FINANCIAL REVIEW

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TABLE OF CONTENTS

1. Company Background

2. Stock Price Analysis

3. Risk Return Analysis

5. References

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PART I

A. Company Background Apple Inc. along with its wholly-owned subsidiaries designs and manufactures and markets mobile communication, media devices, personal computers and portable digital music players along with a variety of related softwares, services, peripherals and networking solutions. The Company offers a range of mobile communication and media devices, personal computing products, and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The most important of which are enumerated below:
1.

iPhone iPhone combines a mobile phone and an iPod, Internet communication device in a single handheld product.

2.

iPad is a multi-purpose mobile device, for browsing web, sending and reading email, viewing photos & watching videos, listening music, playing games and reading e-books etc.

3.

Mac Hardware Products includes likes of iMac, Mac-Pro and Mac mini. The iMac desktop has design that incorporates display, processor, graphics, storage, and other components in a single enclosure

4.

iPod line of portable digital media players includes likes of iPod touch, iPod shuffle and iPod classic. iPod is a flash-memory-based device with a widescreen display, a MultiTouch user interface.

5.

iTunes is an application, which supports the sale, purchase, download, organization and playback of digital video and audio files and is also available for both the Mac and the Windows based computers.

The Company not only sells to retail and bulk consumers, but also to small and mid-sized businesses, and to educational institutions, enterprises and government customers. The Companys fiscal year ends on the last Saturday of September and is of 52 or 53-week period. The company has almost 60400 permanent employees and has the second largest market cap after IBM with about 563.79 Billion dollars and an equal enterprise value, with revenues in excess of 142.36 Billion dollars and with and EBITDA of 53.27 billion dollars.

B. Business Strategy & Organization 3

The Companys business strategy is to uniquely leverage its ability to design, develop its own operating system, hardware, applications softwares, to its customers, and new products and new solutions with superior usage ease and seamless integration and innovative design. The Companys strategy, also includes and basically rests on, expanding its distribution network so in order to effectively reach more customers. The Company manages business primarily on geographical basis and has segregated the business locations of its customers into the following 1. The Americas consisting of both North and South America, 2. Europe, Middles East and Africa, 3. Japan, 4. Asia-Pacific, Australia and Asian countries and 5. Retail. It is to be noted that all the above four segments do not include the retail segment figures and strategy. The retail segment consists of stores directly opened by the company and managed by it. C. Competition The products and services offered by the company are a part of highly competitive markets segment it faces stiff and aggressive competition in almost all areas of its business. The market is characterized by very frequent new product introductions and a rapid technological advancement that has substantial capabilities of use of mobile and related communications devices. There is a cut throat competition in the market where the companys operates, as the competitors are continuously innovating and selling products at extremely low rates. However still the company has been able to maintain its market brand values and sees a good and extremely high level of operating cash flows generation. The Companys major services i.e. digital content services is facing significant competition from other companies who are promoting their own digital music, services and content products, including free peer to peer video and music services. Some of Apples competitors have enough substantial resources and may provide such products and services in market at virtually little or no even profit to compete with the Apples offerings. The most important and major companys competitors can be classified in various ways as below:

Direct Competitors Computers and Accessories Segments CompanyName LastSale Volume 52 Weeks High/ Low P/ERatio Market Cap Apple Inc. $ 603.00 1,45,27,500.00 $ 644.00 14.70 5,62,21,91,10,000.00 Dell Inc. $ 16.44 1,01,72,821.00 $ 18.36 8.70 29,53,46,07,960.00 Hewlett-Packard Company $ 24.75 88,61,104.00 $ 41.74 8.75 48,93,92,39,250.00 International Business Machines Corporation $ 206.81 33,11,119.00 $ 210.69 15.41 2,38,55,20,26,040.00
Direct Competitors All Segments AAPL
Market Cap: Employees: Qtrly Rev Growth (yoy): Revenue (ttm): Gross Margin (ttm): EBITDA (ttm): Operating Margin (ttm): Net Income (ttm): EPS (ttm): P/E (ttm): PEG (5 yr expected): P/S (ttm): 563.79B 60,400.00 58.90% 142.36B 43.95% 53.27B 35.69% 38.62B 41.04 14.69 0.65 3.99

GOOG
200.05B 33,077.00 24.10% 39.98B 64.88% 14.80B 32.11% 10.83B 33.00 18.64 0.80 5.01

HPQ
48.92B 3,49,600.00 -7.00% 124.98B 23.24% 15.54B 8.41% 5.94B 2.86 8.66 1.75 0.39

RIMM
7.23B 16,500.00 -24.60% 18.44B 35.76% 3.49B 10.69% 1.16B 2.22 6.32 (17.38) 0.40

Industry
534.23B 106.70K 24.30% 127.84B 42.41% 45.45B 37.42% N/A 35.14 16.31 1.33 4.18

However for our study later on, we shall consider HPQ or Hewitt Packard as a close competitor.

PART II

A. Stock Price Analysis

For our stock price analysis, we consider the time period from 16 Mar 2012 to 6 April 2012. However it is to be noted that the time frame provided here is not ample for a detailed study and an accurate one for future predictions.

We first study the movement of the Apple Inc. stock price movements vis--vis the S&P 500.

Apple Inc. vs S&P 500

$640.00 $630.00 $620.00 1,425.00 1,420.00
1,415.00

Apple Inc. Stock Prices

1,410.00 $610.00 $600.00 $590.00 $580.00

1,385.00

1,405.00

S&P 500

1,400.00 1,395.00
1,390.00

Apple Inc.
S&P 500

$570.00 $560.00

1,380.00 1,375.00

1-Apr-12

3-Apr-12

26-Mar-12

28-Mar-12

Date

From the above figure it is clear that the movement of Apple is less volatile than that of the Index. It is also to be noted that the pattern of movement of Apples price show that it is lagging behind or trailing the trend movement of the index. Furthermore in the period under consideration above there seems to be an immediate uptrend developing and sustaining. Also the major point of astonishment here is during the period post 3 April 2012, the S&P 500 and Apples stock prices are moving in opposite direction thereby indicating of some news based movement. This move was probably preempting the Q2 filing by the company which was due later in the next week. However no serious trend or movement is visible in either of the charts above.

We do the same comparison of Apple with its peer HPQ for the same period. 6

30-Mar-12

16-Mar-12

18-Mar-12

20-Mar-12

22-Mar-12

24-Mar-12

5-Apr-12

Apple Inc. vs HPQ.

$640.00 $25.00

$630.00 $24.50 $620.00

Apple inc. stock Prices

$24.00
$610.00

HPQ Stock Prices

$600.00 $590.00

$23.50

Apple Inc.
HPQ

$23.00 $580.00 $22.50

$570.00

$560.00

$22.00

20-Mar-12

26-Mar-12

Date

From the graph above it is quite clear that where Apples price movement is positively trending upwards, that of HOQ is a sideways movement without any perfect present trend or direction. The reason being the expectations from the forthcoming Q2 results of Apple, which was an event based movement for Apple, which was absent for HPQ.

Now we study the movement of the stock prices on a standalone basis.

Apple Stock Prices Movement & Volume Data

Millions

35 30
25

30-Mar-12

16-Mar-12

18-Mar-12

22-Mar-12

24-Mar-12

28-Mar-12

5-Apr-12

1-Apr-12

3-Apr-12

$640.00 $630.00 $620.00 $610.00 $600.00 $590.00

Volume

20 15 10 5
0

$580.00 $570.00 $560.00 $550.00

$540.00

1-Apr-12

3-Apr-12

16-Mar-12

18-Mar-12

20-Mar-12

22-Mar-12

24-Mar-12

26-Mar-12

28-Mar-12

Date

30-Mar-12

5-Apr-12

Apple Inc. Stock Prices

From the above diagram it is clear that there is no significant or sudden movement in prices or volume of the stock. However they both show a good trend, and there is not much pressure on the prices of the stock at higher levels which is shown by the build of white candles and an uptrend, which indicates of further upside room present in the stock. However this seems to be news based event and should be properly traded. In all there are five black and ten white candles, which show an imminent uptrend in the stock price, which is also supported by sustenance in the daily volumes.

PART III

A. Risk Return Analysis

We now perform a risk return analysis on the stock. We use the concepts of CAPM model and data for the period as specified in the above segment and calculate different measures as shown below and abridged in the accompanying excel file.
Return on Apple Return on HPQ Average Return Standard Deviaition Variance Covariance Beta Expected Retrun by CAPM Risk free rate=30 yr US TBILL 0.5761% 1.4524% 0.000211 0.000038 1.046 -0.1735% 3.12% Return on S&P 500 -0.4049% -0.0292% 1.3072% 0.6017% 0.000171 0.000036 0.000048 1.333 -1.0768%

From the above calculations we see that the Beta of Apple is lesser than that of HPQ and more close to 1 which resembles that Apple is less volatile than HPQ and more in tandem with the normal or broad market movement. On the other hand HPQ has a high beta indicating that the movement in prices of HPQ is more volatile and would yield a higher return, either positive or negative, as compared to Apple.

This is also visible in the fact that the Expected return of HPQ is less than that of Apple, which is at least a percentage point or a 100 bps better than HPQ. It is also seen that Apple has been able to give positive returns as compared to HPQ and even the market. This means that Apple has been able to outperform the market. The reason behind the same is the fact that it is expected that the results of Apple for Q2 are going to be better due to the fact that they have recently launched new products and expanded on existing sales and product line, which would result in better revenue e, margins and sales and net profits, which would ultimately react in the EPS. Hence the returns of Apple are positive and more than that of HPQ.

This indicates the fact that Apple seems to be an underpriced stock and should be bought as it seems to be giving more returns than the expected returns and compared to HPA and the index 9

is an outperformer due to more fundamental reasons likes above expectation performance rather than purely and only technical reasons. All this is pretty evident in the Beta and the Expected returns of the stock.

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PART IV

REFERENCES: 1. Thirty Year US T-Bill rate; Available at http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

2. Apple Inc. Annual Report and About Company; Available at http://secfilings.nasdaq.com/edgar_conv_html%2f2011%2f10%2f26%2f0001193125-11282113.html#FIS_BUSINESS

3. Stock Prices Data, Apple, S&P, HPQ; Available at http://finance.yahoo.com

4. Apple Competitors; Available at http://www.nasdaq.com/symbol/aapl/competitors

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