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the free cash flow to the firm valuation (FCFF) we can see that Apple is still undervalued
a little bit based on a growth rate of 9.07% going into 2017. In figure 1 in the Appendix,
the previous five years of financials ranging from 2012 to 2016 can be seen for Apple.
This shows revenues, operating cash flow, sales, EBIT, taxes, depreciation and
amortization, working capital investment and capital expenditures in each of those years
along with them as either percentages of EBIT or of sales based on the FCFF
principles. It also shows the amount of growth the revenues have from year to year
which will end up signifying how the growth rate was come up with in figure 2.
Looking into how the numbers were gotten in figure 2, the growth rate comes
from average out the past 4 years of growth in revenues which came out to the 9.07%.
This is an accurate growth for 2017 because Apple had an off year going from 2015-
2016 by having a -7.73% growth due to the outlying growth coming from the year before
of 27.86% from 2014-2015. Apple is still a company that is focused on growth into the
future and the 9.07% reflects that accurately based upon the amount of new generation
coming into technology earlier in their lives. Kids are starting to get younger and
younger and buying Apple products much earlier than they did in the past and Apple has
that brand recognition and brand loyalty that has credibility amongst the many in the
markets. This growth rate accurately reflects how much it should grow after the two
outlying years prior. Other than the growth rate the averages for operating margin
many fluctuations in these numbers over those years the calculations should be
accurately in the range of what they will be in 2017. These averages led to the projected
FCFF calculated by having EBIT - Tax bill + Deprec. And Amort. working capital
capital expenditures. Then taking the WACC of the company which was 14.37%, there
is the ability to find the value of the firm. Adding up the enterprise value + cash and
subtracting the market capitalization was how the value of debt was found allowing for
the value of equity to be found by taking the value of the firm the value of debt. To find
the price of $156.78 per share, that value of equity calculated was $823,084,785,430.76
safety of 15% with the growth rate causing it to be 7.7% instead of 9.07% dropping the
price down to $121.27 per share. This raises some alarms for having this stock to long
because it has shown heavy growth in the past year in regards to how much the stock
has made the portfolio, but the time is now to start to sell off some of the stocks and
accepting the profit that has been had so far which is substantial. We should still hold on
to some shares because of the fact that is still undervalued in this evaluation but in
regards to the 15% margin of safety, we might be risking those profits the longer it is
held.
Relative Valuations
Looking at relative valuations is a tricky thing when looking at Apple in the tech
industry. The biggest reason for this is that although it does have a lot of competitors,
Apple is a company that is much more diverse than many others in regards to what type
of technology it sells. Microsoft and Google are two different companies in the way that
they operate but both can be seen as two of Apples biggest competitors.
Seeing figure 3, Apple has a significantly lower P/E ratio than both Microsoft and
Google which speaks well for Apple because they have a low ratio in accordance to the
tech industry. But, alarms still could be raised because of the relevance of the stock
market being in a tech bubble right now that doesnt appear to be bursting in the near
future but still might. The PEG ratio shows that Apple is in the middle of the pack in
regards to PE and possible growth in the future. This could be alarming since growth is
one of the biggest factors in regards to wanting to invest in a company. In the industry
the dividend yield can be seen as normal at just .02 which is the same as Microsofts
while Google doesnt have dividends at all. Since Apples enterprise value is so high its
enterprise value to EBITDA is significantly lower than both Microsofts and Googles.
Appendix
Figure 1
(Apples numbers from 2012-2016 that are used in the free cash flow to the firm model
Figure 2
(Apples free cash flow to the firm valuation. The left column shows the actual valuation I
found that resulted in $156.78 for 2017. The column on the right represents a 15%
margin of safety with the growth rate and brings the valuation all the way down to
$121.27 and brings the growth rate from 9.07% to 7.7 %.)
Figure 3
(This figure shows Apples relative valuation methods in regards to two of its lead