November 18, 2010

TECHNOLOGY

Henry Fund Research

Apple Inc. (AAPL)

Investment Recommendation
Current Price

Adam D. Newcomb

Target Price

adam-newcomb@uiowa.edu

BUY
$310.57
$400

INVESTMENT THESIS
Apple is the largest tech company in the world by
market cap. With their vast distribution network and
strong brand recognition theyve experienced large
growth in share price, revenues, and income. We
believe this trend to continue in the future. Combined
with high margin and an aggressive expansion
strategy throughout the world we have placed a BUY
recommendation on AAPL.
(+) Apple has an extremely strong balance sheet
with $51B of cash and cash equivalents on hand
combined with no long-term debt. This gives them
the flexibility to make acquisitions or invest in R&D
as needed.
Source: http://yahoo.investor.reuters.com

Key Stock Statistics

52-Week Price Range

$188.68-321.30

Market Capitalization (B)

$277.39

Shares Outstanding (M)

917.3

Institutional Ownership

70.5%

60-Month Beta

1.36

Dividend Yield

0.0%

Price/Earnings (ttm)

19.9

Price/Book

5.78

Price/Sales

4.24

ROA (ttm)

18.73%

ROE(ttm)

35.28%

EPS ($)
Year
EPS

2008
5.36

2009
6.07

2010
14.93

2011E
21.26

2012E
26.47

2013E
29.46

All earnings represent earnings from operations and have been filtered
from net nonrecurring gains.

Valuation Models
Discounted Cash Flow

$401.21

Economic Profit

$401.21

Relative P/E

$469.13

Dividend Discount Model

$331.81

(+) Recently Apple has experienced very robust

growth. We believe this trend to continue into the
near future, especially if any new products are
introduced in the upcoming year.
(+) With a very strong international presence and
more than half their revenues from outside the
U.S. we believe this will help push growth forward.
In addition international goods Apple sells, tend to
be slightly higher margin.
(+) Apple has continually come to the market with
a new product that becomes the standard. Dating
back to the iPod, now the iPhone and soon the
iPad. We believe that Apples innate ability to
make a market will continue.
(+) Apple is known for its very reliable high quality
goods. Apple has obtained the highest customer
satisfaction rating out of any of its peers.
(-) Steve Jobs health has had questions raised
about it for the past several years. We believe that
the company and the stock will feel a massive
impact if Steve Jobs were to leave the company.
(-) Increased competition in the smart phone and
tablet space is compressing Apples margins.
Many competitors will be coming to market with
new tablets within the next year and many more
with smart phones to compete with Apples
iPhone 4.

Important disclosures appear on the last page of this report.

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

such as mobile phones, media players, and most

recently tablet computers.
Apple has become a
behemoth
in
the
mobile
phone
space
with their iPhone.
Apple Inc. is the largest technology firm in the world by
Most
recently
they
experienced
year-over-year
revenue
market cap. Headquartered in Cupertino, CA their
2
growth
of
93%
from
the
iPhone.
product lines include: personal computers (Macs),
tablet computers (iPad), mobile phones (iPhone), media
players (iPod), and media and application software.
Apple has experienced massive growth the past several
Revenue Growth and Composition
70,000
years with the introduction of their iPhone.

EXECUTIVE SUMMARY

60,000

In five years, revenue has more than tripled and net

income has grown ten-fold. With Steve Jobs at the
helm, Apple has been able to introduce industry
changing products repeatedly over the past decade
starting with the iPod and most recently their iPad.

50,000
40,000
30,000
20,000

Overall Apples position is strong having over $50 billion

in cash and cash equivalents and carrying no debt.
They produce high quality products with the best
customer satisfaction ratings in all their businesses. In
addition they have some of the highest margins among
computer and mobile phone manufacturers. With all
this and an aggressive growth strategy we place a BUY
recommendation on AAPL.

10,000
2005

COMPANY DESCRIPTION1,2

2006

2007

2008

2009

2010

Desktops

Portables

iPod

Music related products

iPhone and related products

iPad and related products

Peripherals

Software and other sales

Apple Inc. was established in 1976, incorporated in

1977, as Apple Computer Inc. Founded by Steve Jobs
Figure 2: Source: Apples 2010 10-K
and Steve Wozniak they produced personal computers
that were handmade by Wozniak. From their humble Personal Computing
beginnings Apple has experienced a roller-coaster ride
of successes and failures to land where they are today. Apples original product line consisted purely of
personal computers.
They still produce personal
Currently Apple is the largest technology company by computers but in addition they have their MacBook and
market cap at $277B surpassing Microsoft earlier this AirBook lines.
Both lines are portable laptop
year. Their primary source of growth has been through computers.
Apple has done a tremendous job
the ability of Steve Jobs to innovate industry changing promoting their portable computers nearly doubling the
products. In addition to their products, Apple has revenue of their desktop computers in the past 3 years.
created a strong base of followers also known as Apple
fanboys.

2010 Revenue Breakdown

iPhone and
related
products
39%
Music
related
products
7%

2005-2010 Computer Sales (Bil)

iPad and
related
products
8%

20000
15000
10000

Peripherals
3%

5000
0

iPod
13%

Portables
17%

Desktops
9%

Software
and other
sales
4%

2005
Desktops

2006

2007
Portables

2008

2009

2010

Total Mac Net Sales

Figure 3 Source: Apples 2010 10-K

Figure 1 Source: Apples 2010 10-K

iPod

Apples product lines originated in personal computers, In addition to computers Apple also produces the iPod.
but have strayed more heavily into electronic devices The iPod is the standard for any music/media player

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

today. In combination of the iPod Apple also provides

high margin music related services in products to
support all their mobile devices. IPod sales started
strong, but recently have leveled out; although, services
provided have continued to grow at a steady pace.

10,000

stellar products forward that have captivated millions

and plan to continue doing so. The iPad has not yet
reached the success of the iPod or iPhone but in its first
quarter its on pace to pass the iPod in revenue in less
than a year.
In addition to great products Apple has done a
tremendous job setting up a distribution network
throughout the world. As shown in figures 6 and 7,
Apple now generates a majority of its revenue outside
the United States. Typically its products are also sold
at a slightly higher margin when in internationally
markets.

iPod and Music Related Sales (Bil)

8,000
6,000
4,000
2,000

Revenue by Geography 2010

2005

2006
iPod

2007

2008

2009

Retail
15%

2010

Music related products

Americas
37%

AsiaPacific
13%

Figure 4 Source: Apples 2010 10-K

iPhone

Japan
6%

As mentioned the iPhone is Apples largest source of

revenue and looks to remain a steady source of
revenue into the future. In addition Apples App Store
provides a steady source of revenue from all iOS
devices. iOS is Apples mobile operating system which
is on the iPhone, iPod, and iPad. There are over
200,000 applications in the store with more being
1
added every day.

Europe
29%
Figure 6 Source: Apples 2010 10-K

40000

Revenue Growth by Geography

30000

iPhone and related products (Bil)

30,000

20000

25,000
10000

20,000
15,000

10,000

2006

5,000

2007
America

2008

2009

2010

International
Figure 7 Source: Apples 2010 10-K

2007

2008

2009

2010

Going forward, Apple plans to keep on doing what it

has done. Innovate electronics, maintain high margins
and control every aspect of the user experience. We
believe that Apples success will continue with strong
growth the next 2 years. Beyond 2 years, we have
modeled much less aggressive growth, but pending a
new item such as the iPad, iPhone, or iPod these
forecasts are merely speculation.

Figure 5 Source: Apples 2010 10-K

iPad

In addition to these already great products, Apple has

attempted to control the tablet computing space.
Recently introducing the iPad; in two quarters the iPad
2
has generated just under $5billion dollars in revenue.
Thats substantial considering Apples music service We believe that the great products, excellent
doesnt generate that much and it has been in place for distribution network, strong growth prospects, and
excellent balance sheet align very well with our
nearly a decade.
recommendation of BUY.
Outlook
Overall Apple has positioned itself very strongly
throughout the world. They have repeatedly brought

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

RECENT DEVELOPMENTS

this as the iPhone has much higher margins than every

smart phone on the market.

In April, Apple started selling its iPad. The iPad, which

they refer to as magical, fits somewhere in the space
between a laptop and a cell phone. The iPad has been
difficult to forecast for many analysts and continues to
be a challenge going forward. Overall the success has
been great. Generating nearly $5 billion in the first 6
months it has been out. Many copy cat products have
recently begun to emerge, including products from
RIMM, Dell, HP, and Samsung. We believe the iPad
success will continue with much stronger growth in
2011.
Apple recently reported its best earnings report ever;
revenues of $65 billion an increase of %52 from the
previous year and net income topping $20 billion for the
first time ever. Net income was up almost 300% year
over year. We believe that these growth rates will not
be quite as high into the near future, in the range of 1820%.

Figure 9 Source: MarketingCharts

MARKETS AND COMPETITION

Apple operates in a very competitive space. After the
release of their iPhone, many companies have released
versions of phones that are deemed as copy cats.
Although there are many alternatives out there to the
iPhone, Apple still maintains a large chuck of market
share.

2005-2010 Growth Rates

Revenue Net income
Annualize Growth
36.17%
60.03%
Average Growth
37.11%
65.34%

In addition the mobile space being competitive, many

companies are now trying to entry the newly
established tablet space.
Apple will have fierce
competition from once former allies.

Figure 8 : Source: Apples 2010 10-K

INDUSTRY TRENDS
The largest industry trend is the rumor mill. Every day
you can go online and find multiple sources stating
something is going to be happening in the coming days,
weeks, months. The biggest rumor that has frequently
been occurring is that the iPhone will be coming to
Verizon in 2011. Typically the largest rumors tend to
get clarified or shot down. Due to the secretive nature
of Apple, rumors tend to full a lot of speculation at their
media events.

Overall we find Apple attractive for the relatively high

margin compared to many competitors. Especially
when you consider they are essentially a manufacturer,
retailer of a physical good. In addition there growth has
been strong relative to competitors as well, combine
this with a high ROE and you have an excellent
investment.
We believe Apple to be a premier
company in the tech sector. Contributing to the fact
they are now the largest tech company by market cap.

The space itself has seen massive growth in the mobile

space and tablet space. It is believed the tablets will
have a large growth push much like was experienced
with netbooks more recently. Forecasts project 15.1
million tablets sold in 2011 and more than 150 million
4
6
sold in 2014. Thats a CAGR greater than 60%. Apple
has positioned itself with the first tablet and has
captured well over 90% of the market currently. The
only other competitors currently available are the Dell
Streak and the Samsung Galaxy.
Both released
months after the iPad.

Ticker
DELL
HPQ
MSFT
GOOG
MOT
INTC
RIMM
AMZN

In addition, the mobile space is experience very large

growth; Google and RIMM being Apples largest
competitors in that space. It is projected that smart
phones, such as the iPhone, will overtake features
phones within the next year. This is shown clearly in
figure 9. We believe that Apple will benefit greatly from

AAPL

Peer Comparison
5-year sales
Company
Net Margin ROE
Growth
Dell
1.49%
3.40%
34.50%
HP
7.47%
7%
20.50%
Microsoft
9.45%
31.30%
46.70%
Google
49.29%
28.80%
20.60%
Motorola
-5.76%
1.00%
1.90%
Intel
0.53%
24.70%
24.40%
Research In Motion
61.75%
17.20%
40.90%
Amazon
28.77%
3.60%
22.50%
19.12%
14.63%
26.50%
Apple
36.17%
21.50%
35.30%

Figure 10 Source: MSNMoney

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

ECONOMIC OUTLOOK

internationally to experience growth long-term.

Combined with high margin products, this should keep
Considering Apple has over fifty billion in cash on hand, a very strong cash flow coming into Apples coffers.
inflation should be a real concern. As of recently
though, inflation has been very low (Figure 11) and
therefore having cash on hand is not necessarily a bad INVESTMENT POSITIVES
thing.

(+) Potential payback to the shareholder. Apple has

been known the split its stock when it hits a certain
range. Right now the stock is well past that range
and we believe there is a possibility this occurs in
2011. In addition, Apple used to pay a dividend and
with $51B in cash and cash equivalents on hand, we
believe there is a possibility of returning some of this
money to the shareholder.

(+) Apple has shown the ability to grow at

phenomenal rates recently. Earnings are up nearly
1000% percent in 5 years and revenue is up more
than 400%. We believe this trend will remain intact
for the time being.

(+) Media and product offerings. We believe that

Apple does a great job with their new product press
releases. The media loves them and promotes them
as well. As long as this continues Apple will have
strong cash flows.

(+) Strong international growth and exposure going

forward will help drive both top and bottom lines.
We believe that Apple has created the same buzz in
developing countries as they were capable of
creating in the United States.

Figure 11 Source: Bloomberg Econoday

The biggest economic factor facing Apple this year will

be if consumers are willing to spend over the holiday
season. Apples products tend to be priced a premium.
As people have tightened their balance sheet, it slightly
hindered growth in 2009 only growing about 17% yoy.
We believe that retail sales growth will remain high,
although consumer confidence may not necessarily
reflect this. Expect the trend of retails sales growth to
continue and maybe even surprise deeper into the
holiday season.

(+) Continue being a leader. Apples products have

been copied repeatedly. The iPod, iPhone and now
iPad have all been deemed the standard in their
respective spaces. As long as Apple continues this,
we believe growth will continue.

INVESTMENT NEGATIVES

(-) Steve Jobs is the brains of Apple. He came in

and rescued the company from near bankruptcy
back in the 90s and has built it into the mammoth it
is today. If Steve Jobs were to leave, we would not
recommend the stock. His health has been in
question for several years.

(-) Growing competition in the markets that Apple

competes in. Many companies are seeing Apple
take in record revenues and profits in a market that
was substantially smaller a few years ago. This has
generated a strong amount of competition for many
of Apples products.

Figure 12 Source: Bloomberg Econoday

CATALYSTS FOR GROWTH

Growth in the future will depend greatly on consumer
spending; although, this has not hindered consumers
from buying Apple in the past year. International
growth will also be a very large contributing factor to
growth in the coming years. We believe that Apple has
established themselves in a strong position

(-) Apples stock has recently run up quite a bit. In

addition they have not started a share repurchase
program or dividend program to reward the
shareholder.

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

VALUATION
We expect strong growth in most of Apples businesses
ranging between 11-20% for 2011 trending downward
into 2012. We believe Apple has a strong position to
outperform the markets in the coming year with a strong
exposure to Asia.
Beyond 2014 we model the company growth in
perpetuity at 3.0% per year, using a weighted average
cost of capital of 10.24%. We are expecting profit
margins to hold steady in the long term.
These estimates were modeled in DCF and EP models;
we arrived at a target price of $401.21. With the
company currently trading at $310.57 we recommend
our BUY decisions based on prospects for Apple and
the companys strong international exposure.
We would consider changing our rating to a SELL if any
of the following were to occur:

Steve Jobs were to leave the company.

If Apples shares reach $400/share.

Apple failing to introduce a new product within 5

years of the iPad.

REFERENCES
1.

Apple Investor Relations

2.

Apple 2010- 10-K

3.

Finance.yahoo.com

4.

Bloomberg.com

5.

http://www.marketwatch.com/story/tablet-growth-expected-toexplode-beyond-ipad-2010-11-15

6.

http://www.marketingcharts.com/interactive/smartphonesprojected-to-overtake-feature-phones-next-year-12418/nielsenus-smartphone-mar-2010jpg/

7.

MSNMoney.com

IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Applied
Securities Management (Henry Fund) program at the University of
Iowas Tippie School of Management. The intent of these reports is
to provide potential employers and other interested parties an
example of the analytical skills, investment knowledge, and
communication abilities of Henry Fund students.
Henry Fund
analysts are not registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion contained in
this report does not represent an offer or solicitation to buy or sell any
of the aforementioned securities. 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 Henry Fund may hold a financial interest in the
companies mentioned in this report.

Apple Inc.
Revenue Breakdown

2009 Q1-2010 Q2-2010 Q3-2010 Q4-2010

2010 Q1-2011E Q2-2011E Q3-2011E Q4-2011E 2011E

2007

2008

2012E

2013E

2014E

2015E

Desktops

4,020
21%

5,622
40%

4,324
-23%

1,692

1,532
-9%

1,301
-15%

1,676
29%

6,201
43%

2,030
21%

1,838
-9%

1,641
-11%

1,728
5%

7,238
17%

2,204
28%

2,051
-7%

1,984
-3%

2,074
5%

8,313
15%

9,227
11%

9,966
8%

10,464
5%

Portables

6,294
55%

8,732
39%

9,535
9%

2,758

2,228
-19%

3,098
39%

3,194
3%

11,278
18%

3,448
8%

2,785
-19%

3,108
12%

3,214
3%

12,555
11%

4,137
29%

3,342
-19%

3,189
-5%

3,589
13%

14,257
14%

15,968
12%

17,245
8%

18,108
5%

10,314

14,354

13,859

4,450

3,760

4,399

4,870

17,479

5,478

4,623

4,749

4,942

19,792

6,341

5,393

6,128

6,537

24,399

25,195

27,211

28,571

40%

39%

-3%

-16%

17%

11%

26%

12%

-16%

3%

4%

13%

28%

-15%

14%

7%

23%

18%

8%

5%

iPod

8,305
8%

9,153
10%

8,091
-12%

3,391

1,861
-45%

1,545
-17%

1,477
-4%

8,274
2%

3,408
131%

1,870
-45%

1,553
-17%

1,484
-4%

8,315
0.50%

3,425
131%

1,880
-45%

1,560
-17%

1,492
-4%

8,357
0.50%

8,399
0.50%

8,441
0.50%

8,483
0.50%

Music related services and products

2,496
32%

3,340
34%

4,036
21%

1,164

1,327
14%

1,214
-9%

1,243
2%

4,948
23%

1,374
11%

1,566
14%

1,433
-9%

1,467
2%

5,839
18%

1,593
9%

1,816
14%

1,662
-9%

1,701
2%

6,773
16%

7,450
10%

8,344
12%

9,012
8%

Iphone and related products and services

123

6,742
5381%

13,033
93%

5,578

5,445
-2%

5,334
-2%

8,822
65%

25,179
93%

6,124
-31%

6,048
-1%

6,241
3%

6,318
1%

24,731
-2%

6,418
2%

6,798
6%

6,916
2%

8,125
17%

28,257
14%

31,082
10%

33,258
7%

34,921
5%

iPad and related products and services

2,166

2,792
29%

4,958

6,215
123%

4,285
-31%

5,849
36%

6,111
4%

22,460
353%

9,518
56%

7,486
-21%

8,125
9%

8,725
7%

33,854
51%

39,948
18%

43,942
10%

46,140
5%

Peripherals and other hardware

1,260
15%

1,694
34%

1,475
-13%

469
-68%

472
1%

396
-16%

477
20%

1,814
23%

563
18%

566
1%

475
-16%

572
20%

2,177
20%

664
16%

668
1%

561
-16%

675
20%

2,569
18%

2,954
15%

3,190
8%

3,382
6%

Software, service and other sales

1,508
18%

2,208
46%

2,411
9%

631

634
0%

646
2%

662
2%

2,573
7%

707
7%

710
0%

724
2%

741
2%

2,882
12%

777
5%

781
0%

796
2%

816
2%

3,170
10%

3,455
9%

3,732
8%

3,993
7%

15,683

13,499
-13.93%

15,700
16.30%

20,343
29.57%

Total Mac Net Sales

Total net sales

Quarterly Growth
Annual Growth

24,006
24.29%

37,491
56.17%

42,905
14.44%

65,225
52.02%

23,868

19,669

21,023

21,636

17.33%

-17.59%

6.88%

2.92%

86,196
32.15%

Q1-2012E Q2-2012E Q3-2012E Q4-2012E

28,737

24,822

25,747

28,071

32.82%

-13.62%

3.73%

9.03%

107,378

118,483

128,118

134,501

24.57%

10.34%

8.13%

4.98%

Apple Inc.
Income Statement
In millions
2008

Sales/Revenue
32,479
Cost of Goods Sold (COGS) incl. D&A
21,334
COGS excluding D&A
20,861
Depreciation & Amortization Expense 473
Gross Income
11,145

2009 Q1-2010 Q2-2010 Q3-2010 Q4-2010

2010 Q1-2011E Q2-2011E Q3-2011E Q4-2011E

2011E Q1-2012E Q2-2012E Q3-2012E Q4-2012E

2012E

2013E

2014E

2015E

36,286
23,469
22,766
703
12,817

15,683
9,250
9,041
209
6,433

13,499
7,874
7,658
216
5,625

15,700
9,564
9,291
273
6,136

20,343
12,831
12,502
329
7,512

65,067
39,498
38,471
1,027
25,569

23,868
14,464
14,082
382
9,404

19,669
11,919
11,605
315
7,750

21,023
12,740
12,404
336
8,283

21,636
13,111
12,765
346
8,525

86,196
52,235
50,856
1,379
33,961

28,737
17,414
16,955
460
11,322

24,822
15,042
14,645
397
9,780

25,747
15,603
15,191
412
10,145

28,071
17,011
16,562
449
11,060

107,378
65,071
63,353
1,718
42,307

118,483
71,801
69,905
1,896
46,682

128,118
77,640
75,590
2,050
50,479

134,501
81,508
79,356
2,152
52,993

SG&A Expense
EBIT (Operating Income)

4,870
6,275

5,482
7,335

1,686
4,747

1,646
3,979

1,902
4,234

2,065
5,447

7,299
18,270

2,864
6,540

2,360
5,389

2,523
5,760

2,596
5,928

10,344
23,618

3,448
7,874

2,979
6,801

3,090
7,055

3,369
7,692

12,885
29,422

14,218
32,464

15,374
35,104

16,140
36,853

Nonoperating Income (Expense) - Net

Pretax Income

620
6,895

363
7,984

47
4,758

(50)
4,029

20
4,292

(42)
5,461

(25)
18,540

382
6,922

382
5,771

382
6,142

382
6,310

1,527
25,145

537
8,411

537
7,338

537
7,592

537
8,228

2,147
31,569

2,956
35,420

3,781
38,885

4,652
41,506

Income Taxes
Net Income

2,061
4,834

2,280
5,704

1,380
3,378

955
3,074

1,039
3,253

1,153
4,308

4,527
14,013

1,523
5,399

1,270
4,501

1,351
4,791

1,388
4,922

5,532
19,613

1,850
6,560

1,614
5,724

1,670
5,921

1,810
6,418

6,945
24,623

7,792
27,628

8,555
30,330

9,131
32,374

Net Income available to Common

4,834

5,704

3,378

3,074

3,253

4,308

14,013

5,399

4,501

4,791

4,922

19,613

6,560

5,724

5,921

6,418

24,623

27,628

30,330

32,374

EPS
Average Shares

$5.36
902

$6.07
907

$3.70

$3.33

$3.48

$4.64

$14.93
915

$5.89

$4.91

$5.22

$5.37

$21.26
923

$7.15

$6.24

$6.46

$7.00

$26.47
930

$29.46
938

$32.08
945

$33.97
953

Apple Inc.
Balance Sheet
In Millions
2008

2009

2010

2011E

2012E

2013E

2014E

2015E

Cash & ST Investments

Cash Only
Total Short Term Investments
Total Accounts Receivable
Inventories
Other Current Assets
Total Current Assets

24,490 23,501 25,620

368 1,139 1,690
24,122 22,362 23,930
4,704 5,057 9,924
509
455 1,051
4,987 7,252 5,083
34,690 36,265 41,678

30,905
6,474
24,430
12,067
1,293
8,620
52,885

42,545
17,604
24,941
15,033
1,611
10,738
69,926

Net Property, Plant & Equipment

Total Investments and Advances
Intangible Assets
Net Other Intangibles
Other Assets
Total Assets

2,455 2,954 4,768

6,341
8,434 11,217 14,919 19,842
0 10,528 25,391 38,402 51,930 65,997 80,623 95,832
559
559 1,083
1,414
1,761
1,943
2,101
2,206
352 3,286
353 2,263
342
1,730
5,172
6,443
7,109
7,687
8,070
39,434 53,592 75,183 104,213 138,494 171,689 207,063 243,228

Assets

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities

55,210 69,062 82,980

29,748 43,068 56,443
25,462 25,994 26,537
16,588 17,937 18,830
1,777
1,922
2,018
11,848 12,812 13,450
85,423 101,732 117,278

0
0
0
5,520 5,601 12,015
100
439
210
8,472 13,242 8,497
14,092 19,282 20,722

0
14,653
553
12,067
27,274

0
18,254
695
15,033
33,982

0
20,142
779
16,588
37,509

0
21,780
855
17,937
40,572

0
22,865
913
18,830
42,608

0
0
0
537
707 4,300
3,775 5,771 2,370
18,404 25,760 27,392

0
2,766
6,034
36,074

0
3,473
7,516
44,971

0
3,896
8,294
49,699

0
4,277
8,968
53,818

0
4,566
9,415
56,589

21,030 27,832 47,791

7,177 8,210 10,668
13,845 19,538 37,169

68,140
11,358
56,782

93,523 121,990 153,245 186,639

12,118 12,957 13,881 14,901
81,405 109,033 139,364 171,738

Total Shareholders' Equity

21,030 27,832 47,791

68,140

93,523 121,990 153,245 186,639

Liabilities & Shareholders' Equity

39,434 53,592 75,183 104,213 138,494 171,689 207,063 243,228

Long-Term Debt
Deferred Taxes
Other Liabilities
Total Liabilities

Common Equity
Common Stock Par
Retained Earnings

Apple Inc.
Common Size Balance Sheet
In Millions

Assets
Cash & ST Investments
Total Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Net Property, Plant & Equipment
Total Investments and Advances
Intangible Assets
Other Assets
Total Assets
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities

2009

2010

2011E

2012E

2013E

2014E

2015E

75.40%
14.48%
1.57%
15.35%
106.81%

64.77%
13.94%
1.25%
19.99%
99.94%

39.37%
15.25%
1.62%
7.81%
64.05%

35.85%
14.00%
1.50%
10.00%
61.35%

39.62%
14.00%
1.50%
10.00%
65.12%

46.60%
14.00%
1.50%
10.00%
72.10%

53.90%
14.00%
1.50%
10.00%
79.40%

61.69%
14.00%
1.50%
10.00%
87.19%

7.56%
8.14%
7.33%
7.36%
7.85%
9.47% 11.64% 14.75%
0.00% 29.01% 39.02% 44.55% 48.36% 55.70% 62.93% 71.25%
1.72%
1.54%
1.66%
1.64%
1.64%
1.64%
1.64%
1.64%
5.33%
9.06%
3.48%
6.00%
6.00%
6.00%
6.00%
6.00%
121.41% 147.69% 115.55% 120.90% 128.98% 144.91% 161.62% 180.84%

0.00%
17.00%
0.31%
26.08%
43.39%

0.00%
15.44%
1.21%
36.49%
53.14%

0.00%
18.47%
0.32%
13.06%
31.85%

0.00%
17.00%
0.64%
14.00%
31.64%

0.00%
17.00%
0.65%
14.00%
31.65%

0.00%
17.00%
0.66%
14.00%
31.66%

0.00%
17.00%
0.67%
14.00%
31.67%

0.00%
17.00%
0.68%
14.00%
31.68%

0.00%
1.65%
11.62%
56.66%

0.00%
1.95%
15.90%
70.99%

0.00%
6.61%
3.64%
42.10%

0.00%
3.21%
7.00%
41.85%

0.00%
3.23%
7.00%
41.88%

0.00%
3.29%
7.00%
41.95%

0.00%
3.34%
7.00%
42.01%

0.00%
3.39%
7.00%
42.07%

64.75% 76.70%
Common Stock Par/Carry
22.10%
Value 22.63%
Retained Earnings
42.63% 53.84%

73.45%
16.40%
57.12%

79.05%
13.18%
65.88%

87.10% 102.96% 119.61% 138.76%

11.29% 10.94% 10.83% 11.08%
75.81% 92.02% 108.78% 127.69%

73.45%

79.05%

87.10% 102.96% 119.61% 138.76%

Long-Term Debt
Deferred Taxes
Other Liabilities
Total Liabilities

Common Equity

2008

Total Shareholders' Equity

Liabilities & Shareholders' Equity

64.75%

76.70%

121.41% 147.69% 115.55% 120.90% 128.98% 144.91% 161.62% 180.84%

Apple Inc.
Common Size Income Statement
2008

Sales/Revenue
Cost of Goods Sold (COGS) incl. D&A
COGS excluding D&A
Depreciation & Amortization Expense
Gross Income

2009 Q1-2010 Q2-2010 Q3-2010 Q4-2010

2010 Q1-2011E Q2-2011E Q3-2011E Q4-2011E

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

65.69% 64.68% 58.98% 58.33% 60.92% 63.07% 60.70%
64.23% 62.74% 57.65% 56.73% 59.18% 61.46% 59.13%
1.46%
1.94%
1.33%
1.60%
1.74%
1.62%
1.58%
34.31% 35.32% 41.02% 41.67% 39.08% 36.93% 39.30%

100.00%
60.60%
59.00%
1.60%
39.40%

100.00%
60.60%
59.00%
1.60%
39.40%

100.00%
60.60%
59.00%
1.60%
39.40%

100.00%
60.60%
59.00%
1.60%
39.40%

2011E Q1-2012E Q2-2012E Q3-2012E Q4-2012E

100.00%
60.60%
59.00%
1.60%
39.40%

100.00%
60.60%
59.00%
1.60%
39.40%

100.00%
60.60%
59.00%
1.60%
39.40%

100.00%
60.60%
59.00%
1.60%
39.40%

2012E

2013E

2014E

2015E

100.00% 100.00% 100.00% 100.00% 100.00%

60.60% 60.60% 60.60% 60.60% 60.60%
59.00% 59.00% 59.00% 59.00% 59.00%
1.60%
1.60%
1.60%
1.60%
1.60%
39.40% 39.40% 39.40% 39.40% 39.40%

SG&A Expense
EBIT (Operating Income)

14.99%
19.32%

15.11%
20.21%

10.75%
30.27%

12.19%
29.48%

12.11%
26.97%

10.15%
26.78%

11.22%
28.08%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

12.00% 12.00%
27.40% 27.40%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

12.00%
27.40%

Nonoperating Income (Expense) - Net

Interest Expense
Pretax Income

1.91%
0.00%
21.23%

1.00%
0.00%
22.00%

0.30%
0.23%
30.34%

-0.37%
0.00%
29.85%

0.13%
-0.23%
27.34%

-0.21%
0.00%
26.84%

-0.04%
0.00%
28.49%

1.60%
0.00%
29.00%

1.94%
0.00%
29.34%

1.82%
0.00%
29.22%

1.76%
1.77%
0.00%
0.00%
29.16% 29.17%

1.87%
0.00%
29.27%

11.91%
0.00%
29.56%

14.68%
0.00%
29.48%

16.57%
0.00%
29.31%

2.00%
0.00%
29.40%

2.49%
0.00%
29.89%

2.95%
0.00%
30.35%

3.46%
0.00%
30.86%

Income Taxes
Net Income

6.35%
14.88%

6.28%
15.72%

8.80%
21.54%

7.07%
22.77%

6.62%
20.72%

5.67%
21.18%

6.96%
21.54%

6.38%
22.62%

6.46%
22.89%

6.43%
22.79%

6.42%
6.42%
22.75% 22.75%

6.44%
22.83%

6.50%
23.06%

6.49%
23.00%

6.45%
22.86%

6.47%
22.93%

6.58%
23.32%

6.68%
23.67%

6.79%
24.07%

Apple Inc. (AAPL)

Statement of Cash Flows
2006

2007

2008

2009

2010

Operating Activities
Net Income before Extraordinaries
Depreciation, Depletion & Amortization
Deferred Taxes & Investment Tax Credit
Other Funds
Funds from Operations
Changes in Working Capital
Net Operating Cash Flow

1,989
225
53
174
2,441
(221)
2,220

3,496
317
78
254
4,145
1,325
5,470

4,834
473
(368)
538
5,477
4,119
9,596

5,704
703
(519)
736
6,624
3,535
10,159

14,013
1,027
1,440
903
17,383
1,212
18,595

Investing Activities
Capital Expenditures
Net Assets from Acquisitions
Sale of Fixed Assets & Businesses
Purchase/Sale of Investments
Other Funds
Net Investing Cash Flow

657
40
1,032
(58)
357

986
(2,312)
49
(3,249)

1,199
(220)
(6,760)
(10)
(8,189)

1,213
(16,147)
(74)
(17,434)

2,121
(638)
(11,093)
(2)
(13,854)

Financing Activities
Change in Capital Stock
Issuance/Reduction of Debt, Net
Other Funds
Net Financing Cash Flow

(37)
361
324

Net Change in Cash

2,901

362
377
739

359
757
1,116

2,960

2,523

393
270
663

(6,612)

912
345
1,257

5,998

Apple Inc. (AAPL)

Forecasted Statement of Cash Flows
2011E

2012E

Cash Flows From Operating Activities

Net Income
19,613
24,623
Adjustments to reconcile net income to net cash provided by operating activities:
Add: Depreciation and amortization
Changes in working capital accounts:
Increase in receivables
Increase in inventories
Increase in prepaid expenses and other current assets
Increase in accounts payable
Increase in accrued compensation and other liabilities
Increase in income taxes payable
Increase in deferred revenue
Increase (decrease) in deferred taxes
Increase (decrease) in other non-current liabilities
Net cash provided by operating activities
Cash flows from investing activities
(Increase) decrease in short-term investments
Capital expenditures
capitalization of intangle assets
(increase) decrease in other assets
Net cash used for investing activities
Cash flows from financing activities
Proceeds from issuance of common stock
Net cash provided by financing activities

2013E

2014E

2015E

27,628

30,330

32,374

1,379

1,718

1,896

2,050

2,152

(2,143)
(242)
(3,537)
2,638
3570
343
(563)
(1,534)
3,664
23,188

(2,965)
(318)
(2,118)
3,601
2965
141
(624)
707
1,483
29,213

(1,555)
(167)
(1,111)
1,888
1555
85
(199)
424
777
31,221

(1,349)
(145)
(963)
1,638
1349
76
1
381
674
34,043

(894)
(96)
(638)
1,085
894
58
199
288
447
35,869

(13,511)
(3,005)
331
(2,909)
(19,093)

(14,039)
(3,881)
347
(1,271)
(18,844)

(14,588)
(4,844)
182
(666)
(19,916)

(15,159)
(6,069)
158
(578)
(21,648)

(15,752)
(7,484)
105
(383)
(23,514)

690
690

760
760

839
839

925
925

1,020
1,020

Net increase (decrease) in cash

4,784

11,130

12,144

13,320

13,375

Cash, beginning of year

Cash, end of year

1,690
6,474

6,474
17,604

17,604
29,748

29,748
43,068

43,068
56,443

Apple Inc.
Valuation Model Key Assumptions
Ticker Symbol
Current Stock Price

AAPL
$

310.57

Valuation Model Assumptions

Terminal Growth Rate
Risk free rate
MRP
Cost of Debt
5 Year Beta

N/A

3.00% Used in CV
3.98% 30 Year T-Bond
4.50% Henry Fund Consensus
Value of Long-Term Debt issued in 2009
1.400 60 Month- Weekly Average

Income Statement
Effective Tax Rate

22.0%

COGS excluding D&A

59.0% 3-Year historical average

12.0% 3-Year historical average
2% 10 year treasury

SG&A
Short Term Investments

% of Revenue
% of Revenue

Balance Sheet
Total Accounts Receivable
Inventories
Other Current Assets
Net Property, Plant & Equipment
Total Investments and Advances
Intangible Assets
Other Assets
Accounts Payable
Income Tax Payable
Other Current Liabilities
Other Liabilities
Deferred Taxes

14.00%
1.50%
10.00%
33%
4%
1.64%
6.0%
17%
10%
14%
7%
50%

3-Year historical average

3-Year historical average
3-Year historical average
3-Year historical average
30-Year Treasury
3-Year historical average
3-Year historical average
3-Year historical average
3-Year historical average
3-Year historical average
3-Year historical average
3-Year historical average

% of Revenue
% of Revenue
% of Revenue
Growth
% of Revenue
% of Revenue
% of Revenue
% of Tax Expense
% of Revenue
% of Revenue
% of Tax Expense

Apple Inc.
Value Drivers
NOPLAT
Tax Rate
EBITA
Adjusted Taxes
Tax Provision
Tax on Other income

Change in Deferred Taxes

2008
32.00%
6,275

2009
32.00%
7,335

2010
24.00%
18,270

2011E
22.00%
23,618

2012E
22.00%
29,422

2013E
22.00%
32,464

2014E
22.00%
35,104

2015E
22.00%
36,853

2,061
198

2,280
116

4,527
(6)

5,532
336

6,945
472

7,792
650

8,555
832

9,131
1,023

1,863

2,164

4,533

5,196

6,473

7,142

7,723

8,108

(3,593)

1,534

(6)

(170)

(707)

(424)

(381)

(288)

NOPLAT

4,406

5,001

10,144

19,956

22,242

24,899

27,000

28,457

Invested Capital
Normal Cash
Accounts Recievable
Inventory

2,274
4,704
509

2,540
5,057
455

4,555
9,924
1,051

6,034
12,067
1,293

7,516
15,033
1,611

8,294
16,588
1,777

8,968
17,937
1,922

9,415
18,830
2,018

Less
Accounts Payable
Taxes Payable

5,520
100

5,601
439

12,015
210

14,653
553

18,254
695

20,142
779

21,780
855

22,865
913

Plus
Net PPE
Other Oper Assets

2,455
7,276

2,954
11,097

4,768
8,429

6,341
15,205

8,434
18,941

11,217
20,900

14,919
22,600

19,842
23,726

Less
Other Operating Liabilities
Operating Leases

3,775
1,760

5,771
1,922

2,370
2,098

6,034
2,148

7,516
2,304

8,294
2,518

8,968
2,648

9,415
2,833

Invest Capital

6,063

8,370

14,132

17,552

22,766

27,043

32,094

37,805

99.84%

88.67%

ROIC

= NOPLATt/Invested Capitalt-1

FCF

=NOPLATt-Invested Capitalt,t-1

2,117

2,694

4,382

16,535

17,028

20,622

21,950

22,746

EP

=Invest Capitalt-1 *(ROIC-WACC)

4,020

4,380

9,287

18,509

20,445

22,567

24,231

25,171

WACC

116.77%

10.24%

82.49% 121.19% 141.21% 126.72% 109.37%

Apple Inc.
Weighted Average Cost of Capital (WACC) Estimation
Common Shares Outstanding
Current Stock Price
Market Value Equity ($M)
LT+ST Debt
PV Operating Leases
Value of Debt
Value of Capital (D + E + PFD)

Risk Free Rate

Market Premium
Beta
Cost of Equity
Cost of Debt

WACC

915 Million
$ 310.57
284,172

99.38%

0
1,764
1,764

0.62%

284,172

100%

3.98%
4.50%
1.400
10.28%
N/A

10.24%

Apple Inc.
Valuation Models
Key Assumptions
WACC
CV Growth
NOPLAT
ROIC-CV

10.24%
3.00%
28,457
88.67%

Beta
Beg IC
EP
MRP

1.400
14,132
25,171
4.50%

Discounted CashFlow
1
2011E
16,535
14,999
306,429
30,703
1,764
5,000
333,904

FCF
PV-FCF
Sum of PV
+PV Non-Oper
-PV Debt
-PV ESOP
PV Equity
Shares
Price
Price as of 11/19/2010

$
$

2
2012E
17,028
14,011

3
2013E
20,622
15,392

4
2014E
21,950
14,861

5
2015E
22,746
13,970

5
CV
379,699
233,196

2
2012E
20,445
16,823

3
2013E
22,567
16,844

4
2014E
24,231
16,406

5
2015E
25,171
15,459

5
CV
347,605
213,485

915
364.92
401.21

Economic Profit
1
2011E
18,509
16,789
295,805
30,703
14,132
1,764
5,000
333,876

EP
PV-EP
Sum of PV
+PV Non-Oper
Beg IC
-PV Debt
-PV ESOP
PV Equity
Shares
Price
Price as of 11/19/2010

$
$

915
364.89
401.21

Apple Inc.
Key Management Ratios
2008

2009

2010

2011E

2012E

2013E

2014E

2015E

Liquidity Ratios
Current Ratio
Quick Ratio

2.46
2.43

1.88
1.86

2.01
1.96

1.94
1.89

2.06
2.01

2.28
2.23

2.51
2.46

2.75
2.71

Acitivity Ratios
Recievables turnover
Inventory Turnover
Asset Turnover
Capital Turnover

6.90
63.81
0.82
1.58

7.18
79.75
0.68
2.14

8.69
61.91
0.87
0.75

7.14
66.67
0.83
0.53

7.14
66.67
0.78
0.44

7.14
66.67
0.69
0.42

7.14
66.67
0.62
1.06

7.14
66.67
0.55
0.32

Leverage Ratios
Debt to Equity
Debt to Assets

16.09%
22.65%
39.40%
23.32%

14.65%
19.79%
39.40%
23.67%

13.31%
17.35%
39.40%
24.07%

Profitability Ratios
Return on Assets
Return on Equity
Gross Margin
Net Margin

12.26% 10.64% 18.64% 18.82% 17.78%

22.99% 20.49% 29.32% 28.78% 26.33%
34.31% 35.32% 41.02% 39.40% 39.40%
14.9% 15.7% 21.5% 22.75% 22.93%

Apple Inc.
Relative P/E Analysis
Ticker
DELL
HPQ
MSFT
GOOG
MOT
RIMM
AMZN

Company
Dell
HP
Microsoft
Google
Motorola
Research In Motion
Amazon

AAPL

Apple

Implied Value:
Relative Value 2010E
Relative Value 2011E
Without Amazon
Relative Value 2010E
Relative Value 2011E

Price
14.52
44.07
27.14
624.27
8.1
57.11
168.93

$ 310.57

$ 469.13
$ 457.02
$ 308.86
$ 319.03

2010E-EPS 2011E-EPS
1.29
1.44
4.51
5.11
2.45
2.68
28.73
33.29
0.34
0.52
6
6.24
2.51
3.48
Average
Average w/o AMZN
$ 21.26 $ 26.47

P/E 2010 P/E 2011

11.26
10.08
9.77
8.62
11.08
10.13
21.73
18.75
23.82
15.58
9.52
9.15
67.30
48.54
22.07
17.27
14.53
12.05
14.61

11.73

Apple Inc.
Fundamental P/E Valuation
2011E
2012E
2013E
2014E
CV
$ 21.26 $ 26.47 $ 29.46 $ 32.08 $ 33.97

EPS
Assumptions
CV Growth
CV ROE
Cost of Equity

3.00%
22.65%
10.28%
1

5
11.92
$ 33.97
$ 404.77

P/E Multiple
EPS(CV)
Future Price
Dividends Per Share
Future Cash Flows

404.77

Discounted Cash Flows

301.80

Intrinsic Value
Value as of 11/19/2010

$ 301.80
$ 331.81

Apple Inc.
Sensitivity Analysis
CV
WACC

401.21
9.34%
9.64%
9.94%
10.24%
10.54%
10.84%
11.14%

CV
2.25%
420.53
404.88
390.46
377.13
364.79
353.31
342.63

2.50%
430.54
413.94
398.69
384.64
371.65
359.61
348.41

2.75%
441.31
423.66
407.50
392.65
378.95
366.29
354.54

3.00%
452.92
434.11
416.94
401.21
386.74
373.39
361.04

3.25%
465.49
445.38
427.09
410.38
395.06
380.97
367.96

3.50%
479.14
457.57
438.02
420.23
403.97
389.06
375.32

3.75%
494.00
470.79
449.84
430.85
413.54
397.72
383.19

2.25%
415.43
401.74
389.00
377.13
366.05
355.67
345.93

2.50%
425.13
410.61
397.15
384.64
372.97
362.07
351.87

2.75%
435.55
420.13
405.87
392.65
380.35
368.88
358.16

3.00%
446.78
430.36
415.21
401.21
388.21
376.12
364.85

3.25%
458.91
441.38
425.25
410.38
396.62
383.85
371.97

3.50%
472.07
453.28
436.07
420.23
405.62
392.10
379.55

3.75%
486.38
466.19
447.75
430.85
415.30
400.94
387.66

ROIC

401.21
58.67%
68.67%
78.67%
88.67%
98.67%
108.67%
118.67%

2.25%
373.72
375.19
376.28
377.13
377.81
378.36
378.82

2.50%
380.73
382.41
383.67
384.64
385.41
386.05
386.57

2.75%
388.20
390.11
391.54
392.65
393.53
394.25
394.84

3.00%
396.19
398.35
399.96
401.21
402.20
403.01
403.69

3.25%
404.75
407.17
408.98
410.38
411.50
412.41
413.16

3.50%
413.95
416.65
418.67
420.23
421.48
422.50
423.34

3.75%
423.85
426.86
429.11
430.85
432.23
433.36
434.30

401.21
1.22
1.28
1.34
1.400
1.46
1.52
1.58

MRP
3.75%
514.39
495.76
478.54
462.57
447.73
433.89
420.96

4.00%
489.49
471.66
455.18
439.92
425.74
412.54
400.21

4.25%
467.07
449.97
434.19
419.58
406.01
393.39
381.61

4.50%
446.78
430.36
415.21
401.21
388.21
376.12
364.85

4.75%
428.33
412.54
397.99
384.54
372.07
360.47
349.67

5.00%
411.48
396.28
382.28
369.35
357.37
346.23
335.86

5.25%
396.04
381.39
367.90
355.45
343.92
333.21
323.24

CV
Beta

401.21
1.22
1.28
1.34
1.400
1.46
1.52
1.58

Beta

Apple Inc.
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares):
Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
Current Average Strike Price:
Cost of Equity:
Current Stock Price:

Increase in Shares Outstanding:

Average Strike Price:
Increase in Common Stock Account:
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)

21,725,000
2.85
7,622,807
$

90.46
10.28%

310.57

2011E
2012E
2013E
2014E
2015E
7,622,807
7,622,807
7,622,807
7,622,807
7,622,807
$
90.46 $
99.76 $
110.01 $
121.32 $
133.80
689,559,123 760,445,801 838,619,629 924,829,727
1,019,902,223

0
310.57 $
915,000,000
7,622,807
922,622,807

342.50 $
922,622,807
7,622,807
930,245,614

377.71 $
930,245,614
7,622,807
937,868,421

416.53 $
937,868,421
7,622,807
945,491,228

459.35
945,491,228
7,622,807
953,114,035

(Assumes common stock and additional paid in capital are combined

Apple Inc.
VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns

Range of
Outstanding Options
Range 1
Total

Number
of Shares
21,725,000
21,725,000 $

AAPL
310.57
3.98%
0.00%
35.00%

Average
Exercise
Price
90.46

90.46

Average
Remaining
Life (yrs)
2.85 $
2.85 $

Value
of Options
Granted
230.16 $ 5,000,255,030
230.16 $ 5,000,255,030
B-S
Option
Price