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Name and Surname: Zeliha Kasapoglu
MSc Programme: Business Finance
Title: Business analysis and valuation of Apple, Inc.
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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 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.
10
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,
2019):
∆ 𝑁𝑊𝐶 = ∆ 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):
𝐹𝐶𝐹𝐹 = 𝐸𝐵𝐼𝑇 + 𝐷&𝐴 − 𝐶𝑎𝑝𝐸𝑥 − ∆𝑁𝑊𝐶 − 𝑡 (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
The weighted average cost of capital (𝑟𝑊𝐴𝐶𝐶 ) 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 ∗ 𝐸
𝐷 + 𝐸 + 𝑟𝑑 ∗
𝐷 𝐷 + 𝐸
(5)
The cost of debt (𝑟𝑑 ) is the after-tax rate (𝑡) of the cost of borrowing based on the additional
default spread above the risk-free rate (𝑟𝑓 + 𝑠𝑝𝑟𝑒𝑎𝑑) that the investor is seeking (Ernst &
Young, 2018):
𝑟𝑑 = (𝑟𝑓 + 𝑠𝑝𝑟𝑒𝑎𝑑) ∗ (1 − 𝑡) (6)
The cost of equity (𝑟𝑒), on the other hand, is the extra return above the risk-free rate (𝑟𝑓) that
the investor is requiring to bear the market-wide systematic risk (𝛽𝑒) based on the market
conditions (𝑟𝑝):
11
𝑟𝑒 = 𝑟𝑓 + 𝛽𝑒 ∗ 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 fitted line
that describes all data the best is the regression line. It is a function of Beta estimate (�̂�) and
Alpha estimate (�̂�). Beta estimate is the covariance of Apples’ and Nasdaq’s price returns over
the variance of Nasdaq’s price return (Bodie, et al., 2014, p. 297):
�̂� = 𝐶𝑜𝑣(𝑟𝐴𝑝𝑝𝑙𝑒 , 𝑟𝑁𝑎𝑠𝑑𝑎𝑞 )
𝑉𝑎𝑟(𝑟𝑁𝑎𝑠𝑑𝑎𝑞)
(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 in
section 3.3. Once the perpetuity growth rate (𝑔) and the discount rate (𝑟𝑊𝐴𝐶𝐶 ) are obtained,
the terminal value (𝑇𝑉) beyond 2029 can be found using the following equation (Ross, et al.,
2016, p. 415):
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐹𝐶𝐹𝐹2029 ∗ (1 + 𝑔)
𝑟𝑊𝐴𝐶𝐶 − 𝑔
(10)
4.1.3. Step 3: Discounted cash flows
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
12
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):
𝑃𝑉 = 𝐹𝐶𝐹𝐹2020
(1 + 𝑟𝑊𝐴𝐶𝐶)1 + ⋯ +
𝐹𝐶𝐹𝐹2029 (1 + 𝑟𝑊𝐴𝐶𝐶)10
+ 𝑇𝑉
(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):
𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 = 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑛𝑒𝑡 𝑑𝑒𝑏𝑡 − 𝑚𝑖𝑛𝑜𝑟𝑖𝑡𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠 (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:
𝑁𝑒𝑡 𝑑𝑒𝑏𝑡 = 𝑆ℎ𝑜𝑟𝑡𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 + 𝑙𝑜𝑛𝑔𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 − 𝑐𝑎𝑠ℎ & 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 (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
13
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
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 (𝑔) and the weighted average cost
of 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 weighted
average 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.
14
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.
15
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.
16
Table 1: Revenues by product segments (Bloomberg L.P., 2019)
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)
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
17
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.
18
Table 2: Profitability ratios (Bloomberg L.P., 2019)
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)
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
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
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
Altman's 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
19
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)
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).
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
20
Figure 7: Apple, Inc. stock price and Nasdaq composite index (Yahoo Finance, 2019)
21
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.
22
Table 5: Assumptions for forecasting future cash flows
Assumptions for forecasting (%) 20
08
20 09
20 10
20 11
20 12
20 13
20 14
20 15
20 16
20 17
20 18
20 19
E
20 20
E
20 21
E
20 22
E
20 23
E
20 24
E
20 25
E
20 26
E
20 27
E
20 28
E
20 29
E
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
23
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
24
consistently around 120.00%4. The same ratio is kept for future CapEx predictions. Historical
values of the ∆𝑁𝑊𝐶 to sales ratio were negative and ranging from -7.05% to -50.84%. There
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, ∆𝑁𝑊𝐶 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
25
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 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
% YoY Growth 10.97% -10.00% 11.43% 4.77% 1.95% -7.38% 15.08% -10.91% 7.10% -5.66% 1.60%
(-) Other Operating Expenses (R&D, SG&A)
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
% YoY Growth -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 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
% YoY Growth 17.18% -9.23% 5.56% 4.01% 2.70% 1.28% 4.43% -6.36% 12.27% -7.57% 1.60%
(-) 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
% YoY Growth 56.91% -9.39% 6.82% 3.53% 2.99% 1.82% 4.09% -5.74% 12.00% -8.37% 1.50%
(+) Depreciation & Amortization 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
% YoY Growth 7.77% 3.55% 6.82% -2.94% 2.99% -1.57% 0.50% -25.94% 22.19% 3.08% 12.77%
(-) Capital Expenditures 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
% YoY Growth 6.80% 4.40% 6.82% -2.94% 2.99% -1.57% -0.32% -25.33% 22.19% 3.08% -7.56%
(-) Change in Net Working Capital
(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)
% YoY Growth -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%
26
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
the best fitting line that explains the correlation between the Apple and the Nasdaq stocks is
𝑦 = 0.05 + 0.97 ∗ 𝑥 + 𝑢 and 𝑢 is the residuals that is the shortest vertical line from the actual
point to the fitted line.
5 2008 stock price value are ignored due to the extreme impact of financial crisis.
27
Table 7: Regression analysis variables (Yahoo Finance, 2019)
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.
from 28/09/2009 until 30/09/2019
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
Covariance - Variance Matrix
28
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 weight
of debt and equity are imputed in the equation (5) as indicated in Table 10. As a result, the
𝑟𝑊𝐴𝐶𝐶 is 7.30%:
Table 10: The cost of capital
𝑟𝑊𝐴𝐶𝐶 and 𝑔 from section 3.3 are imputed into the equation (10) and the terminal value is found
at $1,254,103.32 million in 2029: Table 11: The terminal value
Once all FCFFs including the terminal value are obtained, they are discounted back to 2019
using 𝑟𝑊𝐴𝐶𝐶 to obtain the present value of each year. Enterprise value, which is expressed in
equation (11), is found at $1,064,237.28 million. Table 12 illustrates the DCF model.
29
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)
30
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%
31
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 ∓1.00% change in growth rate. Figure 12
and Figure 13 below indicate both scenarios:
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.
32
Table 13: Price sensitivity to changes of revenue and COGS
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
future. Therefore, the sensitivity of the target price to ∓0.50% incremental changes of the
perpetuity growth rate and ∓1.00% incremental changes in the discount rate is calculated. The
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
1.00% 0.00% -1.00% 1.00% 0.00% -1.00%
1.00% 254.85 311.26 362.89 1.00% 16.57% 42.38% 65.99%
0.00% 162.21 218.62 270.24 0.00% -25.80% 0.00% 23.61%
-1.00% 77.39 133.81 185.43 -1.00% -64.60% -38.79% -15.18%
COGS growth (% YoY)
R ev
en ue
gr
ow th
(%
Y oY
)
Target price upside/
downside potential (%)
Target price in USD
COGS growth (% YoY)
R ev
en ue
gr
ow th
(%
Y oY
)
4.30% 5.30% 6.30% 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
WACC (%) Target price in USD
P er
pe tu
ity g
ro w
th r
at e
(% )
33
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
+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
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%
Target price upside/ downside potential
(%)
WACC (%)
P er
pe tu
ity g
ro w
th r
at e
(% )
34
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.
35
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38
8. Abbreviations and acronyms
Alpha estimate 𝛽𝑒 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 𝑔 Perpetuity growth rate GDP Gross domestic production NWC Net working capital ∆𝑁𝑊𝐶 Change in net working capital PV Present value 𝑟𝑑 Cost of debt 𝑟𝑒 Cost of equity 𝑟𝑓 Risk-free rate of return 𝑟𝑀 Return on market portfolio 𝑟𝑃 Market risk premium 𝑟𝑊𝐴𝐶𝐶 Weighted average cost of capital ROA Return on asset ROE Return on equity 𝑅2 Goodness of fit (R square) t Effective tax rate TV Terminal value yoy Year-on-year 𝑤𝑒 Weight of equity 𝑤𝑑 Weight of debt �̅� Mean value of x 𝑦 Mean value of y
�̂�
39
9. Appendix
Figure 14: Stock price curve in the last 10-years (Yahoo Finance, 2019)
40
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 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 + Property, Plant & Equip, Net 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 + Property, Plant & Equip 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 - Accumulated Depreciation 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 + LT Investments & Receivables 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 + LT Marketable Securities 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 + Other LT Assets 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 + Total Intangible Assets 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 - + Goodwill 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 - + Other Intangible Assets 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 - + Prepaid Expense - 844.00 799.00 1,600.00 3,000.00 - - - - - - + Derivative & Hedging Assets - - - - - - - - - - - + Misc LT Assets 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
41
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 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 + LT Debt - - - - - 16,960.00 28,987.00 53,329.00 75,427.00 97,207.00 93,735.00 + LT Borrowings - - - - - 16,960.00 28,987.00 53,329.00 75,427.00 97,207.00 93,735.00 + LT Capital Leases - - - - - - - - - - - + Other LT Liabilities 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 + Accrued Liabilities - - - - - - - - - - - + Pension Liabilities - - - - - - - - - - - + Pensions - - - - - - - - - - - + Other Post-Ret Benefits - - - - - - - - - - - + Deferred Revenue - 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 - + Deferred Tax Liabilities - 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 + Derivatives & Hedging - - - - - - - - - - - + Misc LT Liabilities 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
42
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 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 + Common Stock - 0.01 0.01 0.01 0.01 0.01 0.06 0.06 0.05 0.05 0.05 + Additional Paid in Capital - 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 + Retained Earnings 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 + Other Equity (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 Interest
22,297.00 31,640.00 47,791.00 76,615.00 118,210.00 123,549.00 111,547.00 119,355.00 128,249.00 134,047.00 107,147.00
+ Minority/ Non Controlling Interest
- - - - - - - - - - -
(=) Total Equity 22,297.00 31,640.00 47,791.00 76,615.00 118,210.00 123,549.00 111,547.00 119,355.00 128,249.00 134,047.00 107,147.00 (=) 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
43
Table 19: Adjusted income statement (Bloomberg L.P., 2019)
Apple, Inc. (AAPL US) - Adjusted Income Statement
In Millions of USD except Per Share 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 (+) Revenue 37,491.00 42,905.00 65,225.00 108,249.00 156,508.00 170,910.00 182,795.00 233,715.00 215,091.00 228,594.00 265,595.00 + Sales & Services Revenue - 42,905.00 65,225.00 108,249.00 156,508.00 170,910.00 182,795.00 233,715.00 215,091.00 228,594.00 265,595.00 (-) Cost of Revenue 24,294.00 25,683.00 39,541.00 64,431.00 87,846.00 106,606.00 112,258.00 140,089.00 131,376.00 141,048.00 163,756.00 + Cost of Goods & Services - 25,683.00 39,541.00 64,431.00 87,846.00 106,606.00 112,258.00 140,089.00 131,376.00 141,048.00 163,756.00 (+) (=) Gross Profit 13,197.00 17,222.00 25,684.00 43,818.00 68,662.00 64,304.00 70,537.00 93,626.00 83,715.00 87,546.00 101,839.00 + Other Operating Income - - - - - - - - - - - - Operating Expenses 4,870.00 5,482.00 7,299.00 10,028.00 13,421.00 15,305.00 18,034.00 22,396.00 24,239.00 26,842.00 31,177.00 + Selling, General & Admin 3,761.00 4,149.00 5,517.00 7,599.00 10,040.00 10,830.00 11,993.00 14,329.00 14,194.00 15,261.00 16,705.00 + Research & Development - 1,333.00 1,782.00 2,429.00 3,381.00 4,475.00 6,041.00 8,067.00 10,045.00 11,581.00 14,236.00 + Other Operating Expense - - - - - - - - - - 236.00 (+) (=) Operating Income (Loss) 8,327.00 11,740.00 18,385.00 33,790.00 55,241.00 48,999.00 52,503.00 71,230.00 59,476.00 60,704.00 70,662.00 - Non-Operating (Income) Loss - (326.00) (155.00) (415.00) (522.00) (1,156.00) (1,185.00) (1,376.00) (1,435.00) (2,646.00) (1,985.00)
+ Interest Expense, Net (653.00) (407.00) (311.00) (519.00) (1,088.00) (1,480.00) (1,411.00) (2,188.00) (2,543.00) (2,878.00) (2,446.00) + Interest Expense - - - - - 136.00 384.00 733.00 1,456.00 2,323.00 3,240.00 - Interest Income 653.00 407.00 311.00 519.00 1,088.00 1,616.00 1,795.00 2,921.00 3,999.00 5,201.00 5,686.00
+ Foreign Exch (Gain) Loss - - - - - - - - - - - + Other Non-Op (Income) Loss 33.00 81.00 156.00 104.00 566.00 324.00 226.00 812.00 1,108.00 232.00 461.00
(+) (=) Pretax Income (Loss), Adjusted 8,947.00 12,066.00 18,540.00 34,205.00 55,763.00 50,155.00 53,688.00 72,606.00 60,911.00 63,350.00 72,647.00 - Abnormal Losses (Gains) - - - - - - 205.00 91.00 (461.00) (739.00) (256.00) + Impairment of Goodwill - - - - - - - - - - - + Legal Settlement - - - - - - - - - - (236.00) + Unrealized Investments - - - - - - 205.00 91.00 87.00 (99.00) (20.00) + Other Abnormal Items - - - - - - - - (548.00) (640.00) — (+) (=) Pretax Income (Loss), GAAP 8,947.00 12,066.00 18,540.00 34,205.00 55,763.00 50,155.00 53,483.00 72,515.00 61,372.00 64,089.00 72,903.00 - Income Tax Expense (Benefit) 2,828.00 3,831.00 4,527.00 8,283.00 14,030.00 13,118.00 13,973.00 19,121.00 15,685.00 15,738.00 13,372.00 + Current Income Tax - 2,791.00 3,087.00 5,415.00 9,625.00 11,977.00 11,626.00 17,739.00 10,747.00 9,772.00 45,962.00 + Deferred Income Tax - 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) (+) (=) 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 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 - Minority Interest - - - - - - - - - - - (+) (=) Net Income, 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 - Preferred Dividends - - - - - - - - - - - - Other Adjustments - - - - - - - - - - - (=) 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
44
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 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 from Operating Activities + Net Income 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 + Depreciation & Amortization 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 + Non-Cash Items 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
+ Stock-Based Compensation 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 + Deferred Income Taxes 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) + Other Non-Cash Adj 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
+ Chg in Non-Cash Work Cap 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) + (Inc) Dec in Accts Receiv (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) + (Inc) Dec in Inventories (163.00) 54.00 (596.00) 275.00 (15.00) (973.00) (76.00) (238.00) 217.00 (2,723.00) 828.00 + Inc (Dec) in Accts Payable 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 + Inc (Dec) in Other 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)
+ Net Cash From Disc Ops - - - - - - - - - - - (=) 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 + Change in Fixed & Intang (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)
+ Disp in Fixed & Intang - - - - - - - - - - - + Disp of Fixed Prod Assets - - - - - - - - - - - + Disp of Intangible Assets - - - - - - - - - - - + Acq of Fixed & Intang (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) + Acq of Fixed Prod Assets - (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) + Acq of Intangible Assets - (69.00) (116.00) (3,192.00) (1,107.00) (911.00) (242.00) (241.00) - - -
+ Net Change in LT Investment (38.00) - - - - - - - - - - + Dec in LT Investment - - - - - - - - - - - + Inc in LT Investment (38.00) - - - - - - - - - -
+ Net Cash From Acq & Div - - (638.00) (244.00) (350.00) (496.00) (3,765.00) (343.00) (297.00) (329.00) (721.00) + Cash from Divestitures - - - - - - - - - - - + Cash for Acq of Subs - - (638.00) (244.00) (350.00) (496.00) (3,765.00) (343.00) (297.00) (329.00) (721.00) + Cash for JVs - - - - - - - - - - -
+ Other Investing Activities (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 + Net Cash From Disc Ops - - - - - - - - - - - (=) 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
45
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 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 from Financing Activities + Dividends Paid - - - - (2,488.00) (10,564.00) (11,126.00) (11,561.00) (12,150.00) (12,769.00) (13,712.00) + Cash From (Repayment) Debt - - - - - 16,896.00 18,266.00 29,305.00 22,057.00 29,014.00 432.00
+ Cash From (Repay) ST Debt - - - - - - 6,306.00 2,191.00 (397.00) 3,852.00 (37.00) + Cash From LT Debt - - - - - 16,896.00 11,960.00 27,114.00 24,954.00 28,662.00 6,969.00 + Repayments of LT Debt - - - - - - - - (2,500.00) (3,500.00) (6,500.00)
+ Cash (Repurchase) of Equity 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) + Increase in Capital Stock 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 + Decrease in Capital Stock - - - - - (22,860.00) (45,000.00) (35,253.00) (29,722.00) (32,900.00) (72,738.00)
+ Other Financing Activities - (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) + Net Cash From Disc Ops - - - - - - - - - - - (=) 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
- Abstract
- Table of Contents
- List of Tables
- List of Figures
- 1. Introduction
- 2. Literature Review
- 3. Data
- 3.1. Free cash flow to firm
- 3.1.1. Earnings before interest and debt
- 3.1.2. Depreciation and amortization
- 3.1.3. Capital expenditures
- 3.1.4. Effective tax rate
- 3.1.5. Change in net working capital
- 3.2. Weighted average cost of capital
- 3.2.1. Cost of equity
- 3.2.2. Cost of debt
- 3.3. Perpetuity growth rate
- 3.4. Terminal value
- 3.5. Enterprise value and equity value
- 4. Methodology
- 4.1. Discounted cash flow model
- 4.1.1. Step 1: Forecasting cash flows
- 4.1.1.1. Sales revenues growth trend
- 4.1.1.2. Gross profit margin and EBIT margin
- 4.1.1.3. Capital expenditures to depreciation and amortization ratio
- 4.1.1.4. Effective tax rate
- 4.1.1.5. Working capital calculation
- 4.1.2. Step 2: Free cash flow to firm
- 4.1.2.1. The weighted average cost of capital
- 4.1.2.2. Terminal value
- 4.1.3. Step 3: Discounted cash flows
- 4.1.3.1. Enterprise value and equity value
- 4.2. Sensitivity Analysis
- 4.2.1. Internal justification
- 4.2.2. External justification
- 5. Results
- 5.1. Preliminary fundamental analysis
- 5.2. Forecasting cash flows
- 5.3. The discounted cash flow model
- 5.4. Sensitivity analysis
- 6. Conclusion
- 7. References
- 8. Abbreviations and acronyms
- 9. Appendix