AAPL. Apple Inc. Sector: Information Technology HOLD. Analysts: Alexander Anguiano, Applied Portfolio Management. Bryan Lunzmann and Sam Olberding

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1 AAPL Analysts: Alexander Anguiano, Applied Portfolio Management Bryan Lunzmann and Sam Olberding Apple Inc. Sector: Information Technology HOLD Report Date: 4/4/215 Market Cap (mm) $671,725 Annual Dividend $ Yr Beta (S&P 5 Index).77 Return on Capital 179.8% Dividend Yield 1.7% Annualized Alpha 4. Compared With: EPS (ttm) $7.44 Price/Earnings (ttm) 14.8 Institutional Ownership 5.7% Google Inc. Current Price $11.38 Economic Value-Added (ttm) $37,161 Short Interest (% of Shares) 1. Hewlett-Packard Company 12-mo. Target Price $14. Free Cash Flow Margin 27.3% Days to Cover Short 1.1 and the S&P 5 Index Business Description Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iphone, a line of smartphones that comprise a phone, music player, and Internet device; ipad, a line of multi-purpose tablets; Mac, a line of desktop and portable personal computers; and ipod, a line of portable digital music and media players, such as ipod touch, ipod nano, and ipod shuffle. The company also provides itunes AAPL GOOGL HPQ Investment Thesis After examining the macro-environment we conclude that the economy is in full expansion. When the original investment thesis was formed the technology sector was underweighted in the portfolio, whereas it is now the most overweighted sector in our portfolio. The inital thesis was correct regarding Apple's strong competitive advantage shown by their large ROIC-WACC spread. Metrics such as EBIT & NOPAT growing at slower rates than Revenues give us cause for concern, although they are still able to flow revenue dollars to the bottom line as evidenced by their continued growth in FCF. After a conservative forecast, we have concluded that Apple is slighty undervalued. We recommend a hold. ANNUALIZED 3-YEAR CAGR Total Revenue 19.1% Free Cash Flow 14.6% EBIT 15.8% Total Invested Capital 26.6% NOPAT 14.8% Total Assets 25.8% Earnings Per Share 17.5% Economic Value-Added 14.4% Dividends Per Share N/A Market Value-Added 23.5% AAPL ^SPX ROA ROE ROIC Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield % 31.2% 35.3% 28.7% 28.7% 25.3% 27.8% 26.5% 26.1% 27.3% 4.8% 6.9% 8.4% 7.1% 5.9%...5% % $5, EBIT Net Operating Profit After Tax Per Share Metrics Earnings Dividends NOPAT Free Cash Flow $45, $35, $25, $15, $5, Economic Value-Added Market Valued-Added $6, $5, $4, $3, $2, Price/Earnings Price/Free Cash Flow Datasource: Capital IQ

2 AAPL Apple Inc. Sector Information Technology Average Manual 215E 216E 217E 218E 219E Total Revenue 42,95 65,225 18, ,58 17,91 182, % N/A 217, , ,14 238, ,616 Cost of Goods Sold 25,683 39,541 64,431 87,846 16,66 112,258 Gross Profit 17,222 25,684 43,818 68,662 64,34 7, ,835 88,229 9,875 93,147 95,1 SG&A Expense 4,149 5,517 7,599 1,4 1,83 11,993 R&D Expense 1,333 1,782 2,429 3,381 4,475 6,41 Dep. & Amort. Other Oper. Exp. 31,165 46,84 74,459 11, ,911 13,292 Operating Income 11,74 18,385 33,79 55,241 48,999 52,53 3.4% N/A 61,995 63,344 62,914 63,292 63,34 Interest Expense (136) (384) Other Non-Oper. Exp. (81) (156) (14) (566) (324) (226) EBT ex-unusuals 12,66 18,54 34,25 55,763 5,155 53,688 Total Unusual Exp. (25) Earnings Before Tax 12,66 18,54 34,25 55,763 5,155 53,483 Income Tax Expense 3,831 4,527 8,283 14,3 13,118 13,973 Net Income 8,235 14,13 25,922 41,733 37,37 39, % 21.2% 46,116 47,96 49,399 5,634 51,647 Basic EPS Total Common Shares 6,251 6,366 6,47 6,544 6,477 6,86 -.5% N/A 5,781 5,55 5,384 5,276 5,276 Dividends Per Share N/A Historical Growth and Margins Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values Average Manual 215E 216E 217E 218E 219E 1. Revenue Growth % 9.2% % % Gross Margin 39.4% 4.5% 43.9% 37.6% 38.6% Operating Margin 28.2% 31.2% 35.3% 28.7% 28.7% 3.4% 28.5% % Net Margin 21.5% 23.9% 26.7% 21.7% 21.6% 23.1% 21.2% 5. Common Shares Growth 1.8% 1.6% 1.1% % Dividend Growth % % 3.5% % Total Revenue 2. Gross Profit 3. Operating Income $25, $2, $15, $5, $8, $8, 4. Net Income 5. Total Common Shares 6. Dividends Per Share $5, 8, 6, 4, 2, $3. $2. $1.. AAPL Analysis Analysts: Alexander Anguiamo, Bryan Lunzmann and Sam Olberding

3 AAPL Apple Inc. Sector Information Technology ASSETS Average Manual 215E 216E 217E 218E 219E Cash and Equivalents 5,263 11,261 9,815 1,746 14,259 13, % 7.5% 16,314 16,967 17,476 17,913 18,271 Short-Term Investments 18,21 14,359 16,137 18,383 26,287 11,233 Total Cash & ST Invest. 23,464 25,62 25,952 29,129 4,59 25,158 Total Receivables 5,57 9,924 11,717 18,692 2,641 27, N/A 28,257 29,387 3,268 31,25 31,646 Inventory 455 1, ,764 2, N/A 2,184 2,272 2,34 2,398 2,446 Prepaid Expenses Total Current Assets 31,555 41,678 44,988 57,653 73,286 68, % N/A 81,572 83,74 85,5 85,982 86,484 Gross PPE 4,667 7,234 11,768 21,887 28,519 39,15 Accumulated Depr. (1,713) (2,466) (3,991) (6,435) (11,922) (18,391) Net PPE 2,954 4,768 7,777 15,452 16,597 2, % 12.5% 25,15 27,147 29,127 29,855 3,452 Long-Term Investments 1,528 25,391 55,618 92,122 16,215 13,162 Goodwill ,135 1,577 4,616 Total Assets 47,51 75, , ,64 27, 231, % N/A 278, ,95 37, , ,573 LIABILITIES AND EQUITY 8,221 15,656 19,461 27,924 3,794 42,224 Accounts Payable 5,61 12,15 14,632 21,175 22,367 3,196 Note: Forecasting Payables + Accruals together in row 19 below Accrued Expenses 2,62 3,641 4,829 6,749 8,427 12,28 2.2% ,33 42,983 44,273 45,379 46,287 Short-Term Debt 6,38 Total Current Liabilities 11,56 2,722 27,97 38,542 43,658 63, % 28. 6,97 63,344 65,244 66,875 68,212 Long-Term Debt 16,96 28, % N/A 47,856 54,295 6,584 66,875 24,362 Pension Benefits 16,96 35,295 Total Liabilities 15,861 27,392 39,756 57,854 83,451 12,292 Note: Forecasting ST Debt + LT Debt together in row 22 above Preferred Equity Common Stock & APIC 8,21 1,668 13,331 16,422 19,764 23,313 Retained Earnings 23,353 37,169 62,841 11,289 14,256 87,152 Treasury Stock Total Common Equity 31,64 47,791 76, ,21 123, ,547 Total Equity 31,64 47,791 76, ,21 123, , % N/A 13, ,212 13, , ,989 Total Liab. and Equity 47,51 75, , ,64 27, 231,839 Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values Average Manual 215E 216E 217E 218E 219E 1. Cash and Equivalents 17.3% 9.1% 6.9% 8.3% 7.6% 9.8% 7.5% 2. Total Receivables 15.2% 1.8% 11.9% 12.1% 14.9% Inventory 1.6%.7%.5% % Cash and Equivalents 2. Total Receivables 3. Inventory $15, $5, $2,5 $2, $1,5 $1, $5 AAPL Analysis. Datasource: CapitalIQ Balance Sheet Forecast, Page 3 of 14 Analysts: Alexander Anguiamo, Bryan Lunzmann and Sam Olberding

4 Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values Average Manual 215E 216E 217E 218E 219E 4. Total Current Assets 63.9% 41.6% 36.8% 42.9% 37.5% 44.5% 37.5% % % 5. Net PPE 7.3% 7.2% 9.9% 9.7% 11.3% 9.1% 12.5% 11.5% Total Assets 115.3% 17.5% 112.5% 121.1% 126.8% 116.6% Payables and Accruals % % 2.2% Total Current Liabilities 31.8% 25.8% 24.6% 25.5% 34.7% 28.5% Total Debt % 19.3% 5.8% Total Equity 73.3% 7.8% 75.5% 72.3% % Total Current Assets 5. Net PPE 6. Total Assets $8, $4, $3, $2, 7. Payables and Accruals 8. Total Current Liabilities 9. Total Debt $8, $8, 1. Total Equity $14, $12, $8, AAPL Analysis. Datasource: CapitalIQ Balance Sheet Forecast, Page 4 of 14 Analysts: Alexander Anguiamo, Bryan Lunzmann and Sam Olberding

5 AAPL Apple Inc. Sector Information Technology Report Date 4/4/ Historical Income Statement Highlights Forecasted Income Statement Highlights E 216E 217E 218E 219E Total Revenue 42,95 65,225 18, ,58 17,91 182, , , ,14 238, ,616 Gross Profit 17,222 25,684 43,818 68,662 64,34 7,537 84,835 88,229 9,875 93,147 95,1 Operating Income 11,74 18,385 33,79 55,241 48,999 52,53 61,995 63,344 62,914 63,292 63,34 Net Income 8,235 14,13 25,922 41,733 37,37 39,51 46,116 47,96 49,399 5,634 51,647 Retained Earnings 23,353 37,169 62,841 11,289 14,256 87, , , ,15 237,88 278,45 Total Common Shares 6,251 6,366 6,47 6,544 6,477 6,86 5,781 5,55 5,384 5,276 5,276 Total Diluted Shares 6,349 6,473 6,557 6,617 6,522 6,123 5,817 5,584 5,416 5,38 5,38 Earnings Per Share $1.32 $2.2 $4.1 $6.38 $5.72 $6.49 $7.98 $8.64 $9.18 $9.6 $9.79 Dividends Per Share $1.64 $1.82 $1.88 $1.95 $2.1 $2.6 $2.1 Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights E 216E 217E 218E 219E Cash and Equivalents 5,263 11,261 9,815 1,746 14,259 13,844 16,314 16,967 17,476 17,913 18,271 Total Receivables 5,57 9,924 11,717 18,692 2,641 27,219 28,257 29,387 3,268 31,25 31,646 Inventory 455 1, ,764 2,111 2,184 2,272 2,34 2,398 2,446 Total Current Assets 31,555 41,678 44,988 57,653 73,286 68,531 81,572 83,74 85,5 85,982 86,484 Net PPE 2,954 4,768 7,777 15,452 16,597 2,624 25,15 27,147 29,127 29,855 3,452 Total Assets 47,51 75, , ,64 27, 231, , ,95 37, , ,573 Payables and Accruals 8,221 15,656 19,461 27,924 3,794 42,224 41,33 42,983 44,273 45,379 46,287 Total Current Liabilities 11,56 2,722 27,97 38,542 43,658 63,448 6,97 63,344 65,244 66,875 68,212 Total Debt 16,96 35,295 47,856 54,295 6,584 66,875 24,362 Total Equity 31,64 47,791 76, ,21 123, ,547 13, ,212 13, , ,989 $3, $25, $2, $15, $5, Total Revenue $5, Net Income $12. $1. $8. $6. $4. $2.. Earnings Per Share Dividends Per Share $8, Total Current Assets Cash and Equivalents $35, $3, $25, $2, $15, $5, Total Assets Net PPE 16, 14, 12, 1, 8, 6, 4, 2, Total Equity Total Debt 8, 7, 6, 5, 4, 3, 2, 1, AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 14 Copyright Robert A. Weigand, Ph.D., 213

6 AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 6 of 14 Copyright Robert A. Weigand, Ph.D., 213

7 Margins E 216E 217E 218E 219E Gross Profit Margin 4.1% 39.4% 4.5% 43.9% 37.6% 38.6% Operating Profit Margin 27.4% 28.2% 31.2% 35.3% 28.7% 28.7% 28.5% % 26. Net Profit Margin 19.2% 21.5% 23.9% 26.7% 21.7% 21.6% 21.2% 21.2% 21.2% 21.2% 21.2% Free Cash Flow Margin 2.9% 12.4% 24.3% 21.9% 18.4% 21.7% % % 18.9% Gross Profit Margin Operating Profit Margin Net Profit Margin Free Cash Flow Margin % % 1 5% Liquidity and Debt E 216E 217E 218E 219E Days Sales Outstanding Inventory Turnover Total Debt to Equity % 31.6% 36.7% 41.4% 46.4% 5.9% 18.2% Total Debt to Assets N/A N/A N/A N/A 8.2% 15.2% 17.2% 18.5% 19.7% 21.2% 7.6% Days Sales Outstanding Inventory Turnover Total Debt to Equity Total Debt to Assets Profitability E 216E 217E 218E 219E Total Asset Turnover Equity Multiplier Return on Assets 17.3% 18.6% 22.3% 23.7% 17.9% % 16.3% 16.1% 16.1% 16.1% Return on Equity % 33.8% 35.3% % 35.3% 36.6% 37.9% 38.5% 38.5% Return on Capital 145.5% 122.5% % 161.1% 179.8% 15.4% 142.7% % 128.1% Total Asset Turnover Equity Multiplier % 4 35% 3 25% 2 15% 1 5% Return on Equity Return on Assets Return on Equity Return on Capital AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 7 of 14 Copyright Robert A. Weigand, Ph.D., 213

8 AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 8 of 14 Copyright Robert A. Weigand, Ph.D., 213

9 Capital, NOPAT & FCF E 216E 217E 218E 219E NOWC 2,554 6,58 2,847 2,35 5, ,425 5,642 5,812 5,957 6,76 Net Fixed Assets 2,954 4,768 7,777 15,452 16,597 2,624 25,15 27,147 29,127 29,855 3,452 Total Invested Capital 5,58 11,348 1,624 17,757 22,467 21,574 3,441 32,79 34,938 35,812 36,528 Effective Tax Rate 31.8% 24.4% 24.2% 25.2% 26.2% 26.1% (Tax rate from last historical year used in forecasts) NOPAT 8,13 13,896 25,67 41,342 36,183 38,786 45,798 46,794 46,477 46,757 46,792 Free Cash Flow N/A 8,56 26,331 34,29 31,473 39,679 36,931 44,446 44,328 45,883 46,76 NOPAT Per Share FCF/Share N/A Return on Capital 145.5% 122.5% % 161.1% 179.8% 15.4% 142.7% % 128.1% $35, $25, $15, $5, Total Invested Capital Net Fixed Assets $5, NOPAT Free Cash Flow $5, Economic Value-Added Market Valued-Added $9, $8, $7, $6, $5, $4, $3, $2, Intrinsic Value of FCFs Valuation Model Value Creation E 216E 217E 218E 219E Economic Value-Added 7,639 13,127 24,888 4,139 34,661 37,325 43,736 44,573 44,11 44,331 44,317 Market Valued-Added 156, , ,79 379, ,58 56, , ,74 773,22 784, ,277 PV of Future FCFs 751, ,64 821, , ,62 887,766 91, , , ,55 984,356 Value of Non-Oper. Assets 5,263 11,261 9,815 1,746 14,259 13,844 16,314 16,967 17,476 17,913 18,271 Total Intrinsic Firm Value 756,491 85, ,34 853, ,861 91,61 927,29 945,21 964, ,968 1,2,627 Intrinsic Value of Equity 756,491 85, ,34 853, ,91 866, ,434 89,916 93,69 916,93 978,265 Per Share Intrinsic Value $121.2 $126.5 $128.5 $13.46 $ $ $ $16.52 $ $ $ Year-End Stock Price $3.1 $46.8 $57.86 $76.2 $8.15 $11.38 $ Over (Under) Valuation/Sh ($9.91) ($8.42) ($7.64) ($54.44) ($53.54) ($31.98) % Over (Under) Valued % % -71.6% -66.8% -29. Cost of Capital 214 Weight % Cost Wgt Cost Equity Capitalization 671, % 6.6% Total Debt 35, % Preferred Stock... Value of All Securities 77,2 1. Effective Tax Rate 26.1% Long-Term Growth Rate: Risk-Free Rate 2.122% 2. 5-Yr Beta.82 Alternative Beta: Market Risk Premium 6. CAPM Cost of Equity 6.936% Weighted Average Cost of Capital: 6.774% $2 $15 $1 $5 Year-End Stock Price Per Share Intrinsic Value ($2) ($4) ($6) ($8) ($1) Over (Under) Valuation/Sh % Over (Under) Valued AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 9 of 14 Copyright Robert A. Weigand, Ph.D., 213

10 AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 14 Copyright Robert A. Weigand, Ph.D., 213

11 Relative Valuation E 216E 217E 218E 219E Stock Price/Intr. Value $3.1 $46.8 $57.86 $76.2 $8.15 $11.38 $ $16.52 $ $ $ Price to Earnings Price to Free Cash Flow N/A Price to Sales Price to Book Earnings Yield 4.4% 4.8% 6.9% 8.4% 7.1% 5.9% 5.2% 5.4% 5.5% 5.5% 5.3% Dividend Yield N/A N/A N/A.5% % 1.2% 1.2% 1.2% 1.2% 1.1% Free Cash Flow Yield N/A 2.7% % 6.1% 5.9% 4.2% % % Price to Earnings Price to Free Cash Flow Price to Sales Price to Book 9% 8% 7% 6% 5% 4% 3% 2% 1% Earnings Yield Dividend Yield Relative Valuation Pricing Model Adjust 215E Target Dividend Discount Valuation Model 215E Ratio Ratio Ratio Metric Price AAPL Apple Inc. April 4, 215 Expected Dividend Growth Rates Price to Earnings 19.1 $7.98 $ Annual Dividend 3.5% 3.5% % 2. Price to Free Cash Flow 23.8 $6.39 $ E 216E 217E 218E 219E Price to Sales 4. $37.63 $ $1.64 $1.82 $1.88 $1.95 $2.1 $2.6 $2.1 Price to Book 3.2 $48.16 $ Yr Div Growth 11. PV Dividends 1-4 $6.71 Dividend Yield 1.5% Estimated Target Prices vs. 215E 3-Yr Div Growth N/A PV Perpetual Div. $34.1 Current Price $ Yr Div Growth N/A Intrinsic Value $4.82 If Purchased For: $ PV of Free Cash Flows $ Risk-Free Rate 2.12% Current Price $ Expected Return = -19.3% -23.7% Dividend Discount Model $ Yr Beta.8 ($126.41) $1.88 $1.95 $2.1 $46.33 $44.27 Price to Earnings $ Market Premium 6. Analyst Notes: Price to Free Cash Flow $ Required Return 6.7% Based on a current dividend of $1.82, expected growth as shown above and an equity required Price to Sales $ Alternative Beta.77 return of 6.7%, AAPL is worth $4.82 per share, vs. a current price of $ Price to Book $ Estimated Target Prices vs. Current Price Compared With: Google Inc. Compared With: S&P 5 Index $16 Hewlett-Packard Company $14 $12 $1 $8 $6 $4 $2 Current Price PV of Free Cash Flows Dividend Discount Model Price to Earnings Price to Free Price to SalesPrice to Book Cash Flow AAPL GOOGL HPQ AAPL ^SPX AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 11 of 14 Copyright Robert A. Weigand, Ph.D., 213

12 AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 12 of 14 Copyright Robert A. Weigand, Ph.D., 213

13 Piotroski Financial Fitness Scorecard (1-point scale) E 216E 217E 218E 219E Positive Net Income Positive Free Cash Flow Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) % Change Shares Outstanding (Diluted) < Expanding Gross Margin Asset Turnover (% change sales > % change assets) 1 1 Total Liabilities to Operating Cash Flow (EBIT) < Piotroski Score Altman Probability of Bankruptcy Z-Score Weight E 216E 217E 218E 219E (Current Assets-Current Liabilities)/Total Assets Retained Earnings/Total Assets Earnings Before Interest & Tax/Total Assets Market Value Equity/Total Liabilities Sales/Total Assets Altman Score The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < Piotroski Financial Fitness Scorecard (1-pt scale) Altman Probability of Bankruptcy Z-Score AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 13 of 14 Copyright Robert A. Weigand, Ph.D., 213

14 AAPL Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 14 of 14 Copyright Robert A. Weigand, Ph.D., 213