AVERMA03@GUELPHHUMBER.CA (647) 801-9174 ARJUN VERMA

BUY

DR. GEORGE BRAGUES

Client

APPLE INC.

SECURITY ANALYSIS REPORT

Investment Finance

November 30th, 2016

Table of Contents

A Brief Description – Company Business, Management & Strategy ........................... 3

Recent Events and Issues affecting Apple Inc. ............................................................... 4

Financial Ratios & Apple’s position within the Industry........................................... 4-5

Valuation and Importance of Financial Ratios Used..................................................... 6

Valuation Calculations .................................................................................................. 6-7

Recommendations and Insights ....................................................................................... 8

Appendix ....................................................................................................................... 9-12

Bibliography .................................................................................................................... 13

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Brief Description – Company Business, Management & Strategy

Headquartered in Cupertino, California, Apple is an international technology company that

designs, develops and retails consumer electronics, computers software and online services.

Apple Inc. is currently trading on the Nasdaq Stock Exchange (NSDQ: APPL) at $111.46 USD.1

Some of Apples hardware and software products, and online services include:

Hardware:

iPhone

iPad tablet

Mac personal

computer

iPod

Apple smart-watch

Software:

macOS

iOS

iTunes

Safari Web

Browser

iLife & iWork

Online Services

iTunes Store

iOS App Store

Mac App Store

Apple Music

iCloud & Apple

Pay

Three co-partners, Steve Jobs, Steve Wozniak and Ronald, founded Apple Inc. in April 1976 to

develop and retail personal computers. Apple was then established as Apple Computer, Inc. in

January 1977, and was renamed Apple Inc. in January 2007.2 This was primarily to reflect the

company’s emphasis and change of direction from only computers towards consumer electronics

and innovated technology. Apple was first listed on the Dow Jones Industrial Average in March

2015.

To date, Apple is recognized as the world’s largest technology company (by total assets and

sales), as well as the second-largest mobile phone manufacturer. In November 2014, Apple broke

all-time records. Apple became the first U.S Company to be valued at over US $700 Billion and

was acknowledged as the largest publicly traded corporation in the world by Market

Capitalization. This company employs over 115,000 employees as of July 2015 and is only

growing past 478 retail stores in seventeen countries as of March 2016.3 Staying true to their

core competencies and the strong drive to innovate, 2017 is expected to the record setting, as

Apple marks their 20th anniversary this January.

1 "AAPL : Summary For Apple Inc. - Yahoo Finance" 2016 2 "AAPL Profile | Apple Inc. Stock - Yahoo Finance" 2016 3 "AAPL Profile | Apple Inc. Stock - Yahoo Finance" 2016

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Recent Events and Issues affecting Apple Inc.

Political Risk

For any US based company looking to hire specialty workers from abroad, the H-1B visa was the

golden ticket. The H-B1 is a non-immigrant visa, and must be filed in order for foreign workers

to work in the US. With Donald Trump, now the President of the US and leader of the free

world, seems to be against immigration and does not want foreigners occupying US jobs.

Industries such as IT, finance, accounting, engineering, etc., are quite reliant on foreign specialty

workers as they will be the most affect if Trump stays true to his word.4 If the H-B1 visa were to

be revoked by the US government, Companies like Apple would experience a hard time finding

the right people for job openings. Ultimately, resulting in burden on their innovation and core

competencies.

Growing Beyond the iPhone

The outstanding growth of the Apple’s iPhone over the past decade is slowly coming to and end.

In April 2016, Apple published a report stating that the iPhone sales have dropped by 16%

compared to the previous year.5 This was the first ever year-over-year decline in iPhone sales.

Overall, the smartphone sells very well among the industry. This was specifically recognized in

China, where Apple was first in to opening up new markets back in 2014. When demand was

satisfied and people purchased iPhones, Apple’s revenue slowed down. Historical events and

market data prove that all products go through a lifecycle of birth, growth, and decline, hence

always pushing Apple to innovate with the highest regard and maximum potential.

Financial Ratios & Apples position within the Industry

It is crucial to categorize, examine and understand financial ratios to officially provide clear

insights of how a stock of a company is performing. Financial ratio measure many aspects of a

company including: Finance strength, liquidity, solvency and profitability, how efficient a

company is and even how effective management is. The following are key ratios used to evaluate

Apple Inc. in relation to the industry:

Current Ratio Debt-Equity Inventory

Turnover

Return on

Equity

Net Profit

Margin

Apple 1.35 58.81% 6.22 days 36.9% 21.19%

Industry 1.87 55.76% 18.25 days 13.34% 15.00%

Source: Google Finance 6

4 "US H-1B Visa For Specialty Workers | Workpermit.Com" 2016 5 Green 2016 6 "${Instrument_Companyname} ${Instrument_Ric} Financials | Reuters.Com" 2016

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Debt-to-Equity (Long-term Debt/ Shareholder’s Equity)

The Debt-to-Equity Ratio is used to measure the Financial Leverage of a company and indicates

how much company debt is being used to finance the assets of the company in relation to

Shareholder’s equity. In relation to the industry, Apple has a slightly higher Debt-to-Equity

Ratio. This suggests that Apple Inc. is taking advantage of increased profits; however does not

satisfy long-term debt obligations in relation to the industry.

Inventory Turnover (Revenue/ Inventory)

The Inventory Turnover ratio is used to measure a company’s efficiency. It is precisely measure

how fast a company is selling its total average inventory, in a given 365 day calendar year, and is

generally compared against the industry. The chart above suggests the Apple’s inventory

turnover is almost 3 times lower than the industry average. Now, this can be both, a good and a

bad thing for Apple. On one hand, this suggests that there is a larger demand for Apple products

and consumers are willing to pay a higher price for their product; hence high profit margins. On

the other hand, one may also interpret this as Apple not taking complete advantage of this

demand, hence, missing out on potential sales and not performing at their highest potential.

Overall, I think this is a strategic move for Apple, which continues to leave consumers thirsty for

their product as well as minimize Apple’s inventory holding costs.

Return on Equity (Net Profit/ Shareholder’s Equity)

It is crucial of maximize shareholder wealth. The Return on Equity (ROE) is a profitability

measure of a company shown through how much profit a company generates in relation to

money invested. The ROE of the industry is at 13.34% which is considered very well. However,

Apple nearly triples this and is considered superior in the industry. Apple’s ROE is significantly

high and rising, which suggest that that every dollar invested in this company is being used very

efficiently.

Net Profit Margin (Net Profit/ Revenue)

Net Profit Margin is simply the amount of profit, after all expenses including interest, taxes, and

depreciation generated by the company as a percentage of the Revenues generated. Apple’s Net

Profit margin is more than 6% higher in relation to the industry at 21.19%. This suggests that

Apple has a net income of $0.2119 for each dollar earned.

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Valuation and Importance of Financial Ratios Used

The technology industry is the fastest growing industry in the world! Here are the key multiples

used to value Apple’s stock price:

Current Stock Price = $111.467

Earnings per Share (EPS) = $8.31

Revenue per Share = $39.42

Book value per Share = $24.03

Ratios

Ratios Apple Industry Apple 5yr Avg.

P/E 13.5 15.43 13.42

P/S 2.8 2.4 3.11

P/B 4.65 3.04 4.625

Source: Toronto Dominion Bank (TD Waterhouse 2016) [Appendix]

Source: Google Finance8

Source: Y-charts for Industry Ratios9

Price to Earnings Ratio (P/E)

The P/E ratio suggests how much money an investor is willing to invest for each dollar return. In

the chart above, Apple’s current P/E ratio (13.5) is higher in relation to the industry and also in

relation to its historical 5-year average. Generally, a higher P/E ratio recommends an investor to

pay more for a company’s stock today, due to the potential that the company will over-perform

and produce higher growth in the future (You pay for what you get). However, a relatively lower

P/E ratio may advocate one assume that a company will underperform, in relation to its

competitors, industry and historical performance.

7 "AAPL : Summary For Apple Inc. - Yahoo Finance" 2016 8 "Apple Inc.: NASDAQ:AAPL Quotes & News – Google Finance" 2016 9 "Apple PS Ratio (TTM) (AAPL)" 2016

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Price to Sales Ratio (P/S)

Price to sales (P/S) is a financial ratio, which compares a company’s stock price with its

revenues. In the above chart, we can see that Apple’s current P/S ratio higher than the industry

average, but slightly lower than its previous 5-year historical performance. This can be both

good, and bad. Because the P/S of Apple has dropped slightly, this may indicate that Apple’s

stock price is possible undervalued, while in relation to the industry, the figures suggest that

Apple’s stock price is slightly overvalued. Although an important financial ratio and while there

still exist many other factors to consider, one should not consider a stock investment based solely

on the P/S ratio.

Price to Book Ratio (P/B)

The Price to book (P/B) is a financial ratio used to compare a company’s current market price to

its book value. This ratio signifies the market value for each dollar of tangible assets. In the chart

above, Apple’s current P/B is at 4.65, in other words, for every $1 of tangible assets (Real

goods), there is $4.65 of market value. Since Apple’s P/B is higher than the industry and 5-year

historical average, this suggests that investors have higher performance expectations for the

company in relation to the industry and its previous average 5-year performance. Overall,

Apple’s P/B ratio is fairly high and attractive to many investors.

Valuation Calculations

Ratios Industry Multiples Total

P/E 15.43 8.31 128.2233

P/S 2.4 39.42 94.608

TOTAL 222.8313

Suggested Stock Price 111.41565

Ratios 5 Yr. Average Multiples Total

P/E 13.42 8.31 111.5202

P/S 3.11 39.42 122.5962

TOTAL 234.1164

Suggested Stock Price 117.0582

Industry Stock Price 111.41565

5 Yr. Avg. Stock Price 117.0582

TOTAL 228.47385

FINAL Stock Price 114.236925

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Recommendations and Insights

I used 2 financial ratios to value Apple’s stock price. I used both, the P/E and P/S ratio, and

compared them each to the industry and Apple’s 5-year historical average. Apple’s current stock

price seems to be under-valued when compared only to the P/E ratio of the industry ($128.22)

and its P/S ratio of the 5-year average ($122.60). However, when compared the P/S ratio of the

industry ($94.60), Apple seems to be over-valued.

To precisely determine that stock price, I took the averages of both:

1. The industry P/E and P/S ratios ($111.41), and;

2. The 5-year average P/E and P/S ratios ($117.06)

With that, I was able to determine the Final Stock Price for Apple ($114.27) given all the

information.

Calculating the Multiple = Expected stock Price / Current Stock Price

= $114.27 / $111.46

= 1.02521

Based on my analysis, Apple is currently under-valued by 1.0252%.

I believe it was important to look at both ways to measure a company, with the industry and

itself – historically. Solely comparing Apple to the industry would devalue the stock price. Apple

is a distinguished and well-established company, which brings a unique selling proposition to its

industry. Apple has also created such brand loyalty through its innovation in technology.

Growing faster than any other competitor in the fastest growing industry, Apple’s bottom line

figures are only getting bigger. Hence, this is my rationale as to why I took both approaches to

value Apple’s stock price. Overall, it is safe to say that one can expect above-average returns

with an investment in Apple’s stock right now. I strongly suggest buying Apple stock.

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Appendix

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Toronto Dominion Bank (TD Waterhouse 2016)

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Toronto Dominion Bank (TD Waterhouse 2016)

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Toronto Dominion Bank (TD Waterhouse 2016)

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Bibliography

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"AAPL Profile | Apple Inc. Stock - Yahoo Finance". 2016. Finance.Yahoo.Com.

http://finance.yahoo.com/quote/AAPL/profile?p=AAPL.

"US H-1B Visa For Specialty Workers | Workpermit.Com". 2016. Workpermit.Com.

http://www.workpermit.com/immigration/usa/us-h-1b-visa-specialty-workers.

Green, Timothy. 2016. "Apple's Problems Could Get Much Worse -- The Motley Fool". The

Motley Fool. http://www.fool.com/investing/general/2016/05/09/apples-problems-could-get-

much-worse.aspx.

"${Instrument_Companyname} ${Instrument_Ric} Financials | Reuters.Com".

2016.Reuters. http://www.reuters.com/finance/stocks/financialHighlights?rpc=66&symbol=AAP

L.O.

"Apple Inc.: NASDAQ:AAPL Quotes & News – Google Finance".

2016. Google.Ca.https://www.google.ca/finance?q=NASDAQ%3AAAPL&hl=en&gl=ca&ei=Jh

0_WMmdGIWO2Aah8ouYCQ

"Apple PS Ratio (TTM) (AAPL)".

2016. Ycharts.Com.https://ycharts.com/companies/AAPL/ps_ratio.