Equity Report – Apple Inc.

Date: 29/12/17 Current Price: $172 Target Price: $118 (-31%)

Ticker: AAPL Market Cap.: €880B Recommendation: Sell

FIGURE 1 – MARKET PROFILE Business Description

Market Profile Apple Inc. is an American technology company, offering different products
and services such as Mac computers, iPhones, Apple Pay, iTunes and iOS. In
Closing Price ($) 172
the last decade, the iPhone has been its key product, accounting for 70% of
52 Week H/L ($) 115/177 the total revenue in 2015. Apple was founded in 1976 and went public at $22
Average Volume (3M) 26,06Mn per share on December 12, 1980. Today, it is the largest technology company
Shares Outstanding 5,13Bn by revenue, and the world’s third-largest mobile phone manufacturer. Apple
has a market capitalization of $880 billion, making it the largest publicly
Free Float 38%
traded corporation in the world. The company’s competitive advantages,
P/BV 6,56x including its brand name and a “lock-in” strategy based on developing both
P/E 18,62x complementary hardware and software, allow it to sustain ROC levels
EV/EBITDA 5,6x considerably above industry average levels (20% vs 10%). Revenues grew at
a CAGR of around 8% between 2013-2017 and now stand close to $230Bn.
SOURCE: YAHOO FINANCE
2017 2018F 2019F 2020F 2021F 2022F
FIGURE 2 – SHARE PRICE AND VALUE Revenues ($Bn) 229 245 261 279 297 317
Price Operating Margin 28% 29% 29% 29% 29% 29%
$180
$160 $171 Net Profit Margin 21% 21% 21% 21% 20% 20%
$140 Debt/EBIT 1.6x 1.8x 1.6x 1.6x 1.5x 1.3x
$120
$100 Interest Coverage 28x 19x 18x 20x 20x 22x
$80 Value
$117
FCFF ($Bn) 43 60 64 68 72 77
$60
$40 ROE 36% 33% 32% 27% 23% 21%
$20 ROC 20% 19% 20% 18% 17% 16%
$-
EVA ($Bn) 32 34 37 37 37 39
jan/14
jan/13
jul/13

jul/14
jan/15
jul/15
jan/16
jul/16
jan/17
jul/17

SOURCE: TEAM ANALYSIS

SOURCE: YAHOO FINANCE AND TEAM ANALYSIS
Investment Analysis
Our analysis suggests Apple is considerably overvalued at $171.8, the closing
FIGURE 3 – DCF VALUATION SCENARIOS price in the first day of trading. Therefore, we issue a sell recommendation for
Apple shares based on a DCF estimated share value of $117 supported by a
DCF Valuation Scenarios peer derived multiples valuation yielding a share value of $123. The main
Optimistic – 4% assumptions behind this valuation include (1) a stable operating margin near
excess returns, 3.9% $144 30% until 2022, closing in on the industry average margin in perpetuity, at
growth in perpetuity
9%, (2) the presence of perceived strong, sustainable competitive advantages
Base – 2% excess
returns, 2.9% growth $118 (namely brand name and an unique, integrated ecosystem) and considerable
in perpetuity barriers to entry (substantial investment in production facilities required)
Pessimistic – 0% which allow Apple to generate consistent excess returns of 2% in perpetuity,
excess returns, 1.9% $103 and (3) a growth rate in perpetuity of 2.9%, consistent with market implied
growth in perpetuity
nominal growth rate estimates for the economies Apple operates in.
SOURCE: TEAM ANALYSIS
Our optimistic scenario (figure 3), considering higher excess returns in
perpetuity and higher economic growth rates, yields an intrinsic value of
$144, which adds confidence to our sell recommendation.

Corporate Finance Department | www.fepfinanceclub.org

 P&L
FIGURE 4 – MULTIPLE VALUATION

Multiple Valuation ($Bn) 2017 2018F 2019F 2020F 2021F 2022F

EBIT 64 71 76 81 86 92
P/E 23,2x
Interest 2 4 4 4 4 4
P/B 3,1x EBT 61 68 72 77 81 87
EV/EBITDA 8,8x Effective tax rate 25% 26% 26% 26% 26% 26%
Tobin-Q 2,2x Tax 15 17 18 20 21 22
Net Income 46 51 54 58 61 65
Equity Value (Avg.) $634B
SOURCE: TEAM ANALYSIS
Share Value $123
SOURCE: TEAM ANALYSIS
Balance Sheet
FIGURE 5 – DCF VALUATION
($Bn) 2017 2018F 2019F 2020F 2021F 2022F
DCF Valuation (Base Scenario) Fixed Assets 42 45 49 54 58 63
Enterprise Value ($Bn) 507 Working
-19 -29 -40 -52 -64 -77
Capital
Cash ($Bn) 215
Non Operating
Firm Value ($Bn) 722 195 195 195 195 195 195
Assets
Debt ($Bn) 104 Cash 20 67 84 139 193 245
Equity 134 149 167 210 254 303
Equity Value ($Bn) 618
Debt 104 129 121 126 128 123
Shares Outstanding
5,217 SOURCE: TEAM ANALYSIS
(Bn)
Share Value ($) 118
SOURCE: TEAM ANALYSIS

Cash Flow Statement

FIGURE 6 – WACC
($Bn) 2017 2018F 2019F 2020F 2021F 2022F
WACC Net Income 48 50 54 58 61 65
Risk-free Rate 2,3% - ΔWC 0 -10 -11 -12 -12 -13
Country Risk - Δ FA 6 4 4 4 4 5
0,5%
Premium + Δ Debt 25 25 -7 5 0 -4
Beta 0,8 -Dividends/Buybacks 48 35 36 15 16 17
Equity Risk Premium 5,7% + Δ Equity (Issue) 5 0 0 0 0 0
+ Δ NOA 0 0 0 0 0 0
Cost of Equity 7,5%
= Δ Cash 24 47 17 55 53 53
Default Spread 0,8%
SOURCE: TEAM ANALYSIS
Cost of Debt 3,4%
WACC 7,0%
SOURCE: TEAM ANALYSIS

Corporate Finance Department | www.fepfinanceclub.org

Analysts Email LinkedIn
Nazarii Hrechanyk hrechanyk11@gmail.com https://www.linkedin.com/in/hrechanyk/
Hilde Roskam hjmroskam@gmail.com https://www.linkedin.com/in/hilde-
roskam-3827a8106/
Director Email LinkedIn
Miguel Guimarães migftg95@gmail.com www.linkedin.com/in/miguelftguimaraes

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