Heineken 2 - Accounting
Assessment Criteria for MSc Dissertations – Empirical/Valuation Project
General Criteria/
Marker’s
Comments
Introduction Literature Review Empirical/Valuation
Framework and Data
Description
Empirical/Valuation
Analysis
Conclusion Written Communication
(Presentation)
80+
High
Distinction
• -Incisive introduction
• -Comprehensive and
persuasive rationale
• -Clear statement of the
research problem and
associate objectives
•
-Sources used with
discrimination
-Coherent and entirely
justified conceptual
framework to support the
research undertaken
-Sophisticated use of
examples
-Fully appropriate choice
and application of data
collection methods which
is entirely justified
-Correct sourcing
-Highly original and
creative selection of data
-Strong and broad
evidence of an excellent
level of analysis and use of
appropriate techniques
-Exceptional analysis of
key concepts with very
clear originality and
autonomy
• -Strong original conclusion
• -Extensive evidence of the
ability to critically evaluate
the research results
-Excellent typography and
layout
-Lucid expressions
-Sophisticated vocabulary
-Excellent citation and
bibliography norms
70 – 79.9
Distinction
-Focused introduction
-Subject well justified
-Clear statement of the
research problem and
associate objectives
-A wide range of sources
consulted
-Evidence of a sound
discussion of the literature
relevant to the study
-Good use of examples
- Fully appropriate choice
and application of data
collection methods, well
justified
-Correct sourcing
-Original, well-researched
selection of data
-Critical appraisal and
synthetic analysis
-Excellent analysis of key
concepts demonstrating
independence of thought
and a high level of
intellectual rigour and
consistency
-Conclusion advances
debates
-Extensive evidence of the
ability to critically evaluate
the research results
-Structured appropriately
to the purposes of the
assignment
-Lucid expression with few
flaws
-Good use of vocabulary
-Excellent citation and
bibliography norms
60 – 69.9
Merit
-Clear and thoughtful
introduction
-Subject valid and relevant
-Appropriate selection and
justification of the
methodology adopted
-Well selected range of
sources consulted
-Evidence of a
comprehensive review of
the literature relevant to
the study
-Appropriate examples
-Appropriate choice and
application of data
collection methods which
is also well supported.
- Well – researched
selection of data
-Good analysis of key
concepts
-Development of
conceptual structures and
argument making
consistent use of scholarly
conventions
-Clear conclusions
-Satisfactory evidence of
the ability to critically
evaluate the research
results
-Good typography and
layout
-Good expression
-Appropriate use of
vocabulary
-Few errors of grammar
-Well – structured
Accurate and full citation
and bibliography
50 – 59.9
Pass
-Fair introduction
-Subject has some validity
and relevance
-Rationale present but of
marginal relevance
-A range of sources
consulted
-Indication of a satisfactory
review of the literature
relevant to the study but
with some evident gaps
and omissions
-Limited range of
examples sometimes
inappropriate ones
-Mainly appropriate choice
and application of data
collection methods with
some evidence of
justification
-Some errors and
omissions in sourcing
-Mainly standard range of
data used
-Evidence of a satisfactory
level of analysis and of use
of appropriate techniques
-Satisfactory knowledge of
key concepts, descriptive in
parts but some ability to
synthesize scholarship and
argument.
-Fair conclusions
- Some evidence of
appropriate justification for
critical comment on and
logical development but
incomplete and / or
illogically developed.
-Adequate typography and
layout
-Few serious errors of
grammar;
-Limited vocabulary
-inconsistent citation and
bibliography with
significant omissions
<50
Fail
-Weak introduction
-Descriptive with large
gaps or misses the point
-Minimal range of sources
consulted
-Little attempt to support
any assertions
-Minimal range use of
examples
-Inappropriate choice and
application of data
collection with no
justification
-Narrow or unskilled range
of data used
-Limited knowledge of key
concepts
-Use of scholarly
conventions inconsistent,
largely descriptive with little
synthesis of existing
-Weak conclusions
-Conclusions sketchy or ill-
matched
-Poor presentation
-Flawed expression
-Inaccurate citation and
gaps in bibliography
scholarship and limited
argument
On line Assignment Submission
Student ID Number:
Name and Surname:
MSc Programme:
Title:
Name of Supervisor:
Deleting as appropriate:
I do agree to allow my dissertation to be seen by future students
Online Dissertation submission:
Please ensure that you complete and attach this submission form to the front of your work
By submitting your work online you are confirming that your work is your own and that you understand and have read the University’s rules regarding plagiarism
i
On line Assignment Submission
Student ID Number: 180906257
Name and Surname: Zeliha Kasapoglu
MSc Programme: Business Finance
Title: Business analysis and valuation of Apple, Inc.
Name of Supervisor: Dr. Panagiotis Koutroumpis
Deleting as appropriate:
I do agree to allow my dissertation to be seen by future students
Online Dissertation submission:
Please ensure that you complete and attach this submission form to the front of your
work
By submitting your work online you are confirming that your work is your own and
that you understand and have read the University’s rules regarding plagiarism
ii
BUSINESS ANALYSIS AND VALUATION OF APPLE, INC.
M.Sc. Dissertation
Abstract
This paper investigates a target share price for Apple, Inc. using the discounted cash flow model
as the valuation technique and aims to provide an investment recommendation based on the
comparison between the market price and the estimated target price. The foundation of the
valuation approach is to forecast 10-year future cash flows based on their historical growth
trends to estimate annual free cash flow to firm. These cash flows are discounted back to 2019
with the weighted average cost of capital to find the present value of the company. Under the
guidelines of capital asset pricing model, this discount rate is estimated at 7.30\%. The paper
concludes a target price of $218.62, which is +12.78\% above the market price as of 10/06/2019
and provides an in-debt analysis of the price sensitivity to the model’s assumptions that impacts
Apple’s economic growth and its market position. This paper recommends investors a strong
buy position based on the estimated target price, Apple’s latest strategic decisions, its strong
bargaining power, and its liquidity management.
AUGUST 15, 2019
ZELIHA KASAPOGLU
QUEEN MARY UNIVERSITY OF LONDON
iii
Table of Contents
Abstract .......................................................................................................................... ii
Table of Contents............................................................................................................. iii
List of Tables ....................................................................................................................v
List of Figures .................................................................................................................. vi
1. Introduction ............................................................................................................. 1
2. Literature Review ..................................................................................................... 2
3. Data ........................................................................................................................ 3
3.1. Free cash flow to firm .................................................................................................. 3
3.1.1. Earnings before interest and debt ...................................................................................................3
3.1.2. Depreciation and amortization ........................................................................................................3
3.1.3. Capital expenditures ........................................................................................................................3
3.1.4. Effective tax rate ..............................................................................................................................4
3.1.5. Change in net working capital ..........................................................................................................4
3.2. Weighted average cost of capital .................................................................................. 4
3.2.1. Cost of equity ...................................................................................................................................4
3.2.2. Cost of debt ......................................................................................................................................5
3.3. Perpetuity growth rate ................................................................................................. 6
3.4. Terminal value ............................................................................................................. 7
3.5. Enterprise value and equity value ................................................................................. 7
4. Methodology ........................................................................................................... 8
4.1. Discounted cash flow model ......................................................................................... 8
4.1.1. Step 1: Forecasting cash flows .........................................................................................................8
4.1.2. Step 2: Free cash flow to firm ....................................................................................................... 10
4.1.3. Step 3: Discounted cash flows ...................................................................................................... 11
4.2. Sensitivity Analysis..................................................................................................... 12
iv
4.2.1. Internal justification ...................................................................................................................... 13
4.2.2. External justification ..................................................................................................................... 13
5. Results ....................................................................................................................14
5.1. Preliminary fundamental analysis............................................................................... 14
5.2. Forecasting cash flows ............................................................................................... 21
5.3. The discounted cash flow model................................................................................. 26
5.4. Sensitivity analysis ..................................................................................................... 31
6. Conclusion...............................................................................................................34
7. References ..............................................................................................................35
8. Abbreviations and acronyms ...................................................................................38
9. Appendix.................................................................................................................39
v
List of Tables
Table 1: Revenues by product segments (Bloomberg L.P., 2019) .......................................... 16
Table 2: Profitability ratios (Bloomberg L.P., 2019) ............................................................... 18
Table 3: Solvency and liquidity ratios (Bloomberg L.P., 2019) .............................................. 18
Table 4: Working capital ratios (Bloomberg L.P., 2019) ........................................................ 19
Table 5: Assumptions for forecasting future cash flows ......................................................... 22
Table 6: Free cash flow to firm ................................................................................................ 25
Table 7: Regression analysis variables (Yahoo Finance, 2019) .............................................. 27
Table 8: The cost of equity ...................................................................................................... 27
Table 9: The cost of debt ......................................................................................................... 28
Table 10: The cost of capital .................................................................................................... 28
Table 11: The terminal value ................................................................................................... 28
Table 12: Target equity value of Apple Inc. (Bloomberg L.P., 2019) ..................................... 30
Table 13: Price sensitivity to changes of revenue and COGS ................................................. 32
Table 14: Price sensitivity to market wide factors ................................................................... 32
Table 15: Upside / downside potential of target price due to changes in market .................... 33
Table 16: Standardized balance sheet total assets (Bloomberg L.P., 2019) ............................ 40
Table 17: Standardized balance sheet total liabilities (Bloomberg L.P., 2019) ....................... 41
Table 18: Standardized balance sheet total equities (Bloomberg L.P., 2019) ......................... 42
Table 19: Adjusted income statement (Bloomberg L.P., 2019) .............................................. 43
Table 20: Standardized cash flow statement operating and investing activities (Bloomberg
L.P., 2019)................................................................................................................................ 44
Table 21: Standardized cash flow statement financing activities (Bloomberg L.P., 2019) ..... 45
vi
List of Figures
Figure 1: U.S. economy real GDP growth rate. (IMF, 2019) .................................................... 6
Figure 2: Discounting cash flow model general outlook ........................................................... 8
Figure 3: Comparison of revenues, COGS, gross profit (Bloomberg L.P., 2019)................... 14
Figure 4: Growth rates of the revenues and the COGS (Bloomberg L.P., 2019) .................... 15
Figure 5: Sales distribution by products (Bloomberg L.P., 2019) ........................................... 16
Figure 6: Comparison of the gross profit, the EBIT and the FCFF (Bloomberg L.P., 2019) .. 17
Figure 7: Apple, Inc. stock price and Nasdaq composite index (Yahoo Finance, 2019)......... 20
Figure 8: Apple stock price movements in the last 5-years (Yahoo Finance, 2019) ............... 21
Figure 9: Revenues and cost of goods sold forecasted (Bloomberg L.P., 2019) ..................... 23
Figure 10: Regression analysis ................................................................................................ 26
Figure 11: The target price is $218.62 (Yahoo Finance, 2019) ............................................... 29
Figure 12: Revenue growth forecast sensitivity analysis ......................................................... 31
Figure 13: COGS growth forecasts sensitivity analysis .......................................................... 31
Figure 14: Stock price curve in the last 10-years (Yahoo Finance, 2019) ............................... 39
1
1. Introduction
Apple, Inc. is a California based technology company that is developing consumer electronics
goods together with their accessories, computer software, media devices, third-party digital
content and software applications (Apple Inc., 2018). The multinational company sells and
delivers its products worldwide to retailers and wholesalers. Apple’s stock price is trading
today, 10/06/2019, at $193.85 per share in the securities market under Nasdaq Stock Exchange
(Yahoo Finance, 2019). This work aims to determine a target share price of Apple, Inc. by the
end of 2019 using the discounted cash flow model1. The model is conducted by the forecasting
free cash flow to firm based on historical trends. As a conclusion, an investment
recommendation by comparing the target price to the current price is provided.
The financial assessment of the valuation technique is based on the discounted cash flow
approach. First, the free cash flow available to the firm is forecasted for ten years including the
terminal value, then the free cash flows are discounted back to the current year using the cost
of capital to determine the present value of future cash flows. Long-term forecasting is based
on the historical trends of sales growth and its ratio to other variables. Cash flows are estimated
by applying the same historical growth trend to future cash flows assuming that the investment
policy and capital structure of the company will remain the same. The discount rate is the
weighted average of the cost of equity and the cost of debt. The cost of equity calculation is
based on the capital asset pricing model (CAPM) and the cost debt depends on the default rate
given by the credit rating agencies. The present value of all projected cash flows is the
enterprise value of the company. The equity value, or the target price, is the residual value of
the company once the net debt is paid to debt holders by liquidizing all cash and cash equivalent
securities. Hence, after obtaining the target price, its sensitivity to the assumptions is analysed.
This paper is structured as follows. Section 3 introduces the data and variables that are used for
the DCF model. Section 4 presents the ratios and methodology used for forecasting and
modelling. Section 5 indicates the results of the DCF model, presents the target price and
assesses its sensitivity to the assumptions. Finally, section 6 advises an investment strategy
based on the conclusions.
1 According to the 2018 annual statement, yearend is reported from September to September (Apple Inc., 2018)
2
2. Literature Review
The work closely follows the business valuation techniques addressed by the “Business
Analysis and Valuation” book (Palepu, et al., 2013) and the “Corporate Finance” book (Ross,
et al., 2016). The financial information used in the assessment is based on the 2018 annual
report and proxy statement to the shareholders that are provided by the company itself (Apple
Inc., 2018). The Corporate Finance Institute’s guidelines are followed to provide the most
trustworthy valuation techniques (CFI, 2019).
The Bloomberg Terminal is used as a data source of financial data to support assumptions that
are taken for forecasting future cash flows and valuing the business (Bloomberg L.P., 2019).
The Terminal provides standardized and financial statements which allow easy comparison
between companies and industry benchmarks. Analyst reports and recommendations provided
in Bloomberg Terminal are studied to provide a professional outlook.
Forecasts of the International Monetary Fund are used for macroeconomic data such as
inflation and real GDP growth (IMF, 2019). Stock price movements and related up-to-date
price data are downloaded from Yahoo Finance (Yahoo Finance, 2019). The yield of the 10-
year U.S. treasury bonds is taken from Yahoo Finance to obtain the risk-free rate of return.
Online media resources such as highly reputable and trustworthy newspapers such as Financial
Times, CNBC, Time Magazine and the Guardian Magazine are referenced to provide
background information about Apple’s financial statement, its strategic decision and price
curve.
This paper references the book “Investment Philosophies” (Damoran, 2012) for financial ratio
calculation and technical assessment. Finally, the regression analysis technique is based on the
methodology explained by the “Introductory Econometrics for Finance” book (Brooks, 2014).
3
3. Data
The applied valuation approach to calculate Apple’s fair value is the discounted cash flow
method (DCF), where forecasted future cash flows are discounted to the current year, 2019, to
obtain the total present value of the company (Palepu, et al., 2013, p. 278). The methodology
is based on a 10-year valuation technique starting from 27/09/2008 until 29/09/2018. Historical
financial statements of Apple are analysed to build a foundation for forecasting. This section
briefly explains the financial background of variables and addresses how to access them.
3.1. Free cash flow to firm
The valuation technique used in this work is based on the total cash available to the firm that
is obtained from its operations and ready to distribute for internal purposes, paying off debt or
returning to shareholders (Damoran, 2012, p. 109). It is the free cash flow from operating
activities that is available to debt- and credit-holders when all fixed asset investments, net
working capital and tax obligations are paid (Ross, et al., 2016, p. 32).
3.1.1. Earnings before interest and debt
The DCF model focuses on the value generation from operating income, not from financing or
investing income. Hence, the foundation of the model is estimating earnings before interest
and debt (EBIT) that is generated by the sales of good and services and subtracted by the costs
of goods sold (COGS) and the other operating expenses. These items are taken from the income
statement of Apple.
3.1.2. Depreciation and amortization
Depreciation and amortization (D&A) are non-cash accountancy items from the cash flow
statement under operating activities (Ross, et al., 2016, p. 25). It amounts to the cost of assets
that are depreciating over time. The remaining asset value is the economic value of the asset
that is used up (Ross, et al., 2016, p. 25).
3.1.3. Capital expenditures
Capital expenditures are payments to purchase fixed assets, machinery, equipment or tools to
improve the operation. These are taken from the cash flow statement under “Payments for
acquisition of property, plant and equipment”.
4
3.1.4. Effective tax rate
Tax expenses are other non-cash accountancy items from the balance sheet. A business is
obliged to pay taxes from its income due to the corporate income tax. However, not only the
income but also all value generating/destroying items in a company are subject to various type
of taxes such as capital gain tax, dividend tax, payroll tax, property tax etc. Instead of
considering every single tax item separately, the effective tax rate covers all tax expenses and
computes their annual ratio to pre-tax income.
The 2017 U.S. corporate tax legislation under the President Trump administration reduced the
corporate taxes from 35\% to 21\%, which also reduced overseas income tax to 15.5\%, which
allowed many multinational companies to reinvest in their operations using their overseas
profit (CNBC, 2018).
3.1.5. Change in net working capital
Change in net working capital is a measurement of accountancy components that identify if
the basic requirements of the business to run its daily operations are fulfilled at an adequate
level (Palepu, et al., 2013, p. 194). These balance sheet items are the change in trade
receivables, the change in payables to suppliers and the change in inventory. According to the
Corporate Finance Institute, the calculation technique might slightly vary depending on the
analysts’ perspective2.
3.2. Weighted average cost of capital
The discounting rate with which present value of the company is calculated is the cost of capital
that the investors are paying to receive a minimum required rate of return to bear the risk and
achieve extra returns (Ross, et al., 2016, p. 397). The cost of capital (𝑟𝑊𝐴𝐶𝐶 ) is a function of
the cost of equity (re), the market value of total equity (E), the after-tax cost of debt (rd) and
the market value of total debt (D) (Palepu, et al., 2013, p. 335). The market value of the equity
is the market capitalization of the stock in the equities market.
3.2.1. Cost of equity
The cost of equity (re) calculation method is derived from the capital asset pricing model
(CAPM) that is the expected return-beta relationship of a security relative to its market. Its
2 https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-net-working-capital/
5
graphical representation is the Securities Market Line (Bodie, et al., 2014, p. 297). The
expected return on an asset is expressed as a function of the equity beta (𝛽𝑒), the market risk
premium 𝑟𝑝 = 𝐸(𝑟𝑀 ) − 𝑟𝑓and the risk-free rate of return (𝑟𝑓).
The risk-free rate of return is the historical daily average yield of 10-year U.S. government
bonds from 20093 until 2018 (Palepu, et al., 2013, p. 334). The average risk-free rate is at
2.46\% (Yahoo Finance, 2019). The 10-year maturity of government bonds are chosen exactly
to match the forecasting period (Ross, et al., 2016, p. 400).
The market risk premium (𝑟𝑝) is the extra return investors require from the market portfolio
(𝑟𝑀 ) to bear the market wide risk above the risk-free rate of return (Palepu, et al., 2013, p. 334).
The market risk varies depending on the country and its macroeconomic state. Duff & Phelps,
a global advisory expert company in valuation and corporate finance areas, recommends 5.5\%
for the U.S. market risk premium in 2018 (Duff&Phelps, 2019).
The equity beta, also called as the levered beta or the systematic risk (𝛽𝑒) is the non-
diversifiable market-wide risk that indicates the impact of the market-wide risk on the equity’s
return (Palepu, et al., 2013, p. 331). The market portfolio is usually the market index where the
company is traded or where its headquarter is located. In Apple’s case, instead of the US
benchmark S&P500 index, the tech-heavy index Nasdaq Composite Index, where Apple’s
stocks are traded, is chosen. This allows investors to compare Apple within the technology
industry and to observe its correlation to the market-wide risk that impacts technology firms
the most.
3.2.2. Cost of debt
Since the DCF model is based on after-tax cash flows, the cost of debt is calculated after-tax
basis considering the tax-deductibility of interest expenses and the tax shield that is created
(Palepu, et al., 2013, p. 334). Hence, the cost of debt is the sum of the risk-free rate and the
credit default risk of the company after-tax. The credit default is the default rate at which a
long-term corporate bond issued by a company, which is graded by the credit rating agencies
depending on their ability to repay the debt (David, et al., 2002, pp. 47, 48). Credit rating
3 Year 2008 is bypassed due to the financial crisis in the United States in order to assess normal years.
6
agencies rate the potential risk of repayment of the debt by specific degrees and define the
creditworthiness of the corporations by these rates over their lifetime. The spread is defined by
the extra cost that the investor is paying to bear the default risk of the firm. The higher a firm
is rated, the lower is the cost of debt and hence its interest rate is closer to the risk-free rate of
return (Damoran, 2012, p. 50).
The credit default of the long-term corporate bonds of Apple are rated by the Moody’s agency
at AA1 and by the Standard & Poor’s agency at AA+ (Bloomberg L.P., 2019). The AA1 level
traded corporate bonds in the United States have in average a 1.00\% spread (NYU Stern, 2019).
3.3. Perpetuity growth rate
The perpetuity growth rate is the constant rate at which the terminal value of FCFF growing
forever. It is assumed that in an economy, cash flows do not grow at a higher rate than the
economies perpetuity growth rate. As a benchmark rate, the expected growth rate of the U.S.
economy is taken (Damoran, 2012, p. 102). Herewith, the real GDP growth assumption by the
International Monetary Fund is applied as the perpetuity growth rate.
Figure 1: U.S. economy real GDP growth rate. (IMF, 2019)
IMF estimates the real GDP growth at 1.6\% from 2022 to 2024 (IMF, 2019). After 2024 the
growth rate of the US economy is hardly foreseeable and uncertain. Therefore, the expected
perpetuity growth rate of the FCFF after 2029 is assumed to follow the same trend and remain
stable at 1.6\% as the IMF projections presume.
7
3.4. Terminal value
The terminal year is the last cash flow forecasting year that is covered in the DCF model.
However, cash flows beyond the terminal year are generating value as well and are important
to include in the valuation exercise. The terminal value is the estimated present value of all
cash flows beyond the terminal year and they are assumed to be growing at a perpetuity growth
rate (Damoran, 2012, p. 107).
3.5. Enterprise value and equity value
The sum of all discounted cash flows determines the fair enterprise value of the company at
the calculation date that is the date to which free cash flows to firm are discounted back. The
enterprise value is defined as the asset value if the company had been financed 100\% with
equity (Palepu, et al., 2013, p. 347). However, in reality, there is the tax-shield advantage of
debt that adds value to equity as a whole. As a result, the remaining equity value becomes the
residual claim to shareholders once all debt is paid. The estimated equity value is the fair
(target) value of the companies’ stocks that are driven by the cash flow structure of the
company. The target price of a share is a benchmark value for the investor when compared
with the market price. With the valuation approach, this paper introduces a target price that is
driven by the fair value of the firm and compares it with the current trading price.
8
4. Methodology
The following section introduces the techniques that are used for the valuation of Apple, Inc.
following two sections: the first section explains how to obtain the target price of the company
and the valuation method behind it. The second section examines how the assumptions are
justified and assesses the sensitivity of the obtained target price to both external and internal
assumptions.
4.1. Discounted cash flow model
The first step of the discounted cash flow model (DCF) is analysing historical 10-years of cash
flows and forecasting them based on their growth trend or their ratio to the sales revenues. The
second step is calculating the free cash flow to firm (FCFF). The last step is discounting FCFF
to current year to obtain the present value of the company.
Figure 2: Discounting cash flow model general outlook
4.1.1. Step 1: Forecasting cash flows
The forecasting future cash flows starts with analysing historical financial statements. The goal
is to seek trends and consistent ratios to estimate future cash flows based on that conclusion.
Below are the forecasting methods applied to obtain all necessary variables for the free cash
flow calculation.
4.1.1.1. Sales revenues growth trend
The foundation of the forecasting cash flow is sales revenues. First, the historical 10-year
growth trend is analysed considering the business cycles, the U.S. economic growth and the
recent strategies of the company. Second, the trend is extended to the future 10-years and
additionally the growth rate of the terminal year is expected be exactly to equal as the U.S.
economic growth forecasts.
9
4.1.1.2. Gross profit margin and EBIT margin
The cost of goods sold (𝐶𝑂𝐺𝑆) to revenues margin is analysed to obtain the historical gross
profit margin of the company:
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐶𝑂𝐺𝑆
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
(1)
The same gross margin interval of the past 10-years is kept as the benchmark projection of
future predictions. Next, other operating expenses such as selling, general and administration
expenses, research and development expenses and other operating expenses are summed up to
compute their ratio to the cost of goods sold. As a result, EBIT is the gross profit subtracted by
the other operating expenses and EBIT margin is simply the ratio of EBIT to the revenues.
Hence, the following equation can be applied:
𝐸𝐵𝐼𝑇 = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 − 𝑂𝑡ℎ𝑒𝑟 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (2)
4.1.1.3. Capital expenditures to depreciation and amortization ratio
First, the ratio of depreciation and amortization expenses (D&A) to EBIT is calculated to obtain
a benchmark ratio of how the future organic growth trend might evolve. Second, historical
CapEx to D&A ratio is analysed, and the same ratio is applied to future estimations to maintain
a similar performance. If the CapEx is higher than the D&A, meaning their ratio is greater than
one (or 100\%), the business can not only maintain its current state but can also invest in its
fixed assets to improve production and its operating performance. However, the terminal year
is the year at which the company is just expected to maintain organic growth and to follow …
Aim and Objectives
} Enable students to advance their knowledge of
the field covered by their degree programme
} Independent research project (it can be either
an empirical project or a valuation project)
} Ability to evaluate, challenge, modify and
develop theory and practice.
} Offer synthetic and coherent solutions
2
} The dissertation can be either an empirical project or a
valuation project
◦ For Empirical projects: ECOM146 is strongly recommended
◦ You can change your optional modules in January 2021
◦ Data Analysis for Research, is part of the Dissertation
module
◦ Ungraded
◦ Compulsory
◦ Starts in Sem B
3
} Topics discussed during Data Analysis for
Research
} Topics proposed by supervisors
} Students need to discuss with their supervisor
their topic before the proposal submission
} 1st meeting with supervisor will be in March 2021
◦ Specific dates for each supervisor to be confirmed
4
} Topic selection: Friday 5th of February 2021
} Proposal submission: Friday 16th of April 2021
} Final submission: Monday 23rd of August 2021
} Dissertations that are submitted late will be penalised at
the rate of 5 marks deduction for each 24 hour period
after the set submission time, down to the pass mark.
} Work submitted 7 calendar days or more after the
deadline will be awarded zero (check your handbook).
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5
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ii
BUSINESS ANALYSIS AND VALUATION OF APPLE, INC.
M.Sc. Dissertation
AUGUST 15, 2019
ZELIHA KASAPOGLU
QUEEN MARY UNIVERSITY OF LONDON
Abstract
This paper investigates a target share price for Apple, Inc. using the discounted cash flow model as the valuation technique and aims to provide an investment recommendation based on the comparison between the market price and the estimated target price. The foundation of the valuation approach is to forecast 10-year future cash flows based on their historical growth trends to estimate annual free cash flow to firm. These cash flows are discounted back to 2019 with the weighted average cost of capital to find the present value of the company. Under the guidelines of capital asset pricing model, this discount rate is estimated at 7.30\%. The paper concludes a target price of $218.62, which is +12.78\% above the market price as of 10/06/2019 and provides an in-debt analysis of the price sensitivity to the model’s assumptions that impacts Apple’s economic growth and its market position. This paper recommends investors a strong buy position based on the estimated target price, Apple’s latest strategic decisions, its strong bargaining power, and its liquidity management.
Table of Contents
iii
Abstract ii
Table of Contents iii
List of Tables v
List of Figures vi
Introduction 1
Literature Review 2
Data 3
Free cash flow to firm 3
Earnings before interest and debt 3
Depreciation and amortization 3
Capital expenditures 3
Effective tax rate 4
Change in net working capital 4
Weighted average cost of capital 4
Cost of equity 4
Cost of debt 5
Perpetuity growth rate 6
Terminal value 7
Enterprise value and equity value 7
Methodology 8
Discounted cash flow model 8
Step 1: Forecasting cash flows 8
Step 2: Free cash flow to firm 10
Step 3: Discounted cash flows 11
Sensitivity Analysis 12
Internal justification 13
External justification 13
Results 14
Preliminary fundamental analysis 14
Forecasting cash flows 21
The discounted cash flow model 26
Sensitivity analysis 31
Conclusion 34
References 35
Abbreviations and acronyms 38
Appendix 39
List of Tables
Table 1: Revenues by product segments (Bloomberg
L.P.,
2019)
16
Table 2: Profitability ratios (Bloomberg
L.P.,
2019)
18
Table 3: Solvency and liquidity ratios (Bloomberg
L.P.,
2019)
18
Table 4: Working capital ratios (Bloomberg
L.P.,
2019)
19
Table 5: Assumptions for forecasting future
cash
flows
22
Table 6: Free cash flow
to
firm
25
Table 7: Regression analysis variables (Yahoo
Finance,
2019)
27
Table 8: The cost
of
equity
27
Table 9: The cost
of
debt
28
Table 10: The cost
of
capital
28
Table 11: The
terminal
value
28
Table 12: Target equity value of Apple Inc. (Bloomberg
L.P.,
2019)
30
Table 13: Price sensitivity
to changes
of
revenue
and
COGS
32
Table 14: Price sensitivity to market
wide
factors
32
Table 15: Upside / downside potential of target price due to changes
in
market
33
Table 16: Standardized balance sheet total assets (Bloomberg
L.P.,
2019)
40
Table 17: Standardized balance sheet total liabilities (Bloomberg
L.P.,
2019)
41
Table 18: Standardized balance sheet total equities (Bloomberg
L.P.,
2019)
42
Table 19: Adjusted income statement (Bloomberg
L.P.,
2019)
43
Table 20: Standardized cash flow statement operating
a
nd
investing activities (Bloomberg L.P.,
2019)
44
Table 21: Standardized cash flow statement financing activities (Bloomberg
L.P.,
2019)
45
List of Figures
Figure 1: U.S. economy real GDP growth rate.
(IMF, 2019)
6
Figure 2: Discounting cash flow model
general
outlook
8
Figure 3: Comparison of revenues, COGS, gross profit (Bloomberg
L.P.
,
2019)
14
Figure 4: Growth rates of the revenues and the COGS (Bloomberg
L.P.,
2019)
15
Figure 5: Sales distribution by products (Bloomberg
L.P., 2019)
16
Figure 6: Comparison of the gross profit, the EBIT and the FCFF (Bloomberg
L.P.,
2019)
17
Figure 7: Apple, Inc. stock price and Nasdaq composite index (Yahoo
Finance,
2019)
20
Figure 8: Apple stock price movements in the last 5-years (Yahoo
Finance, 2019)
21
Figure 9: Revenues and cost of goods sold forecasted (Bloomberg
L.P.,
2019)
23
Figure 10:
Regression
analysis
26
Figure 11: The target price
is
$218.62 (Yahoo
Finance, 2019)
29
Figure 12: Revenue growth forecast
sensitivity
analysis
31
Figure 13: COGS growth forecasts
sensitivity
analysis
31
Figure 14: Stock price curve in the last 10-years (Yahoo
Finance, 2019)
39
1.
Introduction
Apple, Inc. is a California based technology company that is developing consumer electronics goods together with their accessories, computer software, media devices, third-party digital content and software applications (Apple Inc., 2018). The multinational company sells and delivers its products worldwide to retailers and wholesalers. Apple’s stock price is trading today, 10/06/2019, at $193.85 per share in the securities market under Nasdaq Stock Exchange (Yahoo Finance, 2019). This work aims to determine a target share price of Apple, Inc. by the end of 2019 using the discounted cash flow model1. The model is conducted by the forecasting free cash flow to firm based on historical trends. As a conclusion, an investment recommendation by comparing the target price to the current price is provided.
The financial assessment of the valuation technique is based on the discounted cash flow approach. First, the free cash flow available to the firm is forecasted for ten years including the terminal value, then the free cash flows are discounted back to the current year using the cost of capital to determine the present value of future cash flows. Long-term forecasting is based on the historical trends of sales growth and its ratio to other variables. Cash flows are estimated by applying the same historical growth trend to future cash flows assuming that the investment policy and capital structure of the company will remain the same. The discount rate is the weighted average of the cost of equity and the cost of debt. The cost of equity calculation is based on the capital asset pricing model (CAPM) and the cost debt depends on the default rate given by the credit rating agencies. The present value of all projected cash flows is the enterprise value of the company. The equity value, or the target price, is the residual value of the company once the net debt is paid to debt holders by liquidizing all cash and cash equivalent securities. Hence, after obtaining the target price, its sensitivity to the assumptions is analysed.
This paper is structured as follows. Section 3
introduces the data and variables that are used for the DCF model. Section 4 presents the ratios and methodology used for forecasting and modelling. Section 5 indicates the results of the DCF model, presents the target price and assesses its sensitivity to the assumptions. Finally, section 6 advises an investment strategy based on the conclusions.
1 According to the 2018 annual statement, yearend is reported from September to September (Apple Inc., 2018)
1
2.
Literature Review
The work closely follows the business valuation techniques addressed by the “Business Analysis and Valuation” book (Palepu, et al., 2013) and the “Corporate Finance” book (Ross, et al., 2016). The financial information used in the assessment is based on the 2018 annual report and proxy statement to the shareholders that are provided by the company itself (Apple Inc., 2018). The Corporate Finance Institute’s guidelines are followed to provide the most trustworthy valuation techniques (CFI, 2019).
The Bloomberg Terminal is used as a data source of financial data to support assumptions that are taken for forecasting future cash flows and valuing the business (Bloomberg L.P., 2019). The Terminal provides standardized and financial statements which allow easy comparison between companies and industry benchmarks. Analyst reports and recommendations provided in Bloomberg Terminal are studied to provide a professional outlook.
Forecasts of the International Monetary Fund are used for macroeconomic data such as inflation and real GDP growth (IMF, 2019). Stock price movements and related up-to-date price data are downloaded from Yahoo Finance (Yahoo Finance, 2019). The yield of the 10- year U.S. treasury bonds is taken from Yahoo Finance to obtain the risk-free rate of return.
Online media resources such as highly reputable and trustworthy newspapers such as Financial Times, CNBC, Time Magazine and the Guardian Magazine are referenced to provide background information about Apple’s financial statement, its strategic decision and price curve.
This paper references the book “Investment Philosophies” (Damoran, 2012) for financial ratio calculation and technical assessment. Finally, the regression analysis technique is based on the methodology explained by the “Introductory Econometrics for Finance” book (Brooks, 2014).
3.
Data
The applied valuation approach to calculate Apple’s fair value is the discounted cash flow method (DCF), where forecasted future cash flows are discounted to the current year, 2019, to obtain the total present value of the company (Palepu, et al., 2013, p. 278). The methodology is based on a 10-year valuation technique starting from 27/09/2008 until 29/09/2018. Historical financial statements of Apple are analysed to build a foundation for forecasting. This section briefly explains the financial background of variables and addresses how to access them.
3.1.
Free cash flow to firm
The valuation technique used in this work is based on the total cash available to the firm that is obtained from its operations and ready to distribute for internal purposes, paying off debt or returning to shareholders (Damoran, 2012, p. 109). It is the free cash flow from operating activities that is available to debt- and credit-holders when all fixed asset investments, net working capital and tax obligations are paid (Ross, et al., 2016, p. 32).
3.1.1.
Earnings before interest and debt
The DCF model focuses on the value generation from operating income, not from financing or investing income. Hence, the foundation of the model is estimating earnings before interest and debt (EBIT) that is generated by the sales of good and services and subtracted by the costs of goods sold (COGS) and the other operating expenses. These items are taken from the income statement of Apple.
3.1.2.
Depreciation and amortization
Depreciation and amortization (D&A) are non-cash accountancy items from the cash flow statement under operating activities (Ross, et al., 2016, p. 25). It amounts to the cost of assets that are depreciating over time. The remaining asset value is the economic value of the asset that is used up (Ross, et al., 2016, p. 25).
3.1.3.
Capital expenditures
Capital expenditures are payments to purchase fixed assets, machinery, equipment or tools to improve the operation. These are taken from the cash flow statement under “Payments for acquisition of property, plant and equipment”.
3.1.4.
Effective tax rate
Tax expenses are other non-cash accountancy items from the balance sheet. A business is obliged to pay taxes from its income due to the corporate income tax. However, not only the income but also all value generating/destroying items in a company are subject to various type of taxes such as capital gain tax, dividend tax, payroll tax, property tax etc. Instead of considering every single tax item separately, the effective tax rate covers all tax expenses and computes their annual ratio to pre-tax income.
The 2017 U.S. corporate tax legislation under the President Trump administration reduced the corporate taxes from 35\% to 21\%, which also reduced overseas income tax to 15.5\%, which allowed many multinational companies to reinvest in their operations using their overseas profit (CNBC, 2018).
3.1.5.
Change in net working capital
Change in net working capital is a measurement of accountancy components that identify if the basic requirements of the business to run its daily operations are fulfilled at an adequate level (Palepu, et al., 2013, p. 194). These balance sheet items are the change in trade receivables, the change in payables to suppliers and the change in inventory. According to the Corporate Finance Institute, the calculation technique might slightly vary depending on the analysts’ perspective2.
3.2.
Weighted average cost of capital
The discounting rate with which present value of the company is calculated is the cost of capital
achieve extra returns (Ross, et al., 2016, p. 397). The cost of capital
𝑟𝑊𝐴𝐶𝐶
is a function of
the cost of equity (re), the market value of total equity (E), the after-tax cost of debt (rd) and the market value of total debt (D) (Palepu, et al., 2013, p. 335). The market value of the equity is the market capitalization of the stock in the equities market.that the investors are paying to receive a minimum required rate of re(turn to )bear the risk and
3.2.1.
Cost of equity
The cost of equity (re) calculation method is derived from the capital asset pricing model (CAPM) that is the expected return-beta relationship of a security relative to its market. Its
2 https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-net-working-capital/
graphical representation is the Securities Market Line (Bodie, et al., 2014, p. 297). The expected return on an asset is expressed as a function of the equity beta 𝑒(𝛽 )
10
premium 𝑟𝑝 = 𝐸(𝑟𝑀) − 𝑟𝑓and the risk-free rate of return (𝑟𝑓).
, the market risk
The risk-free rate of return is the historical daily average yield of 10-year U.S. government bonds from 20093 until 2018 (Palepu, et al., 2013, p. 334). The average risk-free rate is at 2.46\% (Yahoo Finance, 2019). The 10-year maturity of government bonds are chosen exactly to match the forecasting period (Ross, et al., 2016, p. 400).
T(𝑟he)market risk premium (𝑟𝑝) is the extra return investors require from the market portfolio𝑀
to bear the market wide risk above the risk-free rate of return (Palepu, et al., 2013, p. 334).
The market risk varies depending on the country and its macroeconomic state. Duff & Phelps, a global advisory expert company in valuation and corporate finance areas, recommends 5.5\% for the U.S. market risk premium in 2018 (Duff&Phelps, 2019).(𝛽 )𝑒
The equity beta, also called as the levered beta or the systematic risk is the non- diversifiable market-wide risk that indicates the impact of the market-wide risk on the equity’s return (Palepu, et al., 2013, p. 331). The market portfolio is usually the market index where the company is traded or where its headquarter is located. In Apple’s case, instead of the US benchmark S&P500 index, the tech-heavy index Nasdaq Composite Index, where Apple’s stocks are traded, is chosen. This allows investors to compare Apple within the technology industry and to observe its correlation to the market-wide risk that impacts technology firms the most.
3.2.2.
Cost of debt
Since the DCF model is based on after-tax cash flows, the cost of debt is calculated after-tax basis considering the tax-deductibility of interest expenses and the tax shield that is created (Palepu, et al., 2013, p. 334). Hence, the cost of debt is the sum of the risk-free rate and the credit default risk of the company after-tax. The credit default is the default rate at which a long-term corporate bond issued by a company, which is graded by the credit rating agencies depending on their ability to repay the debt (David, et al., 2002, pp. 47, 48). Credit rating
3 Year 2008 is bypassed due to the financial crisis in the United States in order to assess normal years.
agencies rate the potential risk of repayment of the debt by specific degrees and define the creditworthiness of the corporations by these rates over their lifetime. The spread is defined by the extra cost that the investor is paying to bear the default risk of the firm. The higher a firm is rated, the lower is the cost of debt and hence its interest rate is closer to the risk-free rate of return (Damoran, 2012, p. 50).
The credit default of the long-term corporate bonds of Apple are rated by the Moody’s agency at AA1 and by the Standard & Poor’s agency at AA+ (Bloomberg L.P., 2019). The AA1 level traded corporate bonds in the United States have in average a 1.00\% spread (NYU Stern, 2019).
3.3.
Perpetuity growth rate
The perpetuity growth rate is the constant rate at which the terminal value of FCFF growing forever. It is assumed that in an economy, cash flows do not grow at a higher rate than the economies perpetuity growth rate. As a benchmark rate, the expected growth rate of the U.S. economy is taken (Damoran, 2012, p. 102). Herewith, the real GDP growth assumption by the International Monetary Fund is applied as the perpetuity growth rate.
Figure 1: U.S. economy real GDP growth rate. (IMF, 2019)
IMF estimates the real GDP growth at 1.6\% from 2022 to 2024 (IMF, 2019). After 2024 the growth rate of the US economy is hardly foreseeable and uncertain. Therefore, the expected perpetuity growth rate of the FCFF after 2029 is assumed to follow the same trend and remain stable at 1.6\% as the IMF projections presume.
3.4.
Terminal value
The terminal year is the last cash flow forecasting year that is covered in the DCF model. However, cash flows beyond the terminal year are generating value as well and are important to include in the valuation exercise. The terminal value is the estimated present value of all cash flows beyond the terminal year and they are assumed to be growing at a perpetuity growth rate (Damoran, 2012, p. 107).
3.5.
Enterprise value and equity value
The sum of all discounted cash flows determines the fair enterprise value of the company at the calculation date that is the date to which free cash flows to firm are discounted back. The enterprise value is defined as the asset value if the company had been financed 100\% with equity (Palepu, et al., 2013, p. 347). However, in reality, there is the tax-shield advantage of debt that adds value to equity as a whole. As a result, the remaining equity value becomes the residual claim to shareholders once all debt is paid. The estimated equity value is the fair (target) value of the companies’ stocks that are driven by the cash flow structure of the company. The target price of a share is a benchmark value for the investor when compared with the market price. With the valuation approach, this paper introduces a target price that is driven by the fair value of the firm and compares it with the current trading price.
4.
Methodology
The following section introduces the techniques that are used for the valuation of Apple, Inc. following two sections: the first section explains how to obtain the target price of the company and the valuation method behind it. The second section examines how the assumptions are justified and assesses the sensitivity of the obtained target price to both external and internal assumptions.
4.1.
Discounted cash flow model
The first step of the discounted cash flow model (DCF) is analysing historical 10-years of cash flows and forecasting them based on their growth trend or their ratio to the sales revenues. The second step is calculating the free cash flow to firm (FCFF). The last step is discounting FCFF to current year to obtain the present value of the company.
Figure 2: Discounting cash flow model general outlook
4.1.1.
Step 1: Forecasting cash flows
The forecasting future cash flows starts with analysing historical financial statements. The goal is to seek trends and consistent ratios to estimate future cash flows based on that conclusion. Below are the forecasting methods applied to obtain all necessary variables for the free cash flow calculation.
4.1.1.1. Sales revenues growth trend
The foundation of the forecasting cash flow is sales revenues. First, the historical 10-year growth trend is analysed considering the business cycles, the U.S. economic growth and the recent strategies of the company. Second, the trend is extended to the future 10-years and additionally the growth rate of the terminal year is expected be exactly to equal as the U.S. economic growth forecasts.
4.1.1.2. Gross profit margin and EBIT marginThe cost of goods sold (𝐶𝑂𝐺𝑆)
to revenues margin is analysed to obtain the historical gross
profit margin of t𝐺h𝑟e𝑜c𝑠o𝑠m𝑝p𝑟a𝑜n𝑓y𝑖:𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑅𝑒𝑣𝑒𝑅𝑛𝑒𝑢𝑣𝑒𝑒𝑠𝑛−𝑢𝑒𝐶𝑠𝑂𝐺𝑆
(1)
The same gross margin interval of the past 10-years is kept as the benchmark projection of future predictions. Next, other operating expenses such as selling, general and administration expenses, research and development expenses and other operating expenses are summed up to compute their ratio to the cost of goods sold. As a result, EBIT is the gross profit subtracted by the other operating expenses and EBIT margin is simply the ratio of EBIT to the revenues. Hence, the following equation can be applied:
(2)
4.1.1.3. Capital expenditures to depreciation and amortization ratio
First, the ratio of depreciation and amortization expenses (D&A) to EBIT is calculated to obtain a benchmark ratio of how the future organic growth trend might evolve. Second, historical CapEx to D&A ratio is analysed, and the same ratio is applied to future estimations to maintain a similar performance. If the CapEx is higher than the D&A, meaning their ratio is greater than one (or 100\%), the business can not only maintain its current state but can also invest in its fixed assets to improve production and its operating performance. However, the terminal year is the year at which the company is just expected to maintain organic growth and to follow the growth predictions of the economy, hence, the CapEx is assumed to be equal to the D&A in the terminal year in order to maintain a stable growth and replace all the equipment that is depreciating (Forensic Strategic Solutions, 2017).
4.1.1.4. Effective tax rate
The effective tax rate is the ratio of total tax expenses to the pre-tax income (Palepu, et al., 2013, p. 210). Since annual tax payment of the company varies depending on the state tax regimes, applied effective tax rate
(t)
for the future forecasts is set to the average of the past 10-years.
4.1.1.5. Working capital calculation
Applied methodology for calculating the change in net working capital (NWC) is based on the annual change in working capital followed by the methods of Corporate Finance Institute (CFI, 2∆01𝑁9𝑊): 𝐶 = ∆ 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 + ∆ 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − ∆ 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 (3)
4.1.2.
Step 2: Free cash flow to firm
The free cash flow to firm (FCFF) is the operating income after tax that is subtracted by the change in the net working capital (NWC), depreciation and the capital expenditures (Palepu, et al., 2013, p. 618):
(4)
Once, the FCFFs for every forecasting year are calculated, the next step is to estimate free cash flows beyond the terminal year, which is the terminal value.
4.1.2.1.
The weighted average cost of capital(𝑟 )𝑊𝐴𝐶𝐶
The weighted average cost of capital is the discount rate at which all cash flows are discounted. It is calculated by weighting the cost of equity (re) to the market value of total equity (E) and the after-tax cost of debt (rd) to the market value of total debt (D) which is the sum of short-term and long-term debt (Palepu, et al., 2013, p. 335):
𝑟𝑊𝐴𝐶𝐶 = 𝑟𝑒 ∗ 𝐷 +𝐸 𝐸 + 𝑟𝑑 ∗ 𝐷 𝐷+ 𝐸 (5)
default spread above the risk-free rate (𝑟𝑓 + 𝑠𝑝𝑟𝑒𝑎𝑑) that the investor is seeking (Ernst &The cost of debt (𝑟 ) is the after-tax rate (𝑡) of the cost of borrowing based on the additional𝑑
𝑑 𝑓 (6)
the investor is requiring to bear the market-wide systematic risk (𝛽𝑒) based on the market
Young, 2018):
The cost of equity (𝑟𝑒), on the other hand, is the extra return above the risk-free rate (𝑟𝑓) that
conditions (𝑟𝑝):
(7)
The systematic risk, also known as the equity beta or the levered beta, is the beta estimate of the regression analysis of the market benchmark Nasdaq composite index (CCMP: IND) and Apple’s stock index (AAPL: US). Hence, daily stock prices of both indices are downloaded from Yahoo Finance and their daily returns are calculated.
All returns are plotted on a scatter diagram as with the x-axis defining the daily price returns of the market portfolio and the y-axis is the daily price returns of Apple’s stock. The fittêd lineAlpha estimate (𝛼̂). Beta estimate is the covariance of Apples’ and Nasdaq’s price returns over
that describes all data the best is the regression line. It is a function of Beta estimate (𝛽) and
the variance of Nasdaq’s price return (Bodie, et al., 2014, p. 297):
𝛽̂ = 𝐶𝑜𝑣𝑉(𝑎𝑟𝐴𝑟𝑝(𝑝𝑟𝑙𝑁𝑒𝑎, 𝑠𝑟𝑑𝑁𝑎𝑎𝑞𝑠)𝑑𝑎𝑞)
(8)
The beta estimate indicates the sensitivity of the Apple’s stock to the market-wide risks. The alpha estimate is the intercept of the fitted line, that is expressed by the average of Apple’s and Nasdaq’s daily price returns (Brooks, 2014, p. 81):
(9)
4.1.2.2. Terminal value
The perpetuity growth rate is the expected growth rate of the U.S. economy as mentioned insection 3.3. Once the perpetuity growth rate (𝑔) and the discount rate (𝑟 ) are obtained,𝑊𝐴𝐶𝐶
2016, p. 415): 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐹𝐶𝐹𝐹𝑟the terminal value (𝑇𝑉) beyond 2029 can be found using the following equation (Ross, et al.,
𝑊20𝐴2𝐶9𝐶
∗−(1𝑔+ 𝑔)
4.1.3.
Step 3: Discounted cash flows(10)
The goal of discounting the future cash flows is to estimate the present value (PV) of all cash flows the company is aiming to generate in the future. The “present” year of this exercise is the end of year 2019, at which all future cash flows will be discounted back. Therefore, yearend 2019 is the current year and market as “year 0”. The first year of the discounting period is the end of the year 2020 and the last year is the end of the year 2029. The terminal value indicates
the present value of the cash flows at perpetuity in year 2029 yearend, that is the tenth
discounting year. Once all the discounting years are defined, the method is as follows (David,
et al., 2002):
𝐹𝐶𝐹𝐹
𝐹𝐶𝐹𝐹
𝑇𝑉
𝑃𝑉 = (1 + 𝑟𝑊2𝐴0𝐶2𝐶0)1 + ⋯ + (1 + 𝑟𝑊𝐴20𝐶2𝐶9)10 + (1 + 𝑟𝑊𝐴𝐶𝐶 )10 (11)
4.1.3.1. Enterprise value and equity value
The present value of all discounted cash flows indicates the fair asset value of the enterprise based on the cash flows assumptions that were made. However, due to the tax advantage of interests, debt financing adds value to the firm. According to the pecking order theory of financing, debt holders are being paid before equity holders can claim their stake. Therefore, equity value is the total asset value subtracted by net debt and minority interest, which are non- equity claimants (Palepu, et al., 2013, p. 347):
(12)
Minority interests are payments that are made to the outside shareholders and not related to the economic value of the business (Palepu, et al., 2013, p. 349). The net debt is the sum of all interest-bearing debt subtracted by the cash and cash-equivalents. The reason is that the cash equivalent marketable securities can be quickly turned into cash and the remaining debt can be immediately paid off (Ross, et al., 2016, p. 56). In the end, net debt will be only the remaining portion of the debt that is not payable with the current liquidity of the company:
(13)
The reached equity value is expected to be at least equal to the market capitalization that is the selling price of the company’s equities at the secondary market, meaning the trading price of a single share multiplied by the number of outstanding shares (Ross, et al., 2016, p. 56). Thus, the purpose of the valuation is to obtain a target equity value that is derived from the fair enterprise value and to compare this to the market price.
4.2.
Sensitivity Analysis
After obtaining the target price, its sensitivity to the assumptions is an important measurement. This section examines sensitivity analysis in to two parts. Internal justification is the sensitivity
of the target price to performance-related “internal” assumptions and external justification is the sensitivity of the target price to market-wide “external” effects.
4.2.1.
Internal justification
All variables are forecasted depending on their ratios related to revenues or COGS. Thus, it is important to justify the sensitivity of the target price to the growth assumptions of both variables. This work presents the good and bad case scenarios for the two core variables. The good-case scenario is when the annual growth of sales revenues is +1.00\% faster and/or the annual growth of the costs is -1.00\% lower than an expected “average” year. The worst-case scenario is when the annual growth of revenues is slower by -1.00\% and/or the costs increase
+1.00\% higher than expectations.
At this section, the target price is calculated multiple times applying all three steps of the discounted cash flow model mentioned in section
4.1 and lastly, the target price is indicated in a matrix form.
4.2.2.
External justification(𝑔)
In this section, the market-wide external factors are examined. Two core variables have a crucial impact on the target price: the perpetuity growth rate and the weighted average costof capital (𝑟𝑊𝐴𝐶𝐶). ∓0.50\% incremental change in the perpetuity rate is computed and the
impact on the target price is calculated. Similarly, ∓1.00\% incremental change in the weightedaverage cost of capital (𝑟𝑊𝐴𝐶𝐶) is applied and the DCF model is built multiple times to obtain
the target price. Lastly, the impact of the variables to the target price is illustrated in a matrix form.
5.
Results
Results are presented in four sections: the preliminary analysis of the 10-year historical financial statements, the 10-year forecast of future cash flows, the discounted cash flow model with the target price and the sensitivity analysis.
5.1.
Preliminary fundamental analysis
Figure 3: Comparison of revenues, COGS, gross profit (Bloomberg L.P., 2019)
Analysing the past decade, Apple indicated fast revenue growth after the financial crisis with the highest annual revenue growth of 66.00\% in 2011. However, reports indicate that Apple’s revenue growth has been slowing down since 2012. The extreme growth increase from 2010 to 2011 can be related to the post-financial crisis recovery period.
Figure 4: Growth rates of the revenues and the COGS (Bloomberg L.P., 2019)
Figure
4
indicates the historical growth rates in sales revenues and COGS. There is no evidence of a constant revenue growth trend with Apple’s revenues. However, the diagram indicates an exponential fall together with business cycles every two years. During 2010-2012 and 2013- 2015, there is an upward revenue growth trend whereas in years 2012-2014 and 2015-2017 a downward trend is visible. Researches indicate that upward trending years are expansionary, downward trending years are contractionary business cycles (Ross, et al., 2016, p. 405). Hence, it can be concluded that the periodic fluctuation of revenues indicates overall cyclicality of business performance which is in-line with the empirical studies (Ross, et al., 2016, p. 405). Consequently, the future revenue projections for FCFF calculation are adapted to the cyclicality nature of the business and the slowing growth trend.
Table 1: Revenues by product segments (Bloomberg L.P., 2019)
Revenues by product
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Last 5-years
average
Revenues
(mln USD)
37,491 42,905 65,225 108,249 156,508 170,910 182,795 233,715 215,639 229,234 265,595
225,396
iPhone
17.98\% 30.38\% 38.60\% 42.49\% 50.28\% 53.41\% 55.80\% 66.34\% 63.39\% 61.65\% 62.08\%
61.85\%
Services
14.80\% 15.03\% 11.53\% 8.66\% 8.24\% 9.39\% 9.88\% 8.52\% 11.29\% 13.08\% 14.97\%
11.55\%
Mac
38.29\% 32.30\% 26.80\% 20.12\% 14.84\% 12.57\% 13.17\% 10.90\% 10.59\% 11.28\% 9.49\%
11.08\%
iPad
0.00\% 0.00\% 7.60\% 17.71\% 19.77\% 18.71\% 16.57\% 9.94\% 9.57\% 8.39\% 6.92\%
10.28\%
iPod
24.41\% 18.86\% 12.69\% 6.89\% 0.00\% 0.00\% 0.00\% 0.00\% 0.00\% 0.00\% 0.00\%
0.00\%
Other
accessories
4.52\% 3.44\% 2.78\% 4.13\% 6.88\% 5.92\% 4.58\% 4.31\% 5.16\% 5.61\% 6.54\%
5.24\%
Average
Selling Price
(USD)
Mac
1,477 1,333 1,279 1,302 1,279 1,315 1,274 1,237 1,235 1,343 1,384
1,295
iPhone
580 629 630 651 643 607 603 671 645 652 757
666
iPad
- - 665 628 557 450 445 423 452 439 422
437
iPod
167 149 164 175 160 167 159 - - - -
32
Table 1 indicates Apple’s annual revenues in each product segment. Apple stopped iPod production in 2011 based on the reduced market demand and concentrated its sales more on the iPhone side. The last 5-year average indicates that 61.85\% of total revenues are iPhones sales with an average sales price of $1,295 per unit. Apple has announced not to report the unit sales in number due to the wide range of product capacity (CNBC, 2018). Furthermore, Apple has decided to turn its focus on developing its services business by introducing more subscription offers and original videos (Bloomberg News, 2018).
Figure 5: Sales distribution by products (Bloomberg L.P., 2019)
COGS are followed by the trend of revenue growth. There is no significant scissors effect or cost reduction evidence found. Thus, gross profit margin stayed in the 35.00\%-40.00\% band as indicated on Table 5. However, the difference occurs on the EBIT side. EBIT margin increased from 22.21\% to 35.30\% until 2012, but decreased gradually to 26.69\% until 2018. That is a sign that other operating expenses such as research and marketing have increased significantly since 2013.
Figure 6: Comparison of the gross profit, the EBIT and the FCFF (Bloomberg L.P., 2019)
The net income margin increased slowly from 16.21\% to 26.67\% and stabilized up until 2018 at around 21.00\%. The FCFF had bad performance in 2008 and 2009, assumingly due to the financial crisis and its ratio to sales stagnated at around 22.00\% in the last 5 years. This level of FCFF to sales margin is kept stable for further forecasting of the future cash flows.
Table 2: Profitability ratios (Bloomberg L.P., 2019)
Profitability ratios (\%)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
10-years average
Returns
Return on Equity
33.23
30.54
35.28
41.67
42.84
30.64
33.61
46.25
36.90
36.87
49.36
37.93
Return on Assets
20.05
19.68
22.84
27.07
28.54
19.34
18.01
20.45
14.93
13.87
16.07
20.08
Margins
Gross Margin
35.20
40.14
39.38
40.48
43.87
37.62
38.59
40.06
39.08
38.47
38.34
39.20
EBIT Margin
22.21
27.36
28.19
31.22
35.30
28.67
28.72
30.48
27.84
26.76
26.69
28.49
Net Income Margin
16.32
19.19
21.48
23.95
26.67
21.67
21.61
22.85
21.19
21.09
22.41
21.68
Ratios
Effective tax rate
31.61
31.75
24.42
24.22
25.16
26.15
26.13
26.37
25.56
24.56
18.34
25.84
Dividend payout ratio
-
-
-
-
5.94
28.48
27.92
21.41
26.19
25.98
22.64
14.41
Profitability measures such as the return on equity (ROE) and the return on assets (ROA) follow the gross margin and the EBIT trends. ROE was 33.23\% in 2008 and improved to 49.36\% in 10 years, meaning the equity holder has 49.36\% return on their investment to the common equity stocks.
The corporate effective tax rate between 2009 and 2018 had an average of 25.84\%. Due to the high deviation in the effective tax rate, the forecasting is based on the 10-year average.
Apple has decided to pay dividends starting from 2012. The average dividend-payout ratio is at 14.41\% annually.
Table 3: Solvency and liquidity ratios (Bloomberg L.P., 2019)
Solvency and liquidity ratios
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
10-years average
Solvency ratios
Interest Coverage (x)
-
-
-
-
-
360.29
136.73
97.18
41.23
26.41
21.88
62.15
Net Debt/EBITDA (\%)
(2.78)
(2.73)
(2.63)
(2.29)
(2.07)
(2.33)
(1.98)
(1.71)
(2.13)
(2.14)
(1.50)
(2.21)
Liquidity ratios
Current ratio (x)
2.64
2.74
2.01
1.61
1.50
1.68
1.08
1.11
1.35
1.28
1.13
1.65
Cash ratio (x)
1.95
2.04
1.24
0.93
0.76
0.93
0.40
0.52
0.85
0.74
0.57
0.99
Quick ratio (x)
2.16
2.33
1.50
1.12
1.04
1.23
0.67
0.73
1.05
0.91
0.77
1.23
Balance Sheet ratios
Lt-Debt/Tot. Assets (\%)
-
-
-
-
-
8.19
12.50
18.37
23.45
25.90
25.63
10.37
Tot. Debt/Tot. Assets (\%) (\%)
-
-
-
-
-
8.19
15.22
22.16
27.06
30.82
31.30
12.25
Com. Equity/Tot. Assets (\%)
61.64
66.61
63.57
65.84
67.14
59.69
48.11
41.11
39.87
35.72
29.30
52.60
Altmans z-score
7.96
9.12
8.59
8.59
9.44
5.71
5.18
4.46
3.74
3.62
4.25
6.42
Two main solvency ratios are analysed. The interest coverage ratio, that is EBIT over interest expenses and the net debt to EBITDA ratio. The interest coverage ratio has a 10-year average
of 62.15x, meaning Apple can cover its interest expenses 62.15 times with its income. Because Apple has more cash than its total debt, net debt indicates negative number. Although the interest coverage ratio has been falling, a negative net debt is an indication successful debt level, hence, there is no default risk observed.
Table 4: Working capital ratios (Bloomberg L.P., 2019)
Working capital
efficiency ratios
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
10- years
average
Days sale outstanding
19.70
24.53
24.75
18.29
19.32
25.59
30.43
26.72
27.52
27.21
28.14
24.75
Days inventory held
56.83
53.28
52.51
70.53
112.12
83.45
57.94
62.82
58.64
40.37
37.17
62.33
Days payables outstanding
78.06
78.97
79.88
75.59
75.60
73.66
84.96
85.19
101.00
111.40
117.27
87.42
Cash Conversion Cycle
(in days)
-51.95
-47.61
-48.19
-52.14
-52.97
-43.71
-48.24
-52.68
-67.27
-75.00
-79.34
-56.28
The main reason for the high level of cash is Apple’s strength on cash and liquidity management. Apple’s current assets are on average 1.65 times of its current liabilities over the past 10 years (Ross, et al., 2016, p. 49) due to the current ratio. Working capital management has a tremendous impact on Apple’s strong liquidity. Apple’s cash conversion cycle (CCC) has been decreasing dramatically. A negative CCC means days payables outstanding are longer than receivables and inventory held. On a 10-year average, Apple has been receiving payments for its goods and services in 24.75 days, holding inventory only for 62.33 days and paying its suppliers in 87.42 days. In other words, Apple is financed by its supplier for approximately 3 months and can pool cash for its internal needs for -56.28 days. This indicates, on one hand, dominant bargaining power towards its supplier and persuasive sales strength towards its customers.
Figure 7 below indicates the price movement of the Apple stocks in the securities market. Apple’s shares are trading as of today, 10/06/2019, under Nasdaq Stock Exchange at $193.85 (Yahoo Finance, 2019). Nasdaq Composite Index, which follows all Nasdaq companies that are traded in the open market, is trading at $7,861.19 currently (Yahoo Finance, 2019).
Figure 7: Apple, Inc. stock price and Nasdaq composite index (Yahoo Finance, 2019)
20
Apple’s stock price has increased +108.00\% over the last 5 years, and +5.00\% since 2018 June. The higher price was obtained at the beginning of October with $232.07 followed by a similar rise in the market portfolio. With the reduction of corporate tax rate early 2018, Apple was able to increase its cash level furthermore, which allowed Apple to reinvest in itself. In May 2018, Apple announced a $100.00 billion worth share buyback program to be implemented gradually starting from June (Time, 2018). With the buyback operations, Apple was able to use the excess cash so that shareholder could appreciate the value with the price jump. The rise in stock price continued until the beginning of October until the announcement of 25.00\% additional tariffs on Chinese goods (Guardian, 2019). Added tariffs, affected Apple dramatically since many spare parts and components are produced in China. Analysts assume that the increase in tariff could add +14.00\% to the COGS (Fortune, 2019). According to 2018 annual report, 19.56\% of the total revenue came from Greater China (Apple Inc., 2018). An accordingly slowdown in sales in China will be unattractive for Apple’s shareholders.
Figure 8: Apple stock price movements in the last 5-years (Yahoo Finance, 2019)
5.2.
Forecasting cash flows
Table 5 indicates the assumptions that are calculated based on the methodology explained in section 4.1.1.
21
Table 5: Assumptions for forecasting future cash flows
Assumptions for
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
forecasting (\%)
Revenue growth
52.54
14.44
52.02
65.96
44.58
9.20
6.95
27.86
-7.73
6.30
15.86
-3.30
4.21
5.86
2.22
4.50
-5.00
2.00
-2.00
2.00
1.60
1.60
COGS to
Revenues
64.80
59.86
60.62
59.52
56.13
62.38
61.41
59.94
60.92
61.53
61.66
56.00
62.00
60.00
59.00
60.00
61.00
56.00
60.00
58.00
61.00
61.00
Gross profit
margin
35.20
40.14
39.38
40.48
43.87
37.62
38.59
40.06
39.08
38.47
38.34
44.00
38.00
40.00
41.00
40.00
39.00
44.00
40.00
42.00
39.00
39.00
Other Oper. Expe.
to COGS
20.05
21.34
18.46
15.56
15.28
14.36
16.06
15.99
18.45
19.03
19.04
21.00
16.00
20.00
21.20
20.00
15.00
24.00
18.00
17.00
16.00
16.00
EBIT Margin
22.21
27.36
28.19
31.22
35.30
28.67
28.72
30.48
27.84
26.76
26.61
32.24
28.08
28.00
28.49
28.00
29.85
30.56
29.20
32.14
29.24
29.24
D&A to
EBIT
5.96
6.25
5.59
5.37
5.93
13.79
15.13
15.80
17.50
16.56
15.43
14.19
16.19
16.38
15.29
15.33
14.90
14.34
11.34
12.34
13.77
15.28
CapEx to
D&A
219.96
155.86
195.23
234.84
253.13
120.84
120.45
99.91
121.22
122.59
122.10
121.00
122.00
122.00
122.00
122.00
122.00
121.00
122.00
122.00
122.00
100.00
Net Ch.in WC to
Ch. in Sales
3.08
14.85
-16.44
-7.05
-2.00
13.56
-26.29
-11.13
17.24
-50.84
-6.67
9.46
-34.74
-40.45
-92.00
-45.51
22.69
-31.17
14.31
-16.39
-92.84
-92.84
FCFF to
Sales margin
12.02
15.60
25.37
24.11
23.74
19.03
21.90
24.72
20.97
21.91
21.58
23.43
21.38
22.06
22.27
21.86
22.40
22.43
21.24
23.32
22.36
23.26
Effective tax rate
31.61
31.75
24.42
24.22
25.16
26.15
26.13
26.37
25.33
24.31
18.34
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
22
The revenues are forecasted based on the preliminary analysis results. The slowdown in revenue growth has been adapted to future forecasts. The revenues of the terminal is set equal to the expected economic growth rate of 1.60\%. As the US economy is expected to growth at 1.60\% in 10 years, the growth of the revenues is assumed to be equal to the economic growth rate.
Figure 9: Revenues and cost of goods sold forecasted (Bloomberg L.P., 2019)
Historical values of the COGS to revenues ratio are ranging between 56.13\%-64.80\% with an average of 60.80\% as indicated in Table 5. The same weight is applied to future COGS prediction. Hence, the growth rate pattern is kept similar to the revenues. Other operating expenses ratio indicated historical figures were around 14.36\%-21.34\%. The same margin range is kept for future forecasting. As a result, the EBIT margin was stable at around 29.55\% on average, similar to its historical average (28.49\%).
From 2013 to 2018, D&A to EBIT ratio was ranging between 13.79\% to 16.56\%. Here, using the last 10-years as a benchmark does not make any sense, since the first 5 years of the decade and last 5 years of the decade have different ratios. 10-year forecasts are set at the range of last 5 years with an average of 14.49\%. Similarly, during these years CapEx to D&A ratio is
23
consistently around 120.00\%4. The same ratio is kept for future CapEx predictions. Historical to sales ratio were negative and ranging from -7.05\% to -50.84\%. Therevalues of the ∆𝑁𝑊𝐶
∆𝑁𝑊𝐶
has been no clear pattern found with the WC growth. However, FCFF to sales ratio indicated consistent values around 22.22\% in the last 5 years of the past decade. Hence,forecasts
are set by values that are maintaining FCFF to sales at stable 22.22\% level. The effective tax rate is adjusted to its 10-year average that is around 25.00\% for forecasting.
Once all variables are forecasted using the above-mentioned ratios as summarized in Table 5, annual FCFF predictions are calculated using the equation (4). Table 6 summarizes the annual FCFF and the annual (\%YoY) growth of cash flows.
4 Ignoring the outlier year 2015 with 99.91\% CapEx to D&A ratio
Table 6: Free cash flow to firm
In Millions of USD except Per Share
Free Cash Flow to Firm
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
TV
(+) Revenue
256,839.55
267,656.93
283,346.94
289,625.67
302,661.50
287,528.43
293,278.99
287,413.41
293,161.68
297,852.27
302,617.91
\% YoY Growth
-3.30\%
4.21\%
5.86\%
2.22\%
4.50\%
-5.00\%
2.00\%
-2.00\%
2.00\%
1.60\%
1.60\%
(-) Cost of Goods & Services
143,830.15
165,947.30
170,008.16
170,879.14
181,596.90
175,392.34
164,236.24
172,448.05
170,033.78
181,689.88
184,596.92
\% YoY Growth
-12.17\%
15.38\%
2.45\%
0.51\%
6.27\%
-3.42\%
-6.36\%
5.00\%
-1.40\%
6.86\%
1.60\%
(=) Gross Profit
\% YoY Growth
(-) Other Operating Expenses (R&D, SG&A)
\% YoY Growth
113,009.40
101,709.63
113,338.78
118,746.52
121,064.60
112,136.09
129,042.76
114,965.37
123,127.91
116,162.38
118,020.98
10.97\%
-10.00\%
11.43\%
4.77\%
1.95\%
-7.38\%
15.08\%
-10.91\%
7.10\%
-5.66\%
1.60\%
30,204.33
26,551.57
34,001.63
36,226.38
36,319.38
26,308.85
39,416.70
31,040.65
28,905.74
29,070.38
29,535.51
-3.12\%
-12.09\%
28.06\%
6.54\%
0.26\%
-27.56\%
49.82\%
-21.25\%
-6.88\%
0.57\%
1.60\%
(=) EBIT, Operating Income
\% YoY Growth
(-) Tax
\% YoY Growth
(+) Depreciation & Amortization
\% YoY Growth (-) Capital Expenditures
\% YoY Growth
(-) Change in Net Working Capital
\% YoY Growth
82,805.07
75,158.07
79,337.14
82,520.15
84,745.22
85,827.23
89,626.06
83,924.72
94,222.16
87,092.00
88,485.48
17.18\%
-9.23\%
5.56\%
4.01\%
2.70\%
1.28\%
4.43\%
-6.36\%
12.27\%
-7.57\%
1.60\%
20,982.67
19,011.41
20,307.68
21,024.43
21,653.02
22,047.68
22,949.67
21,631.58
24,228.39
22,200.55
22,532.63
56.91\%
-9.39\%
6.82\%
3.53\%
2.99\%
1.82\%
4.09\%
-5.74\%
12.00\%
-8.37\%
1.50\%
11,750.30
12,167.30
12,996.91
12,614.66
12,991.81
12,787.65
12,851.81
9,517.90
11,629.63
11,988.29
13,519.58
7.77\%
3.55\%
6.82\%
-2.94\%
2.99\%
-1.57\%
0.50\%
-25.94\%
22.19\%
3.08\%
12.77\%
14,217.86
14,844.11
15,856.24
15,389.89
15,850.01
15,600.94
15,550.70
11,611.83
14,188.14
14,625.72
13,519.58
6.80\%
4.40\%
6.82\%
-2.94\%
2.99\%
-1.57\%
-0.32\%
-25.33\%
22.19\%
3.08\%
-7.56\%
(828.05)
(3,757.90)
(6,346.97)
(5,776.41)
(5,932.17)
(3,433.09)
(1,792.52)
(839.25)
(942.22)
(4,354.60)
(4,424.27)
-65.87\%
353.83\%
68.90\%
-8.99\%
2.70\%
-42.13\%
-47.79\%
-53.18\%
12.27\%
362.16\%
1.60\%
(=) Free Cash Flow to Firm
60,182.89
57,227.76
62,517.11
64,496.90
66,166.16
64,399.36
65,770.03
61,038.45
68,377.48
66,608.63
70,377.12
1,254,103.32
\% YoY Growth
5.02\%
-4.91\%
9.24\%
3.17\%
2.59\%
-2.67\%
2.13\%
-7.19\%
12.02\%
-2.59\%
5.66\%
25
5.3.
The discounted cash flow model
First, the appropriate discount rate is calculated following the methodology in section 4.1.2.1. Equity Beta is the beta estimate of the regression analysis of the stock price of Apple Inc. and Nasdaq Composite Index between 2009 and 20195. Figure
10
illustrates the regression analysis.
Figure 10: Regression analysis
Table 7 indicates variables that are used for the regression analysis. As a result, the analysis of
26
point to the fitted line.
and 𝑢 is the residuals that is the shortest vertical line from the actual
5 2008 stock price value are ignored due to the extreme impact of financial crisis.
Table 7: Regression analysis variables (Yahoo Finance, 2019)
from 28/09/2009 until 30/09/2019
Covariance -
Variance Matrix
Apple
Nasdaq
(y- Axis)
(x-Axis)
Apple
2.51
1.07
Nasdaq
1.07
1.1
Regression Analysis
Mean
0.11
0.06
Beta
0.97
Alpha
0.05
R square
0.45
Number of observations
2,27
R square adjusted
0.45
With Beta 0.97, Apple stays lower than the industry average for instance in the consumer electronics (1.19), the computer services (1.27), the semiconductor (1.34), and the software industries (1.46) (NYU Stern, 2019). Hence, the cost of equity is found as 7.80\% using equation
(7) as follows:
Table 8: The cost of equity
After adding the risk-free rate of 2.46\% to the default spread of 1.00\%, as explained in section 3.2.2, the after-tax cost of debt of Apple’s is found as 2.59\%. Table
9 below summarized the calculation.
Table 9: The cost of debt
The end of the year market capitalization in 2018 was $1,073,390.54 million and the market value of total debt $114,483 million (Bloomberg L.P., 2019). As a result, the debt-weight is found as 0.10 whereas the equity weight is 0.90. The cost of equity and the appropriate weight𝑟
of debt and equity are imputed in the equation (5)
as indicated in Table
10.
As a result, the
𝑊𝐴𝐶𝐶 is 7.30\%:
Table 10: The cost of capital
and from section 3.3
are imputed into the equation (10)
and the terminal value is found at $1,254,103.32 million in 2029:𝑟 𝑔𝑊𝐴𝐶��
Table 11: The terminal value
Once all FCFFs including the terminal value are obtained, they are discounted back to 2019 to obtain the present value of each year. Enterprise value, which is expressed inusing 𝑟𝑊𝐴𝐶𝐶
equation (11), is found at $1,064,237.28 million. Table 12 illustrates the DCF model.
In order to find the target equity value, net debt and minority interest are obtained from financial statements. Apple did not have any short-term debt until 2014 (Apple Inc., 2018). Cash and cash equivalent in 2018 were $66,301.00 million. Total debt, short-term and long- term debt together were $114,483.00 million (Apple Inc., 2018). Annual net debt growth on average is found as 18.29\% and, set equal to the 2019 net debt growth assumption. Accordingly, net debt for 2019 yearend is found at $56,993.69 million. Apple never paid minority interest (Apple Inc., 2018), therefore minority interests are set to zero. Net debt, minority interests and, the target enterprise value are imputed into equation (12), hence, the target equity value is $1,007,243.59 million.
Apple’s number of outstanding shares are strongly depending on share buyback operations and employee bonus payments. Hence, number annual outstanding shares are growing inconsistently. In order to reach the closest possible number, the 2019 first quarter trailing twelve months report is used. First-quarter 2019 outstanding shares are reported as 4,607.28 million (Bloomberg L.P., 2019). As a result, the target price is $218.62 per share. Table 12 summarizes the methodology. Today, Apple is trading at $193.85 in the securities market (Yahoo Finance, 2019). Figure 11 displays the stock price movements of Apple in the last 5- years.
Figure 11: The target price is $218.62 (Yahoo Finance, 2019)
Table 12: Target equity value of Apple Inc. (Bloomberg L.P., 2019)
In Millions of USD except per share
DCF Model
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
TV
(+) EBIT
82,805.07
75,158.07
79,337.14
82,520.15
84,745.22
85,827.23
89,626.06
83,924.72
94,222.16
87,092.00
88,485.48
(-) Tax
20,982.67
19,011.41
20,307.68
21,024.43
21,653.02
22,047.68
22,949.67
21,631.58
24,228.39
22,200.55
22,532.63
(+) D&A
11,750.30
12,167.30
12,996.91
12,614.66
12,991.81
12,787.65
12,851.81
9,517.90
11,629.63
11,988.29
13,519.58
(-) CapEx
14,217.86
14,844.11
15,856.24
15,389.89
15,850.01
15,600.94
15,550.70
11,611.83
14,188.14
14,625.72
13,519.58
(-) Ch. in Net WC
(828.05)
(3,757.90)
(6,346.97)
(5,776.41)
(5,932.17)
(3,433.09)
(1,792.52)
(839.25)
(942.22)
(4,354.60)
(4,424.27)
(=) FCFF
60,182.89
57,227.76
62,517.11
64,496.90
66,166.16
64,399.36
65,770.03
61,038.45
68,377.48
66,608.63
70,377.12
1,254,103.32
DCF years
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
10.00
Discounted cash flows
53,333.58
54,298.40
52,206.07
49,912.83
45,274.31
43,091.58
37,270.21
38,910.39
35,324.59
34,783.40
619,831.91
(+) (=) Target Enterprise Value
1,064,237.28
(-) Net debt
56,993.69
(-) Minority Interest
-
(=) Target Equity Value
1,007,243.59
Number of Outstanding Shares
4,607.28
Price Target as of 30/09/2019
218.62
Market Price as of 10/06/2019
193.85
Upside Potential
12.78\%
30
5.4.
Sensitivity analysis
The target price of $218.62 depends on performance-related or market-related assumptions. The performance factors are revenue growth and COGS growth assumptions. As explained in section 4.2.1, these assumptions are computed with change in growth rate. Figure 12 and Figure 13 below indicate both scenarios:∓1.00\%
Figure 12: Revenue growth forecast sensitivity analysis
Figure 13: COGS growth forecasts sensitivity analysis
According to the sensitivity matrix, Table 13, in the good-case scenario, the target price will reach $362.89 with a 65.00\%-99.00\% upside potential by the end of year 2019 if the annual growth of revenues increases +1.00\% and the annual growth of COGS decreases -1.00\%. The worst-case scenario is realised if the revenue growth deteriorates -1.00\% and the COGS grow
+1.00\% faster than expected. As a result, the target price will be $77.39 with a -64.60\% downside risk.
31
Perpetuity growth rate (\%)
Table 13: Price sensitivity to changes of revenue and COGS
1.00\% 254.85
311.26
362.89
0.00\% 162.21
218.62
270.24
-1.00\% 77.39
133.81
185.43
-1.00\%
0.00\%
1.00\%
COGS growth
(\% YoY)
Target price in USD
Target price upside/ downside
potential (\%)
COGS growth
(\% YoY)
1.00\%
0.00\%
-1.00\%
1.00\% 16.57\%
42.38\%
65.99\%
0.00\% -25.80\%
0.00\%
23.61\%
-1.00\% -64.60\% -38.79\% -15.18\%
The market-related assumptions have a significant impact on the target price. The perpetuity growth rate, the risk-free rate, and the market premium depend on the U.S. economic state and the market conditions. Hence, all assumptions might overperform or underperform in the
Revenue growth (\% YoY)
Revenue growth (\% YoY)
future. Therefore, the sensitivity of the target price to ∓
0.50\% incremental changes of the incremental changes in the discount rate is calculated. Theperpetuity growth rate and ∓1.00\%
perpetuity rate of 1.60\% and the discount rate of 7.30\% are assumed to the neutral case scenarios. Table
14 represents the sensitivity matrix to price changes due to the changes in the perpetuity rate and the discount rate.
Table 14: Price sensitivity to market wide factors
Target price in USD
4.30\%
5.30\%
6.30\%
WACC (\%)
7.30\%
8.30\%
9.30\%
10.30\%
-0.40\%
311.65
253.03
212.00
181.72
158.47
140.07
125.15
0.10\%
338.12
269.20
222.61
189.03
163.69
143.91
128.05
0.60\%
371.73
288.82
235.07
197.42
169.59
148.19
131.24
1.10\%
415.85
313.11
249.93
207.16
176.31
153.00
134.78
1.60\%
476.30
343.96
267.95
218.62
184.03
158.43
138.73
2.10\%
564.20
384.45
290.26
232.28
192.99
164.62
143.16
2.60\%
703.76
439.92
318.59
248.84
203.53
171.72
148.16
3.10\%
959.48
520.59
355.77
269.35
216.10
179.98
153.86
3.60\%
1579.71
648.67
406.72
295.39
231.33
189.68
160.40
According to Table 15 if the economy grows +0.50\% more than expected, the expected target price will be 6.25\% higher than predictions. For the opposite case, the target price will underperform -5.24\% than the expectations. The higher the discount rate is, the lower the target price will be. There is a risk of a -42.75\% target price deterioration if the discount rate increases
Perpetuity growth rate (\%)
+3\% and the U.S. economy shrinks to -0.40\% growth rate.
Table 15: Upside / downside potential of target price due to changes in market
Target price upside/ downside potential
(\%)
WACC (\%)
4.30\%
5.30\%
6.30\%
7.30\%
8.30\%
9.30\%
10.30\%
-0.40\%
42.55\%
15.74\%
-3.03\%
-16.88\% -27.51\% -35.93\% -42.75\%
0.10\%
54.66\%
23.14\%
1.82\%
-13.54\% -25.13\% -34.17\% -41.43\%
0.60\%
70.04\%
32.11\%
7.52\%
-9.70\% -22.43\% -32.21\% -39.97\%
1.10\%
90.22\%
43.22\%
14.32\%
-5.24\% -19.35\% -30.02\% -38.35\%
1.60\%
117.86\% 57.33\%
22.56\%
0.00\%
-15.82\% -27.53\% -36.54\%
2.10\%
158.07\% 75.85\%
32.77\%
6.25\%
-11.72\% -24.70\% -34.52\%
2.60\%
221.91\% 101.23\% 45.73\%
13.82\%
-6.90\% -21.45\% -32.23\%
3.10\%
338.88\% 138.12\% 62.74\%
23.20\%
-1.15\% -17.68\% -29.62\%
3.60\%
622.58\% 196.71\% 86.04\%
35.12\%
5.81\%
-13.24\% -26.63\%
6.
Conclusion
The preliminary analysis indicates that despite a slow down in revenue growth, Apple’s 10- year gross margin average is at 39.20\% with net income margin of 21.68\%. On the liquidity side, Apple has a current ratio of 1.65 and a quick ratio of 0.99. Due to high levels of cash, Apple’s net debt to EBITDA ratio is negative with an average of -2.21 and the cash conversion cycle is around 56.28 days which is a sign of strong bargaining power and dominant market position.
Apple stocks are currently trading at $193.85 and the expected target price by 30/09/2019 is
$218.62 that is 12.78\% upside price potential, according to the DCF model. The discount rate that is based on the weighted average cost of capital method is 7.30\%. The perpetuity rate of future cash flows is assumed at 1.60\%. The estimated target price is highly sensitive to the deviation of each assumption. +1.00\% increase in the discount rate, reduces the target price by
-15.82\% assuming that the perpetuity rate remains the same. -0.50\% decrease in the perpetuity rate, drops the target price down by -5.24\% if the discount rate is constant.
Business growth assumptions have a strong impact on the estimated target price as well. Two scenarios are investigated. First, if the revenues grow +1.00\% faster than expectated and the COGS slow down by -1.00\% annually, the target price rises up to $362.89 per share. Second, if the COGS’ growth rate increases +1.00\% annually followed by a -1.00\% fall on the revenues side, the estimated target price drops down to $77.39 per share.
Apple has announced to turn its focus towards services business and to not report the number of units sold in upcoming financial reports. This creates uncertainty about whether Apple wants to continue developing its long-time cash-cow products iPhone or Macbook and creates confusion about the intention of reducing the transparency of its’ sales. Despite all concerns, refocusing in the services area will help Apple to boost its revenue growth, to relief from tariff and trade, and to expand its business barrier-free even with possible sanctions. Considering its strong market position, bargaining power towards its supplier, updated market strategy and the state of the economy, Apple is currently underpriced by 12.78\%. Therefore, this paper recommends investors a strong buy strategy.
7.
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8.
Abbreviations and acronyms
Alpha estimate Equity beta Beta estimate
CapEx Capital expenditures
CAPM Capital asset pricing model
CCC Cash conversion cycle
COGS Cost of goods sold
D Market value of debt
D&A Depreciation and amortization
DCF Discounted cash flow model
E Market value of equity
EBIT Earnings before interest and tax
EBITDA Earnings before interest tax depreciation and amortization
FCFF Free cash flow to firm Perpetuity growth rate
GDP Gross domestic production
NWC Net working capital
Change in net working capital
PV Present value
Cost of debt Cost of equity
Risk-free rate of return Return on market portfolio Market risk premium
Weighted average cost of capital
ROA Return on asset
ROE Return on equity
Goodness of fit (R square)
t Effective tax rate
TV Terminal value
yoy Year-on-year
Weight of equity
Weight of debt Mean value of x Mean value of y
39
9.
Appendix
Figure 14: Stock price curve in the last 10-years (Yahoo Finance, 2019)
Table 16: Standardized balance sheet total assets (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Standardized Balance Sheet
In Millions of USD except Per Share
Total Assets
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
12 Months Ending
09/27/2008
09/26/2009
09/25/2010
09/24/2011
09/29/2012
09/28/2013
09/27/2014
09/26/2015
09/24/2016
09/30/2017
09/29/2018
+ Cash, Cash Equivalents & STI
22,111.00
23,464.00
25,620.00
25,952.00
29,129.00
40,546.00
25,077.00
41,601.00
67,155.00
74,181.00
66,301.00
+ Cash & Cash Equivalents
11,875.00
5,263.00
11,261.00
9,815.00
10,746.00
14,259.00
13,844.00
21,120.00
20,484.00
20,289.00
25,913.00
+ ST Investments
10,236.00
18,201.00
14,359.00
16,137.00
18,383.00
26,287.00
11,233.00
20,481.00
46,671.00
53,892.00
40,388.00
+ Accounts Receivables
2,422.00
3,361.00
5,510.00
5,369.00
10,930.00
13,102.00
17,460.00
16,849.00
15,754.00
17,874.00
23,186.00
+ Accounts Receivable, Net
2,422.00
3,361.00
5,510.00
5,369.00
10,930.00
13,102.00
17,460.00
16,849.00
15,754.00
17,874.00
23,186.00
+ Inventories
509.00
455.00
1,051.00
776.00
791.00
1,764.00
2,111.00
2,349.00
2,132.00
4,855.00
3,956.00
+ Raw Materials
-
-
-
-
124.00
683.00
471.00
-
-
-
-
+ Work In Process
-
-
-
-
-
-
-
-
-
-
-
+ Finished Goods
-
-
-
-
667.00
1,081.00
1,640.00
-
-
-
-
+ Other Inventory
-
-
-
-
-
-
-
-
-
-
-
+ Other ST Assets
4,964.00
4,275.00
9,497.00
12,891.00
16,803.00
17,874.00
23,883.00
28,579.00
21,828.00
31,735.00
37,896.00
+ Prepaid Expenses
-
309.00
157.00
728.00
1,200.00
-
-
-
-
-
-
+ Derivative & Hedging Assets
-
37.00
107.00
516.00
150.00
214.00
1,635.00
1,945.00
1,399.00
1,630.00
1,274.00
+ Deferred Tax Assets
-
1,135.00
1,636.00
2,014.00
2,583.00
3,453.00
4,318.00
-
-
-
-
+ Misc ST Assets
-
2,794.00
7,597.00
9,633.00
12,870.00
14,207.00
17,930.00
26,634.00
20,429.00
30,105.00
36,622.00
(+) (=) Total Current Assets
+ Property, Plant & Equip, Net
+ Property, Plant & Equip
- Accumulated Depreciation
+ LT Investments & Receivables
+ LT Marketable Securities
+ Other LT Assets
+ Total Intangible Assets
+ Goodwill
+ Other Intangible Assets
+ Prepaid Expense
+ Derivative & Hedging Assets
+ Misc LT Assets
30,006.00
31,555.00
41,678.00
44,988.00
57,653.00
73,286.00
68,531.00
89,378.00
106,869.00
128,645.00
131,339.00
2,455.00
2,954.00
4,768.00
7,777.00
15,452.00
16,597.00
20,624.00
22,471.00
27,010.00
33,783.00
41,304.00
3,747.00
4,667.00
7,234.00
11,768.00
21,887.00
28,519.00
39,015.00
49,257.00
61,245.00
75,076.00
90,403.00
1,292.00
1,713.00
2,466.00
3,991.00
6,435.00
11,922.00
18,391.00
26,786.00
34,235.00
41,293.00
49,099.00
2,379.00
10,528.00
25,391.00
55,618.00
92,122.00
106,215.00
130,162.00
164,065.00
170,430.00
194,714.00
170,799.00
2,379.00
10,528.00
25,391.00
55,618.00
92,122.00
106,215.00
130,162.00
164,065.00
170,430.00
194,714.00
170,799.00
1,331.00
2,464.00
3,346.00
7,988.00
10,837.00
10,902.00
12,522.00
14,431.00
17,377.00
18,177.00
22,283.00
559.00
453.00
1,083.00
4,432.00
5,359.00
5,756.00
8,758.00
9,009.00
8,620.00
8,015.00
-
207.00
206.00
741.00
896.00
1,135.00
1,577.00
4,616.00
5,116.00
5,414.00
5,717.00
-
352.00
247.00
342.00
3,536.00
4,224.00
4,179.00
4,142.00
3,893.00
3,206.00
2,298.00
-
-
844.00
799.00
1,600.00
3,000.00
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
772.00
1,167.00
1,464.00
1,956.00
2,478.00
5,146.00
3,764.00
5,422.00
8,757.00
10,162.00
22,283.00
(+) (=) Total Noncurrent Assets
6,165.00
15,946.00
33,505.00
71,383.00
118,411.00
133,714.00
163,308.00
200,967.00
214,817.00
246,674.00
234,386.00
(=) Total Assets
36,171.00
47,501.00
75,183.00
116,371.00
176,064.00
207,000.00
231,839.00
290,345.00
321,686.00
375,319.00
365,725.00
Table 17: Standardized balance sheet total liabilities (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Standardized Balance Sheet
In Millions of USD except Per Share
Total Liabilities
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
12 Months Ending
09/27/2008
09/26/2009
09/25/2010
09/24/2011
09/29/2012
09/28/2013
09/27/2014
09/26/2015
09/24/2016
09/30/2017
09/29/2018
+ Payables & Accruals
5,520.00
9,428.00
17,132.00
23,770.00
32,032.00
35,788.00
48,568.00
59,659.00
58,245.00
73,230.00
53,752.00
+ Accounts Payable
5,520.00
5,601.00
12,015.00
14,632.00
21,175.00
22,367.00
30,196.00
35,490.00
37,294.00
49,049.00
55,888.00
+ Accrued Taxes
-
430.00
658.00
1,140.00
1,535.00
1,200.00
1,209.00
-
-
-
-
+ Interest & Dividends Payable
-
-
-
-
-
-
-
-
-
-
-
+ Other Payables & Accruals
-
3,397.00
4,459.00
7,998.00
9,322.00
12,221.00
17,163.00
24,169.00
20,951.00
24,181.00
(2,136.00)
+ ST Debt
-
-
-
-
-
-
6,308.00
10,999.00
11,605.00
18,473.00
20,748.00
+ ST Borrowings
-
-
-
-
-
-
6,308.00
8,499.00
8,105.00
11,977.00
11,964.00
+ ST Capital Leases
-
-
-
-
-
-
-
-
-
-
-
+ Current Portion of LT Debt
-
-
-
-
-
-
-
2,500.00
3,500.00
6,496.00
8,784.00
+ Other ST Liabilities
5,841.00
2,078.00
3,590.00
4,200.00
6,510.00
7,870.00
8,572.00
9,952.00
9,156.00
9,111.00
41,429.00
+ Deferred Revenue
-
2,053.00
2,984.00
4,091.00
5,953.00
7,435.00
8,491.00
8,940.00
8,080.00
7,548.00
5,966.00
+ Derivatives & Hedging
-
25.00
606.00
109.00
557.00
435.00
81.00
1,012.00
1,076.00
1,563.00
2,136.00
+ Misc ST Liabilities
5,841.00
-
-
-
-
-
-
-
-
-
33,327.00
(+) (=) Total Current Liabilities
+ LT Debt
+ LT Borrowings
+ LT Capital Leases
+ Other LT Liabilities
+ Accrued Liabilities
+ Pension Liabilities
+ Pensions
+ Other Post-Ret Benefits
+ Deferred Revenue
+ Deferred Tax Liabilities
+ Derivatives & Hedging
+ Misc LT Liabilities
11,361.00
11,506.00
20,722.00
27,970.00
38,542.00
43,658.00
63,448.00
80,610.00
79,006.00
100,814.00
115,929.00
-
-
-
-
-
16,960.00
28,987.00
53,329.00
75,427.00
97,207.00
93,735.00
-
-
-
-
-
16,960.00
28,987.00
53,329.00
75,427.00
97,207.00
93,735.00
-
-
-
-
-
-
-
-
-
-
-
2,513.00
4,355.00
6,670.00
11,786.00
19,312.00
22,833.00
27,857.00
37,051.00
39,004.00
43,251.00
48,914.00
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
853.00
1,139.00
1,686.00
2,648.00
2,625.00
3,031.00
3,624.00
2,930.00
2,836.00
-
-
2,216.00
4,300.00
8,159.00
13,847.00
16,489.00
20,259.00
24,062.00
31,921.00
36,562.00
275.00
-
-
-
-
-
-
-
-
-
-
-
2,513.00
1,286.00
1,231.00
1,941.00
2,817.00
3,719.00
4,567.00
9,365.00
4,153.00
3,853.00
48,639.00
(+) (=) Total Noncurrent Liabilities
2,513.00
4,355.00
6,670.00
11,786.00
19,312.00
39,793.00
56,844.00
90,380.00
114,431.00
140,458.00
142,649.00
(=) Total Liabilities
13,874.00
15,861.00
27,392.00
39,756.00
57,854.00
83,451.00
120,292.00
170,990.00
193,437.00
241,272.00
258,578.00
Table 18: Standardized balance sheet total equities (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Standardized Balance Sheet
In Millions of USD except Per Share
Total Equities
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
12 Months Ending
09/27/2008
09/26/2009
09/25/2010
09/24/2011
09/29/2012
09/28/2013
09/27/2014
09/26/2015
09/24/2016
09/30/2017
09/29/2018
+ Preferred Equity & Hybrid Capital
+ Share Capital & APIC
+ Common Stock
+ Additional Paid in Capital
+ Retained Earnings
+ Other Equity
-
-
-
-
-
-
-
-
-
-
-
7,177.00
8,210.00
10,668.00
13,331.00
16,422.00
19,764.00
23,313.00
27,416.00
31,251.00
35,867.00
40,201.00
-
0.01
0.01
0.01
0.01
0.01
0.06
0.06
0.05
0.05
0.05
-
8,209.99
10,667.99
13,330.99
16,421.99
19,763.99
23,312.94
27,415.94
31,250.95
35,866.95
40,200.95
15,129.00
23,353.00
37,169.00
62,841.00
101,289.00
104,256.00
87,152.00
92,284.00
96,364.00
98,330.00
70,400.00
(9.00)
77.00
(46.00)
443.00
499.00
(471.00)
1,082.00
(345.00)
634.00
(150.00)
(3,454.00)
(+) (=) Equity Before Minority
22,297.00
-
22,297.00
31,640.00
-
31,640.00
47,791.00
-
47,791.00
76,615.00
-
76,615.00
118,210.00
-
118,210.00
123,549.00
-
123,549.00
111,547.00
-
111,547.00
119,355.00
-
119,355.00
128,249.00
-
128,249.00
134,047.00
-
134,047.00
107,147.00
-
107,147.00
Interest
+ Minority/
Non Controlling Interest
(=) Total Equity
(=) Total Liabilities & Equity
36,171.00
47,501.00
75,183.00
116,371.00
176,064.00
207,000.00
231,839.00
290,345.00
321,686.00
375,319.00
365,725.00
Table 19: Adjusted income statement (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Adjusted Income Statement
In Millions of USD except Per Share 12 Months Ending
2008
09/27/2008
2009
09/26/2009
2010
09/25/2010
2011
09/24/2011
2012
09/29/2012
2013
09/28/2013
2014
09/27/2014
2015
09/26/2015
2016
09/24/2016
2017
09/30/2017
2018
09/29/2018
(+) Revenue
+ Sales & Services Revenue
(-) Cost of Revenue
+ Cost of Goods & Services
37,491.00
-
24,294.00
-
42,905.00
42,905.00
25,683.00
25,683.00
65,225.00
65,225.00
39,541.00
39,541.00
108,249.00
108,249.00
64,431.00
64,431.00
156,508.00
156,508.00
87,846.00
87,846.00
170,910.00
170,910.00
106,606.00
106,606.00
182,795.00
182,795.00
112,258.00
112,258.00
233,715.00
233,715.00
140,089.00
140,089.00
215,091.00
215,091.00
131,376.00
131,376.00
228,594.00
228,594.00
141,048.00
141,048.00
265,595.00
265,595.00
163,756.00
163,756.00
(+) (=) Gross Profit
+ Other Operating Income
- Operating Expenses
+ Selling, General & Admin
+ Research & Development
+ Other Operating Expense
13,197.00
- 4,870.00
3,761.00
-
-
17,222.00
- 5,482.00
4,149.00
1,333.00
-
25,684.00
- 7,299.00
5,517.00
1,782.00
-
43,818.00
- 10,028.00
7,599.00
2,429.00
-
68,662.00
- 13,421.00
10,040.00
3,381.00
-
64,304.00
- 15,305.00
10,830.00
4,475.00
-
70,537.00
- 18,034.00
11,993.00
6,041.00
-
93,626.00
- 22,396.00
14,329.00
8,067.00
-
83,715.00
- 24,239.00
14,194.00
10,045.00
-
87,546.00
- 26,842.00
15,261.00
11,581.00
-
101,839.00
- 31,177.00
16,705.00
14,236.00
236.00
(+) (=) Operating Income (Loss)
- Non-Operating (Income) Loss
+ Interest Expense, Net
+ Interest Expense
- Interest Income
+ Foreign Exch (Gain) Loss
+ Other Non-Op (Income) Loss
8,327.00
-
(653.00)
- 653.00
-
33.00
11,740.00
(326.00)
(407.00)
- 407.00
-
81.00
18,385.00
(155.00)
(311.00)
- 311.00
-
156.00
33,790.00
(415.00)
(519.00)
- 519.00
-
104.00
55,241.00
(522.00)
(1,088.00)
- 1,088.00
-
566.00
48,999.00
(1,156.00)
(1,480.00)
136.00
1,616.00
- 324.00
52,503.00
(1,185.00)
(1,411.00)
384.00
1,795.00
- 226.00
71,230.00
(1,376.00)
(2,188.00)
733.00
2,921.00
- 812.00
59,476.00
(1,435.00)
(2,543.00)
1,456.00
3,999.00
- 1,108.00
60,704.00
(2,646.00)
(2,878.00)
2,323.00
5,201.00
- 232.00
70,662.00
(1,985.00)
(2,446.00)
3,240.00
5,686.00
- 461.00
(+) (=) Pretax Income (Loss), Adjusted
- Abnormal Losses (Gains)
+ Impairment of Goodwill
+ Legal Settlement
+ Unrealized Investments
+ Other Abnormal Items
8,947.00
-
-
-
-
-
12,066.00
-
-
-
-
-
18,540.00
-
-
-
-
-
34,205.00
-
-
-
-
-
55,763.00
-
-
-
-
-
50,155.00
-
-
-
-
-
53,688.00
205.00
-
- 205.00
-
72,606.00
91.00
-
- 91.00
-
60,911.00
(461.00)
-
- 87.00
(548.00)
63,350.00
(739.00)
-
- (99.00)
(640.00)
72,647.00
(256.00)
- (236.00)
(20.00)
—
(+) (=) Pretax Income (Loss), GAAP
- Income Tax Expense (Benefit)
+ Current Income Tax
+ Deferred Income Tax
8,947.00
2,828.00
-
-
12,066.00
3,831.00
2,791.00
1,040.00
18,540.00
4,527.00
3,087.00
1,440.00
34,205.00
8,283.00
5,415.00
2,868.00
55,763.00
14,030.00
9,625.00
4,405.00
50,155.00
13,118.00
11,977.00
1,141.00
53,483.00
13,973.00
11,626.00
2,347.00
72,515.00
19,121.00
17,739.00
1,382.00
61,372.00
15,685.00
10,747.00
4,938.00
64,089.00
15,738.00
9,772.00
5,966.00
72,903.00
13,372.00
45,962.00
(32,590.00)
(+) (=) Income (Loss) from Cont Ops
6,119.00
8,235.00
14,013.00
25,922.00
41,733.00
37,037.00
39,510.00
53,394.00
45,687.00
48,351.00
59,531.00
- Net Extraordinary Losses (Gains)
-
-
-
-
-
-
-
-
-
-
-
(+) (=) Income (Loss) Incl. MI
- Minority Interest
6,119.00
-
8,235.00
-
14,013.00
-
25,922.00
-
41,733.00
-
37,037.00
-
39,510.00
-
53,394.00
-
45,687.00
-
48,351.00
-
59,531.00
-
(+) (=) Net Income, GAAP
· Preferred Dividends
· Other Adjustments
6,119.00
-
-
8,235.00
-
-
14,013.00
-
-
25,922.00
-
-
41,733.00
-
-
37,037.00
-
-
39,510.00
-
-
53,394.00
-
-
45,687.00
-
-
48,351.00
-
-
59,531.00
-
-
(=) Net Income Avail to Common, GAAP
6,119.00
8,235.00
14,013.00
25,922.00
41,733.00
37,037.00
39,510.00
53,394.00
45,687.00
48,351.00
59,531.00
Table 20: Standardized cash flow statement operating and investing activities (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Standardized Cash Flow Statement
In Millions of USD except Per Share 12 Months Ending
2008
09/27/2008
2009
09/26/2009
2010
09/25/2010
2011
09/24/2011
2012
09/29/2012
2013
09/28/2013
2014
09/27/2014
2015
09/26/2015
2016
09/24/2016
2017
09/30/2017
2018
09/29/2018
Cash from Operating Activities
+ Net Income
+ Depreciation & Amortization
+ Non-Cash Items
+ Stock-Based Compensation
+ Deferred Income Taxes
+ Other Non-Cash Adj
+ Chg in Non-Cash Work Cap
+ (Inc) Dec in Accts Receiv
+ (Inc) Dec in Inventories
+ Inc (Dec) in Accts Payable
+ Inc (Dec) in Other
+ Net Cash From Disc Ops
6,119.00
8,235.00
14,013.00
25,922.00
41,733.00
37,037.00
39,510.00
53,394.00
45,687.00
48,351.00
59,531.00
496.00
734.00
1,027.00
1,814.00
3,277.00
6,757.00
7,946.00
11,257.00
10,505.00
10,157.00
10,903.00
2,889.00
713.00
3,097.00
8,531.00
8,697.00
7,915.00
11,220.00
13,714.00
8,783.00
6,447.00
10,373.00
516.00
710.00
879.00
1,168.00
1,740.00
2,253.00
2,863.00
3,586.00
4,210.00
4,840.00
5,340.00
398.00
1,040.00
1,440.00
2,868.00
4,405.00
1,141.00
2,347.00
1,382.00
4,938.00
5,966.00
(32,590.00)
1,975.00
(1,037.00)
778.00
4,495.00
2,552.00
4,521.00
6,010.00
8,746.00
(365.00)
(4,359.00)
37,623.00
92.00
477.00
458.00
1,262.00
(2,851.00)
1,957.00
1,037.00
2,901.00
1,256.00
(730.00)
(3,373.00)
(785.00)
(353.00)
(4,860.00)
(1,791.00)
(6,965.00)
(1,949.00)
(6,452.00)
(3,124.00)
476.00
(6,347.00)
(13,332.00)
(163.00)
54.00
(596.00)
275.00
(15.00)
(973.00)
(76.00)
(238.00)
217.00
(2,723.00)
828.00
596.00
92.00
6,307.00
2,515.00
4,467.00
2,340.00
5,938.00
5,400.00
2,117.00
8,966.00
9,175.00
444.00
684.00
(393.00)
263.00
(338.00)
2,539.00
1,627.00
863.00
(1,554.00)
(626.00)
(44.00)
-
-
-
-
-
-
-
-
-
-
-
(=) Cash from Operating Activities
Cash from Investing Activities
+ Change in Fixed & Intang
+ Disp in Fixed & Intang
+ Disp of Fixed Prod Assets
+ Disp of Intangible Assets
+ Acq of Fixed & Intang
+ Acq of Fixed Prod Assets
+ Acq of Intangible Assets
+ Net Change in LT Investment
+ Dec in LT Investment
+ Inc in LT Investment
+ Net Cash From Acq & Div
+ Cash from Divestitures
+ Cash for Acq of Subs
+ Cash for JVs
+ Other Investing Activities
+ Net Cash From Disc Ops
9,596.00
10,159.00
18,595.00
37,529.00
50,856.00
53,666.00
59,713.00
81,266.00
66,231.00
64,225.00
77,434.00
(1,091.00)
(1,213.00)
(2,121.00)
(7,452.00)
(9,402.00)
(9,076.00)
(9,813.00)
(11,488.00)
(12,734.00)
(12,451.00)
(13,313.00)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,091.00)
(1,213.00)
(2,121.00)
(7,452.00)
(9,402.00)
(9,076.00)
(9,813.00)
(11,488.00)
(12,734.00)
(12,451.00)
(13,313.00)
-
(1,144.00)
(2,005.00)
(4,260.00)
(8,295.00)
(8,165.00)
(9,571.00)
(11,247.00)
(12,734.00)
(12,451.00)
(13,313.00)
-
(69.00)
(116.00)
(3,192.00)
(1,107.00)
(911.00)
(242.00)
(241.00)
-
-
-
(38.00)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(38.00)
-
-
-
-
-
-
-
-
-
-
-
-
(638.00)
(244.00)
(350.00)
(496.00)
(3,765.00)
(343.00)
(297.00)
(329.00)
(721.00)
-
-
-
-
-
-
-
-
-
-
-
-
-
(638.00)
(244.00)
(350.00)
(496.00)
(3,765.00)
(343.00)
(297.00)
(329.00)
(721.00)
-
-
-
-
-
-
-
-
-
-
-
(7,060.00)
(16,221.00)
(11,095.00)
(32,723.00)
(38,475.00)
(24,202.00)
(9,001.00)
(44,443.00)
(32,946.00)
(33,666.00)
30,100.00
-
-
-
-
-
-
-
-
-
-
-
(=) Cash from Investing Activities
(8,189.00)
(17,434.00)
(13,854.00)
(40,419.00)
(48,227.00)
(33,774.00)
(22,579.00)
(56,274.00)
(45,977.00)
(46,446.00)
16,066.00
Table 21: Standardized cash flow statement financing activities (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Standardized Cash Flow Statement
In Millions of USD except Per Share 12 Months Ending
2008
09/27/2008
2009
09/26/2009
2010
09/25/2010
2011
09/24/2011
2012
09/29/2012
2013
09/28/2013
2014
09/27/2014
2015
09/26/2015
2016
09/24/2016
2017
09/30/2017
2018
09/29/2018
Cash from Financing Activities
+ Dividends Paid
+ Cash From (Repayment) Debt
+ Cash From (Repay) ST Debt
+ Cash From LT Debt
+ Repayments of LT Debt
+ Cash (Repurchase) of Equity
+ Increase in Capital Stock
+ Decrease in Capital Stock
+ Other Financing Activities
+ Net Cash From Disc Ops
-
-
-
-
(2,488.00)
(10,564.00)
(11,126.00)
(11,561.00)
(12,150.00)
(12,769.00)
(13,712.00)
-
-
-
-
-
16,896.00
18,266.00
29,305.00
22,057.00
29,014.00
432.00
-
-
-
-
-
-
6,306.00
2,191.00
(397.00)
3,852.00
(37.00)
-
-
-
-
-
16,896.00
11,960.00
27,114.00
24,954.00
28,662.00
6,969.00
-
-
-
-
-
-
-
-
(2,500.00)
(3,500.00)
(6,500.00)
1,240.00
745.00
1,663.00
1,964.00
2,016.00
(21,629.00)
(43,531.00)
(33,961.00)
(29,227.00)
(32,345.00)
(72,069.00)
1,240.00
745.00
1,663.00
1,964.00
2,016.00
1,231.00
1,469.00
1,292.00
495.00
555.00
669.00
-
-
-
-
-
(22,860.00)
(45,000.00)
(35,253.00)
(29,722.00)
(32,900.00)
(72,738.00)
-
(82.00)
(406.00)
(520.00)
(1,226.00)
(1,082.00)
(1,158.00)
(1,499.00)
(1,570.00)
(1,874.00)
(2,527.00)
-
-
-
-
-
-
-
-
-
-
-
(=) Cash from Financing Activities
1,116.00
663.00
1,257.00
1,444.00
(1,698.00)
(16,379.00)
(37,549.00)
(17,716.00)
(20,890.00)
(17,974.00)
(87,876.00)
Net Change in Cash
+ Cash from Operating Activities
9,596.00
10,159.00
18,595.00
37,529.00
50,856.00
53,666.00
59,713.00
81,266.00
66,231.00
64,225.00
77,434.00
+ Cash from Investing Activities
(8,189.00)
(17,434.00)
(13,854.00)
(40,419.00)
(48,227.00)
(33,774.00)
(22,579.00)
(56,274.00)
(45,977.00)
(46,446.00)
16,066.00
+ Cash from Financing Activities
1,116.00
663.00
1,257.00
1,444.00
(1,698.00)
(16,379.00)
(37,549.00)
(17,716.00)
(20,890.00)
(17,974.00)
(87,876.00)
(=) Net Changes in Cash
2,523.00
(6,612.00)
5,998.00
(1,446.00)
931.00
3,513.00
(415.00)
7,276.00
(636.00)
(195.00)
5,624.00
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