Sunday, November 05, 2006

AAPL – Apple Computers, Inc.

Portfolio Decision: Will not add
Value Assessment: Earnings yields do not provide enough premium compared to treasury bonds.
Growth Assessment: Current trading levels already account for future growth performance.

Company Overview

Apple Computer, Inc. engages in the design, manufacture, and marketing of personal computers and related software, services, peripherals, and networking solutions worldwide. It also offers a line of portable digital music players, accessories, and services. The company’s products and services include Macintosh line of desktop and notebook computers; iPod digital music player; Xserve G5 server and Xserve RAID storage products; a portfolio of consumer and professional software applications; Mac OS X operating system; iTunes Music Store; and a portfolio of peripherals that support and enhance the Macintosh and iPod product lines. The company also sells various third-party products, including computer printers and printing supplies, storage devices, computer memory, digital camcorders and still cameras, personal digital assistants, iPod accessories, and various other computing products and supplies. In addition, it engages in the online distribution of music, audio books, music videos, short films, and television shows. Further, the company offers products and services for the educational industry, which include eMac, iMac, and iBook; video creation and editing solutions; wireless networking; student information systems; curriculum and professional development solutions; and one-to-one learning solutions. It sells its products primarily to education, creative, consumer, and business markets primarily through online, retail stores, wholesalers, resellers, and cataloguers. As of September 24, 2005, the company operated 116 stores in the United States; and 8 stores in Canada, Japan, and the United Kingdom. Apple Computer was co-founded by Steven P. Jobs in 1976. The company is headquartered in Cupertino, California.

5-Year Financial History

AAPL has shown strong sales and income growth over the last five years with revenue and net income compound annual growth rates of 27.5% and 98.3%, respectively.

AAPL has experience significant annual revenue growth starting from 2004. Gross margins have slightly improved with leveraging across the other operating expenses.

5-Year Stock Performance

If you had invested $10,000 in AAPL stock on 01.02.2001, your stock would be worth $60,052, which representsa +500% return.

Value Assessment

I use an 8 criteria selection grid to help me assess potential value in any equity assessment. These 8 criteria are mainly driven from my readings of Benjamin Graham. The security doesn’t have to pass all of the below criteria to be selected for my portfolio, the more the better. Some of the major items that I focus on are Price to Book ratio (Criteria D.) and the earnings and free cash flow yields metrics (Criteria G.).

The value scorecard will show you that AAPL has passed the 5 years Revenue, Income, and Liabilities as a % to Book Value. Regarding the Free Cash Flow metric (Criteria C), it will highlight a positive rating in the next year, currently only showing growth of the last 4 reported years. I cannot categorize AAPL as a value investment, because it is trading at 6.4x above its book value and it does not provide an adequate risk/reward profile compared to the 10year federal bonds.

Growth Assessment
With my growth reviews of stock, I use a few different valuation techniques to surround my assumptions.
- 5 Year Discounted Cash Flow model with terminal value
- Industry Price to Earnings multiples
- Industry Price to Sales multiples
- Current Price to Earnings sensitivity

From a growth perspective, the current market cap has the future growth priced in with a potential downside.

DCF Model
In the 5 year DCF model, I am assuming 20% sales growth with no margin or FCF improvement. With a 4.0% terminal value, AAPL is worth around $62.6 Billion.

Industry P/E and P/S multiples
I am currently using 5 competitors in the industry multiple comparison section. These competitors are mainly focused on the personal computers industry, one of the major industries that AAPL competes in.

Current P/E sensitivity
In the above industry list, you will notice the AAPL is currently trading at 34.9x to earnings per share. Below you will find a sensitivity grid to future earnings growth compared to Price to Earnings metrics.

Company Website
Yahoo Finance Website
Morningstar Website

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