Biting Into The Future: Apple

1. Biting Into The Future: Apple Kristen Bachteler April 23, 2014 Modules 12 : Reformulation Module 13: Full-Information Forecasting & Valuation

2. Agenda Review of Past Modules Module 12 Measures Common Size Income Statement Common Size Balance Sheet Module 13 Forecast of Sales Forecast of EPM Forecast of EATO Assumptions Valuations Adjustments Recommendation Apple is everywhere! Just this past fall, Apple set up shop in the Hammes Bookstore!

3. “Everyone here has the sense right now is one of those moments when we are influencing the future.” -Steve Jobs, 1985

4. Comparing Apples & Oranges An Incomparable Industry Analysis

5. Catalog & Mail Order Houses Industry • Founded: 1498 • Aldus Manutius: Italian humanist, printer & publisher • Comprised of companies that sell products through “non-store” channels, including catalogs, online sales, television, and radio • Products and services are delivered through the mail • Act as the “middle-man” in sales transactions • Low amounts of inventory

6. Getting to the Core • Module 1: Apple & other players in industry are not comparable • Amazon, eBay, & Barnes & Noble • Module 2: Apple is a cash cow • “Fun Number: Apple Has Twice as Much Cash as the US Government” Forbes, April 13, 2014 • Apple: $160 billion; Microsoft: $85 billion; US Gov.: $49 billion • April 2013: $17 billion debt offering • First bond offering in almost 20 years (WSJ, April 30,2013) • Module 4: Forecasting Difficulties • Difficult to forecast sales for Apple as they swing tremendously with the release of new products • 2011: 66% growth; 2012: 45% growth; 2013: 9% growth • Apple reorganized their operating segments & how they breakdown products in the 2013 10-K

7. Reformulation Revisited & More Complete Analysis Module 12

8. Reformulation • Reformulated with additional line items from Module 10 and adjustments in Module 11 • Apple’s financials didn’t give as much detail as had hoped • Able to adjust for operating leases & stock-compensation

9. Common Size Income Statement & EPM

10. Common Size Balance Sheet & EATO (Part I)

11. Common Size Balance Sheet & EATO (Part II)

12. Full-Information Forecasting & Valuation Module 13

13. Forecasting Sales Two issues that arose while forecasting Apple’s sales: (1) Apple’s sales are highly unpredictable as tied to the release of new products (2) They changed how they organize their operating segments & products in their financial statements

14. Forecasting EPM

15. Forecasting EATO (Part I)

16. Forecasting EATO (Part II)

17. Assumptions

18. Discounted Cash Flow Model

19. Residual Enterprise Income Model

20. Abnormal Enterprise Income Growth Model

21. Adjustments

22. Results of Valuation • Apple’s currently listed market capitalization is $474.27 B • My valuation before adjustments: $470.36 B • After adjustments, $527.35 B & $410 B value of equity • My per share price (with adjustments): $460.35 • Closing price on December 31, 2013: $557.68 • Yesterday’s (April 22, 2014) closing price: $531.17 • As mine is lower, it would suggest sell • But really? Yahoo! Finance suggests below

23. Apple’s FY 2014 Q2 Call is Today at 2PM • Apple’s Q1 2014 $57.6 billion was a quarterly record • But profits equal to $13.1 billion, last year’s quarterly record, indicating shrinking profit margins • Q1 (October – December) is usually its best quarter • January 27, the day before Conference Call: $550.07 • The next day, January 28, dropped to $508.76 • Dropped but been rising since the dividend on Feb. 6 • Up & down throughout the past month’s but increasing in past few days & currently $528.31 • Analyst focus on growth is on iPhones

24. My Recommendation: