First Cut Stock Study Report Company Name: Apple Inc. Ticker: AAPL Date of Study: 2/8/2016 Price: $ 94.02 Your Name: Email address: Ann Cuneaz annc@betterinvesting.org City: Madison Heights State: MI Chapter Name (if applicable): BetterInvesting Staff My investment club owns Apple stock, and I am the stock watcher for AAPL. This report summarizes my annual review of the stock and the recommended changes to the club SSG for Apple. Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt. AAPL has had a decade of phenomenal growth, largely due to the successful launch of the iphone in 2007. Profit margins are fairly stable around 31%. Return on equity is high and trending up. After years of carrying no debt, Apple has taken on a manageable level of debt over the past few years. The interest coverage is over 80, so it does not appear that the debt is a financial burden to Apple. Briefly describe how the company makes money: Apple makes and sells iphone smartphones (66% of 2015 revenue), ipad tablet devices (10% of revenue), Mac computers (11% of revenues), services, including itunes, App store, Apple Pay (8.5% of revenues) and other products such as Apple Watch, Apple TV, accessories (4% of revenue). Projected growth rate for sales: 6% Why did you select this rate? Discuss from where future growth will come. The club's original forecast for sales growth was 9%. Compared to the historical growth, 9% seems like a conservative forecast for sales. But Apple's biggest growth driver since 2007, the iphone, is now facing challenges from competition and a general smart phone market that is maturing. There is no new blockbuster product from Apple, and there is nothing extremely compelling in the known pipeline. Apple Watch sales are OK, but not great. Investors are waiting to see what "the next big thing" Apple has in the works.
Recent growth is slow - only up 1.7% in the most recent quarter (ended 12/26/15). Apple indicated they expect sales to be about 10% less in the next quarter as compared to the year ago quarter. Analysts (as reported on finance.yahoo.com) are expecting revenues to be lower by 2.7% in FY 2016 and then rising to 6.2% in FY 2017. The Morningstar analyst writing the premium stock analysis is forecasting 3% sales growth for Apple over the long-term. Considering all of this data it seems that 9% may end up being a very aggressive forecast for sales. Making a growth forecast for Apple has become difficult due to the lack of clarity regarding where future growth will come from. Apple is a gigantic company with nearly $235B in sales over the past 4 quarters. It appears that future growth may be in a range more consistent with that of a very large company, from 5% to 7%. My recommendation is to reduce the forecast sales growth to 6%. Projected growth rate for earnings per share: 7% Why did you select this rate? The club's original forecast for EPS growth was 9%. If sales growth is slowing then the general expectation would be for EPS growth to do the same. Of course, if profit margins are rising and/or shares of stock are being repurchased by the company, then EPS can grow faster than sales. It is my opinion that the current PTPM of 31% may be the high water mark for Apple. The strength of the Apple ecosystem helps the company maintain their high prices and their current user base, but competition from Samsung and others of what ultimately are "commodity-type" products (smart phones, tablets, computers) will pressure future margins. In addition, the Research and Development (R&D) dollars being spent to develop future products will weigh on profitably. Morningstar is forecasting operating margins of mid to high 20s, compared to Apple's recent operating profit of 30.5%. Apple has been aggressively buying back stock, and they indicate their intent to continue to do so. Since 2012, Apple has bought back about 1 billion shares of stock. I made the following judgments in the Preferred Procedure calculator. Sales growth 6% Pre-tax profit margin 29% (reduced from the 5-year average of 31.4%) Tax rate 26.4% (default value from last fiscal year) Number of shares 5,000 M (down from current value of 5,600 M) This results in a 7.3% EPS growth rate. I rounded that down to 7%, which is my recommendation for EPS growth. Projected High P/E: 14 Why did you select this value?
Previously this was 16 on the club SSG. Slowing growth often is reflected in lower P/E ratios. Since I have projected future growth at a slower rate than the previously selected growth rates, I recommend adjusting the future average high P/E to 14, lower than the previously selected value. Projected Low P/E: 9 Why did you select this value? This was the low P/E on the current club SSG. I still think this is still a reasonable average low P/E over the next 5 years. Projected Low Price: $81.00 Why did you select this value? We generally use 4B(a) (Average low P/E times Low EPS) as the projected low price. It has been noted that the analyst community is generally expecting lower EPS in the next fiscal year, so the low EPS figure is adusted downward to $9.00 to refelect this lower value. The $81 forecasted low price is a little bit closer to the current price of $94 than I would prefer, but I'm OK with leaving it. At the current price, the stock is a (check one): Buy or Hold or Sell At the current price, the upside-downside ratio is: 7.0 to 1 Compound Annual Return Using Forecast High P/E: 16.3% Your final recommendation (check one): Explain: Buy or Hold or Sell The outlook has gotten murkier for Apple in the most recent quarters. They are facing a number of challenges, and it is not apparent how things will play out. Based on the historical performance of the company one might assume that Apple will figure it out in the end, and get back on track. On the other hand, one could look at the current situation as Tim Cook's first big challenge. One could argue that until now, Cook has been managing the initiatives that Steve Jobs put into place. Now that Steve Jobs is gone, does Apple still have the vision to continue to grow? That is the question I have. At this point we own plenty of Apple in our club and do not need to add to this position. Further, I would be open to replacing this company with one that may show more promise of future growth. While we look for a replacement, AAPL is paying us about 2.2% in dividend yield.
My final recommendation is always to do your own research, complete your own stock study and make sure you are comfortable with your forwardlooking projections before making any buy or sell decisions.
Stock Selection Guide Company Apple Date 02/05/16 Prepared by CUNEAZ Data taken from BI Stock Data Where traded NAS Industry Consumer Electronics Capitalization --- Outstanding Amounts Reference Preferred ($M) 0.0 % Insiders % Institution Common (M Shares) 5,594.1 0.2 66.8 Debt ($M) 62,963.0 % to Tot Cap 32.9 % Pot Dil 0.6 1 VISUAL ANALYSIS of Sales, Earnings, and Price Symbol: AAPL FY 2016 Q1 Latest Quarter Year Ago Quarter Percentage Change Sales ($M) 75,872 74,599 1.7% Earnings Per Share 3.28 3.06 7.1% (1) Historical Sales Growth 34.9% (3) Historical Earnings Per Share Growth 46.1% (2) Estimated Future Sales Growth 6.0% (4) Estimated Future Earnings Per Share Growth 7.0%
2 EVALUATING Management 5 5-YEAR POTENTIAL This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks. A Indicated Annual Dividend Closing Price 1.98 94.02 B AVERAGE YIELD - USING FORECAST HIGH P/E Avg. % Payout 25.0 % 1.8 % Forecast High PE 14.00 C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Annualized Appreciation Average Yield Annualized Rate of Return 14.5 % 1.8 % 16.3 % 0.0221 2.2 % Current Yield AVERAGE YIELD - USING FORECAST AVERAGE P/E Avg. % Payout 25.0 % 2.2 % Forecast Average PE 11.50 COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation Average Yield Annualized Rate of Return 10.1 % 2.2 % 12.2 % Apple 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Last 5 Year Avg. Pre-tax Profit on Sales 14.6% 20.9% 21.2% 28.1% 28.4% 31.6% 35.6% 29.3% 29.3% 31.0% 31.4% % Earned on Equity 20.8% 25.6% 22.6% 25.8% 29.0% 33.6% 37.1% 29.0% 31.3% 40.9% 34.4% % Debt To Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.1% 24.0% 35.1% 14.2% 3 PRICE-EARNINGS HISTORY as an indicator of the future This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices. CLOSING PRICE 94.02 (02/05/16) HIGH THIS YEAR 134.54 LOW THIS YEAR 92.00 A B C D E F G H Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * 100 2011 60.4 39.7 3.95 15.3 10.0 0.00 0.0 0.0 2012 100.7 50.6 6.31 16.0 8.0 0.38 6.0 0.7 2013 96.3 55.0 5.68 17.0 9.7 1.63 28.7 3.0 2014 103.7 68.3 6.45 16.1 10.6 1.81 28.1 2.7 2015 134.5 92.0 9.22 14.6 10.0 1.98 21.5 2.2 AVERAGE 61.1 15.8 9.7 16.8 CURRENT/TTM 9.42 2.08 22.1 AVERAGE PRICE EARNINGS RATIO 12.7 CURRENT PRICE EARNINGS RATIO 10.0 4 EVALUATING RISK and REWARD over the next 5 years Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward. A HIGH PRICE - NEXT 5 YEARS Avg. High P/E 14.0 X Estimate High Earnings/Share 13.21 Forecasted High Price $ 184.9 B LOW PRICE - NEXT 5 YEARS (a) Avg. Low P/E (b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support 9.0 X Estimate Low Earnings/Share 9.00 Forecasted Low Price $ 81.0 61.1 68.3 Indicated Dividend High Yield Selected Forecasted Low Price $ 81.0 C ZONING using 25%-50%-25% Forecasted High Price 184.9 Minus Forecasted Low Price 81.0 103.9 Range. 25% of Range 26.0 Buy Zone Hold Zone Sell Zone 1.98 2.96% 81.0 to 107.0 107.0 to 158.9 158.9 to 184.9 Present Market Price of 94.02 is in the BUY Zone D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price 184.9 Minus Present Price 94.02 Present Price 94.02 Minus Low Price 81.0 66.9 90.85 13.02 7.0 To 1 E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price Closing Price 184.9 94.02 1.9663 X 100 196.63-100 96.6 % Appreciation