18% 64.68% 64.28% 62.62% 61.99% 61.44% 60.73% 60.02% WACC 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% 7.18% Economic Profit (EP): 38,429 31,585 34,105 37,048 39,592 41,692 41,895 42,671 42,700 42,923 43,281 43,622 43,964
Important disclosures appear on the last page of this report. 31