PPT
Bonds and Stock Analysis of Apple
Background & Industry.
In 1976 Steve Jobs and Steve Wozniak founded Apple Computer, Inc. Jobs and Wozniak vision was to develop a computer that is portable and easy to use. The process started in Steve Job’s household where the first product focused on its capabilities, meaning bare bones. The cosmetics were added in 1977 and Apple changed the computer industry after going public with their product in 1980 (www.loc.gov, 2015, p. 1-2).
Apple encountered challenges along the way which included Wozniak leaving the organization in 1983 and Jobs in 1985. Steve Jobs launched his own business, NeXT Software and attained Pixar from George Lucas. The acquisition of Pixar later proved that it was one of the finest moves from Jobs. Although Apple was able to hold its ground without Steve Jobs, the organization realized that without a software the company will soon close its door. Sculley, the current president at that time decided to work with Jobs once more. Steve Jobs became the interim CEO and he revolutionized Apple (www.loc.gov, 2015, p. 3-7)
Apple’s innovation of computers and how music was perceived through a portable device became the game changer for the organization. Apple’s success skyrocketed with the release of their mp3 and various handheld devices including the iPhone under Steve Jobs’ supervision.
Financial Leverage Ratios.
|
Financial Leverage Ratios |
2020 |
2019 |
2018 |
|
Debt - to - asset ratio (Debt ratio) |
0.35 |
0.32 |
0.31 |
|
Debt - to - equity ratio |
1.72 |
1.19 |
1.07 |
|
Interest coverage ratio (the Times Interest Earned) |
24.35 |
19.38 |
23.5 |
Apple is financing its assets by having less debt and more assets in the company. Apple has more cash since they sell more and make positive profit from their sales. The risk associated with the bonds issued by Apple are low because most of their bonds have high interest rates and the bond prices are not too high.
Bond Performance.
|
Bond Symbol |
Coupon Rate |
Last Price of Bond (Assuming $1,000 par) |
Annual Coupon Interest Payment (Assuming $1,000 par) |
Current Yield (Assuming $1,000 par) |
YTM |
Is Bond Callable? |
|
AAPL4001809 |
2.4% |
$1,046.401 |
$242 |
2.29%3 |
Not listed |
Yes |
|
AAPL4122386 |
4.45% |
$1,238.704 |
$44.505 |
3.59% |
Not listed |
Yes |
Calculations:
1. Price of bond AAPL4001809 ($1000/100) * 104.64 = 10* 104.64 = $1,046.40
1. Annual Coupon Payment = $1000*2.4% = $24
1. Current Yield = ($1000*2.4%)/($104.64*10) = 2.29%
1. Price of Bond APPL4122386 = ($1000/100) * 123.87 = 10* 123.87 = $1,238.70
1. Annual Coupon Payment = $1000*4.45% = $44.50
1. Current Yield = ($1000*4.45%)/($123.87*10) = 3.59%
The current recommendation is to purchase Apple bond APPL4122386 which currently holds a 4.45% coupon (Finra 2021). This is one of the higher coupon rates for Apple Inc. bonds, signifying that holding out for a larger rate may prove frivolous. While the bond in question is callable, presenting a chance that the bond can be retired prior to maturity and not realize its full earnings, the rate is nearly double that of the bonds Apple Inc has recently issued. This will result in the highest annual payments and yield. Additionally, the bond ratings are high with a Moody's Rating at Aa1, and a Standard & Poor's Rating of AA+ (Finra, 2021). These ratings indicate the company has a high capacity to meet financial obligations and presents less of a risk to the investor. The + sign in the Standard & Poor's Rating indicates the company is in the higher (stronger) end of this AA ranking making it an even safer investment.
Investing in Apple Inc. would be a fruitful financial move based on the profitability/liquidity ratios as well. While the ratios are not always consistent (up and down from year to year since 2016) the company overall has maintained or increased the financial leverage, ROE, ROA, and interest coverage. These ratios indicate a high ability to repay debt and a safe or less risky investment with a decent return. The Quick ratio for Apple Inc. is 1.2 (Morningstar, 2021), another indicator of good financial health as the asserts can cover the company’s liabilities should they need to be liquidated. However, caution is needed as always when investing as the debt-to-equity ratio is 1.5 (Morningstar, 2021) indicating that the company has used large volumes of debt to finance current operations. When considering the current pandemic and weakened economy, a high ratio for most companies is to be expected over the next year or so until the global economy restabilizes. After careful analysis, it would be a good investment for a bondholder to purchase Apple Inc. bond APPL4122386.
Stock Performance.
Market Ratios.
|
Microsoft over Apple |
|
|||
|
Year |
2017 |
2018 |
2019 |
Average by data |
|
PE Ratio |
64.56% |
215.71% |
20.45% |
100.24% |
|
Price/Book |
14.49% |
30.46% |
-20.45% |
8.17% |
|
EPS |
41.30% |
-28.52% |
70.37% |
27.72% |
|
DPS |
156.45% |
142.25% |
148.68% |
149.13% |
|
ROE |
111.75% |
32.98% |
170.30% |
105.01% |
|
|
|
|
Overall Average: |
78.05% |
Microsoft had an overall average of 78.05% aggregate difference from Apple based on the average data compiled by using different ratio analysis. In terms of the common stockholders receiving an adequate return on their investment, both companies increase their dividend yield. Apple increased by 5% and Microsoft by 11% (Sparks, 2020, p. 3-5). The increase tells me that the common stockholders are getting adequate return, however, depending on how you look at the ratios or returns this could lead to a subjective perspective based on the approach of the stockholder’s strategy in investing to an organization.
Apple’s PEG ratio showed a significant advantage over Microsoft from 2017 to 2019 as illustrated respectively, 9.86%, 5.04%, and 3.7%. This shows that Apple had a better EPS growth than Microsoft, however, considering the “accepted” PEG ratio both organizations are over 1 which indicates that the stock prices are overvalued.
Cohan (2020), argues that the APPLE P/E ratio is overvalued. In recent findings, APPLE’s revenue had declined due to factors such as low sales from China, overall iPhone retention from current and previous owners, and overall foreign exchange rate (p. 7).
APPL’s EPS forecast for 2021 is estimated $4.47 (Nasdaq.com, n.d., p-5). Which tells us that the P/E ratio will be approximately 30. APPLE is trading their stocks 30x per share.
Overall, P/E is a quick tool analysis to understand the financial situation of a company. However, a higher or lower P/E does not necessarily good nor bad. It is important to understand the organization from different factors such as, target market, demographics, projected growth and so on.
Microsoft has been one of biggest challenger for APPLE. The EPS forecast for this quarter is estimated to be around $7.4 which makes the P/E ratio by approximately 32. Koss (2020), explains that significant increase of activity from big tech companies in developing their own version of gaming systems (p. 1-2). I think that the rise of AI gaming has been steadily improving over the past five years. Microsoft has been one of the leading pioneers of gaming for over a decade now and I think that they will only grow from here on out.
Historical Stock Prices.
Microsoft’s (MS) stock prices are significantly higher than Apple, with an average stock price of $201 (MS) and $124 (APPL). MS has a rate of 61.39% higher than APPL. Conversely, the trend, shown in the red line, indicates that MS and APPL almost had the same increase and decrease of stock prices in FY 2020. We can observe that both organizations peaked around August of 2020 and held the stock prices with relatively minute differences until the end of the year. The ratios above convey that MS could potentially be overvalued, however, considering the complete financial health of MS and APPL we can conclude that both organizations have a steady EPS growth at this time. Which brings us the possibility of investing in both organizations.
Required Return on Apple’s Stock.
CAPM In order to estimate the required return on stock using the Capital Asset Pricing Model (CAPM), the following data will be used:
· Risk-free rate: 1.4460%
· Beta: 1.24
· Market risk premium (Adjusted for COVID-19): 5.35%
Required rate of return= .014460+(1.24*.0535)= 0.0808= 8.08%
Sustainable Growth Rate
The company’s sustainable growth rate is calculated as g=ROE*(1-Dividend payout ratio). The following data was used to calculate this rate:
· ROE= 82.09%
· Dividend payout ratio= 21.77%
Sustainability growth rate= .8209*(1-.2177)= 0.6422= 64.22%
Stock Value
The Gordon growth rate model will be used to calculate the economic value of Apple’s stock. The equation for this model is as follows:
· P=D1/(r-g)
Where:
· P= Stock price
· D1= Expected dividend value
· r= Required rate of return
· g= Dividend growth rate
The the stock price was calculated using the following values:
· D1= 0.82
· r= 8.08%
· g= 6.91%
Stock price= 0.82/(.0808-.0691)= $70.09
Based on the calculations above Apple’s stock, which is currently priced at $125.12, is actually overvalued. This is most likely due to growing investor confidence. The company’s financial performance justifies the confidence that investors have placed on its shares. Apple is a highly liquid company that continues to grow at a high rate. With a sustainability growth rate of 64.22% from its current resources, and the potential to acquire more, investors can expect even greater returns on their investment down the line.
Recommendation for Apple’s Management.
Eassa 2018 explains that Apple's stability for the past five years could be an indicator that investors should consider looking at Apple for long-term investment (p. 1-5). Apple has been working diligently to ensure that the shareholders are getting the most benefit by investing in the company. Although Apple may not have the highest percentage rate of return for dividends per share, it has proven itself as one of the best tech companies to invest in now. Moreover, Apple's marketing strategy is unique and stands out to its customers. Apple values its creation and not its product. Apple identifies the exclusivity of their product and allows the consumers to market for them. The strategy that Apple has been using is creating an experience for the consumers. Moreover, Apple has been rated as Aa1 due to its robust and constant growth for the past five years (Yahoo.com/Moody, 2021, p. 1-3)
Reflections
While completing this assignment, I gained an understanding of the amount of research required to properly value a company. Not all stock shares are properly valued, so as an investor it is important to find out what a company is truly worth and understand the reasoning behind its valuation. I also learned how to estimate a company’s growth in order to determine if it is performing at a sustainable rate. I can use what I have learned to make wiser decisions when dabbling in the stock market.
-Dimitry Decolin
When researching the financial leverage ratios, I got more information for understanding how bonds can be evaluated with supporting financial leverage ratios when helping someone/client understand if a company has good bonds to buy or not. Additionally, I learned that it is easy to understand if a company is doing good with it’s financial leverage ratios because it shows the companies debts.
-Celine Denk
Surprisingly this was my first time working on a project like this at UMGC and I had an overall good experience. There were communication problems in the beginning as expected, but I feel like we worked through them fast and set up a game plan fairly quick for the remainder of the weeks. We eventually found out that if we split up the work, so that we can all contribute. I have learned that if you are not clear on something it is always a good idea to ask, so that everyone can walk away with a clear understanding. I could apply this to the workplace in many different ways; collaboration, communication, using Microsoft excel, and researching and interpreting data. Especially how most companies are switching to telework or working from home, I think that this was a great learning experience for that.
-Jesse Cortez
This assignment taught me a lot about how to properly analyze a company’s performance and gave insight on how to project the longevity of a company’s finances. It was also an eye opener into the difference in communication styles/strengths of a team. I am more of a communicator through text rather than webcam and in this team environment I had to find ways to adjust. Both the academic and personal enlightenments can be beneficial in the work environment. While my work is not financial in nature, I will be forming partnerships with various organizations in the future and will need to study their finances to determine possible levels of financial backing. In addition, the differences in communication styles and finding ways to adjust or work around them are essential in today’s virtual world.
– Regina Cain
The group project on Apple was my first time completing at UMGC. My group overall was great! We came together as a team to figure out how we can tackle the project. Allowing each team member to pick which part that they were most comfortable completing, which helped a lot as a team. Learning how to work as a team, is a great skill that can applied to real life situations. I now would fill comfortable completing group assignments, not only with fellow classmates, but my co-workers too! Now that the world is dealing with this COVID-19 crisis and being able to virtually collaborate is also another skill that can and will definitely be applied.
-Antonia Davis
I learned more information about Apple and its history. I find it interesting how it went all way around and back to Steve Jobs. The trend analysis allowed me to have a better understanding of the organization’s growth capacity every year. This also includes a possible forecast that can be achieved by analyzing not just the trend the overall market that is the organization part of. The income statements and balance sheet are making more sense to me as well.
-Rocky Conejos
References
Cohan, P. (2020, January 2). Forbes. https://www.forbes.com/sites/petercohan/2020/01/02/59 -overvalued-why-apple-is-neither-a-growth-nor-value-stock/?sh=6fd0f2753990
Davuluri, A. C. (2021, March 1). Apple’s iPhone 12 Launch Propels December Quarter Sales to Record Heights; Raising FVE to $98. Retrieved from https://www.morningstar.com/stock s/xnas/aapl/quote
Dikov, D. F. (2020, December 14). Understanding the Gordon Growth Model for Stock Valuation . Retrieved from https://medium.com/magnimetrics/understanding-the-gordon-growth- model-for-stock-valuation-943f429ff1cf#:%7E:text=Gordon%20Growth%20Model%20fo rmula&text=PO%20is%20the%20price%20(fair,the%20expected%20dividend%20growth %20rate.
Dybek, M. (2020, October 31). Apple Inc. (NASDAQ:AAPL): Analysis of SOLVENCY RATIOS. https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Ratios/Long-term-Deb t-and-Solvency#Debt-to-Assets.
Dybek, M. (2020, October 31). Apple Inc. (NASDAQ:AAPL): Analysis of Solvency Ratios. Stock Analysis on Net. https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Ratio s/Long-term-Debt-and-Solvency#Debt-to-Equity.
Dybek, M. (2020, October 31). Apple Inc. (NASDAQ:AAPL): Analysis of Solvency Ratios. Stock Analysis on Net. https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Ratio s/Long-term-Debt-and-Solvency#Interest-Coverage.
Eassa, A. (2018, December 11). What you need to know about Apple’s capital return program. The Motley Fool. https://www.fool.com/investing/2018/12/11/what-you-need-to-know -about-apples-capital-return.aspx
Finra. (2021). Bond detail. Retrieved March 04, 2021, from http://finra-markets.morningstar.co m/BondCenter/BondDetail.jsp?ticker=C592367&symbol=AAPL4001809
Finra. (2021). Bond detail. Retrieved March 04, 2021, from http://finra-markets.morningstar.co m/BondCenter/BondDetail.jsp?ticker=C610233&symbol=AApl4122386
Koss, H. (2020, February 3). What does the future of the gaming industry look like? Built In. https://builtin.com/media-gaming/future-of-gaming
Morningstar, Inc. (2021). Apple Inc. Retrieved March 04, 2021, from https://financials.mornings tar.com/ratios/r.html?t=0p000000GY&culture=en&platform=sal
Nasdaq.com. (n.d.). Apple Inc. Common stock (AAPL) earnings report date. https://www.nasdaq .com/market-activity/stocks/aapl/earnings
Sparks, D. (2020, January 15). Battle of dividends: Apple vs. Microsoft. The Motley Fool. https://www.fool.com/investing/2020/01/15/battle-of-dividends-apple-vs-microsoft.as px
Www.loc.gov. (2015, August 12). Apple computers: This month in business history (Business) references services, Library of Congress). Library of Congress. https://www.loc.gov/rr/b usiness/businesshistory/April/apple.html
Yahoo.com. (2021, February 1). Apple Inc. – Moody’s assigns Aa1 rating to Apple’s new senior notes. Yahoo. https://www.yahoo.com/now/apple-inc-moodys-assigns-aa1
Yahoo is now a part of Verizon Media. (n.d.). Retrieved from https://finance.yahoo.com/quote/ %5ETNX?p=%5ETNX
Price/Book Ratio
Price/Book Ratio Apple 2017 2018 2019 6.42 6.96 14.23 Price/Book Ratio MS 7.35 9.08 11.32
Ratio
PE Ratio
PE Ratio Apple 2017 2018 2019 18.37 13.24 24.7 PE Ratio MS 30.23 41.8 29.75
Ratios
PEG Ratio
PEG Ratio Apple 2017 2018 2019 1.4 1.25 2.0299999999999998 PEG Ratio MS 2.78 1.88 2.78Ratio
MS & APPL Historical Stock Prices
Stock Prices Apple 43885 43892 43899 43906 43913 43920 43927 43934 43941 43948 43955 43962 43969 43976 43983 43990 43997 44004 44011 44018 44025 44032 44039 44046 44053 44060 44067 44074 44081 44088 44095 44102 44109 44116 44123 44130 44137 44144 44151 44158 44165 44172 44179 44186 44193 71.632499999999993 70.569999999999993 65.9375 60.487499 57.02 62.685001 62.724997999999999 67.077499000000003 69.487503000000004 70.449996999999996 72.292502999999996 77.025002000000001 78.292502999999996 80.875 79.4375 82.5625 83.3125 87.834998999999996 88.3125 92.5 97.264999000000003 96.417502999999996 93.709998999999996 108.199997 112.599998 116.0625 128.697495 127.58000199999999 113.949997 114.720001 104.540001 115.010002 113.910004 120.05999799999999 119.959999 114.010002 109.110001 120.5 118.91999800000001 117.18 116.970001 122.30999799999999 122.599998 125.019997 133.990005 Stock Prices MS 43885 43892 43899 43906 43913 43920 43927 43934 43941 43948 43955 43962 43969 43976 43983 43990 43997 44004 44011 44018 44025 44032 44039 44046 44053 44060 44067 44074 44081 44088 44095 44102 44109 44116 44123 44130 44137 44144 44151 44158 44165 44172 44179 44186 44193 169.71000699999999 165.30999800000001 151 140 137.009995 152.44000199999999 160.320007 164.35000600000001 176.63000500000001 176.58999600000001 174.490005 183.14999399999999 185.75 186.33999600000001 182.53999300000001 185.94000199999999 184.58000200000001 195.78999300000001 195.779999 208.83000200000001 214.479996 205 201.470001 211.520004 211.66999799999999 209.60000600000001 214.78999300000001 227 206.5 204.240005 197.19000199999999 210.88000500000001 207.220001 218.78999300000001 220.41999799999999 213.85000600000001 204.28999300000001 224.44000199999999 214.86999499999999 210.949997 214.10000600000001 214.36999499999999 213.10000600000001 217.550003 224.449997
Apple's Financial Leverage
Interest coverage ratio (the Times Interest Earned) 2020 2019 2018 24.35 19.38 23.5
Apple's Dividends Per Share
Debt - to - asset ratio (Debt ratio) 2020 2019 2018 0.35 0.32 0.31