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North America Equity Research February 24, 2012

US Equity Strategy FLASH


Too Early to Fade on AAPL. A Cyclical Sector unto Itself and Still Underowned
Portfolio Strategy
Thomas J. Lee, CFA AC (1-212) 622-6505 thomas.lee@jpmorgan.com Bloomberg JPMA TLEE<GO> J.P. Morgan Securities LLC Daniel M. McElligott (1-212) 622-5598 daniel.m.mcelligott@jpmorgan.com J.P. Morgan Securities LLC Katherine C. Khor (1-212) 622-0934 katherine.khor@jpmorgan.com J.P. Morgan Securities LLC

IT Hardware
Mark MoskowitzAC (1-415) 315-6704 mark.a.moskowitz@jpmorgan.com J.P. Morgan Securities LLC Anthony Luscri (1-415) 315-6702 anthony.s.luscri@jpmorgan.com J.P. Morgan Securities LLC Mike Kim (1-415) 315-6755 mike.j.kim@jpmorgan.com J.P. Morgan Securities LLC

See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


2

Overview: Given upturn in global growth, Cyclicals are leading


Cyclicals and Near-Cyclicals have been the leaders in the market over the past five months, outperforming as the macro environment has improved. Since early October, when the S&P 500 troughed at 1099, global growth prospects improved: (i) the US labor and housing markets have improved; (ii) the risk of a tail event in Europe has diminished; and (iii) China is moving to easing.
Note outperformance of Cyclicals below with 530bp since Octobers low and 330bp YTD. The best performing Sectors within this have been Financials and Technology.

Relative Price Performance of S&P 500 Sectors


% chg

Since October low


Absolute Rank Sector S&P 500 Cyclicals 1 2 3 4 Materials Industrials Technology Discretionary Near-Cyclicals Financials Energy Defensives HealthCare Staples Telecom Utilities Perf 23.9% 29.2% 32.2% 31.4% 26.6% 26.5% 30.8% 30.9% 30.7% 10.5% 16.7% 11.8% 7.6% 5.9% Relative Perf 5.3% 8.3% 7.5% 2.7% 2.6% 6.9% 7.0% 6.8% -13.4% -7.2% -12.2% -16.4% -18.0% Rank Sector S&P 500

2012 YTD
Absolute Perf 8.3% 11.6% 14.1% 12.2% 10.1% 9.7% 10.4% 13.4% 7.5% 0.0% 3.4% 0.7% -0.7% -3.4% Relative Perf 3.3% 5.8% 3.9% 1.8% 1.4% 2.1% 5.1% -0.9% -8.3% -4.9% -7.7% -9.1% -11.8%

1 2

Cyclicals and Near-Cyclicals have been the clear leaders since the October low, as macro conditions have strengthened over the past five months.

Cyclicals 1 2 3 4 Technology Materials Industrials Discretionary Near-Cyclicals Financials Energy Defensives HealthCare Staples Telecom Utilities

Technology and Financials have been the clear leaders YTD.

1 2

1 2 3 4

1 2 3 4

Source: J.P. Morgan and FactSet

Overview: Given upturn in global growth, Cyclicals are leading


Macro scenario for Europe, China, and US housing favor Cyclicals outperformance
Investors still need to re-allocate into equities, particularly Cyclicals and Financials. Consider the scenarios listed below. In each case, US equities are the consistently most attractive, and within US equities, there is a Cyclical bias. But this was not the positioning of investors at the end of 2011--then, risk aversion was so high, being Defensive was the consensus call.
European outlook has been stabilizing recently, with recent developments on Greece showing a more coordinated and

effective effort in the region to resolve the sovereign debt crisis.


Chinas monetary policy has shifted from containing inflation to selective easing in order to promote economic growth. The US Housing market likely bottomed in mid-2011, as evidenced by sharp improvement in housing starts and

homebuilder sentiment.
Macro Scenario Suggests Outperformance for Cyclicals
J.P. Morgan Strategy view on asset class and sectors to own under certain macro conditions

What asset class to own?


US Treasuries Gold Corp bonds Other fixed inc High-yield US equities Euro equities EM equities High-yield US equities Euro equities EM equities High-yield US equities Euro equities EM equities

What sector to own?


Cyclicals Near-Cyclicals (Energy/ Financials) Defensives

European outlook stabilizes

China eases

US Treasuries Gold Corp bonds Other fixed inc

Cyclicals Near-Cyclicals (Energy/ Financials) Defensives

Investors need to be positioned in Cyclicals and Near-Cyclicals in order to outperform under likely macro scenarios.

US housing bottomed in mid-2011

US Treasuries Gold Corp bonds Other fixed inc

Cyclicals Near-Cyclicals (Energy/ Financials) Defensives

Source: J.P. Morgan

US equities likely to outperform under all three projected macro scenarios. 4

Overview: Given upturn in global growth, Cyclicals are leading


Data show Cyclicals are Underowned Active Managers should buy Cyclicals on dips
Below we have summarized the sector weightings of Russell 1000 funds, with an underweight or overweight defined as being 100bp difference compared to the comparable weighting in the Russell 1000. There are some notable conclusions.
50% of funds with data available are UW Cyclicals. Of these funds that are UW Cyclicals, 15% are missing their benchmark

by 250bp YTD, much worse than the 9% of overall Russell 1000 funds that are missing by 250bp YTD. Clearly, being UW Cyclicals is not an effective strategy so far in 2012.
Those funds OW Cyclicals (which is only 35% of funds based on AUM), have outperformed their benchmark by 60bp YTD,

which is 110bp better than the average performance of those funds UW Cyclicals.
The key takeaway is that 50% of funds are UW Cyclicals, and it is these Funds that we believe should make the

rotation into Cyclicals, given the improving macro momentum.


50% of Russell 1000 Funds Are Underweight Cyclicals
Shaded rows indicate a Cyclical Tilt Strategy; OW (UW) defined as fund having weighting of sector that is 100bp greater (less) than weighting in Russell 1000

Fund Sample Size YTD Perf % of Total Total AUM of Funds Avg YTD Relative Total Return 0.0% 0.6% -0.5% 0.2% -0.1% -0.9% 0.5%

% of Funds Beating & Missing Diffusion (% % Funds % Funds missing beating by by 250bp 9% 4% 15% 9% 11% 27% 4% 250bp 8% 14% 5% 12% 10% 2% 13% beating minus % missing) -1% 10% -10% 3% -1% -25% 9%

Funds that are OW Cyclicals are outperforming by 110bp relative to funds that are UW Cyclicals.

Category All Funds Funds OW Cyclicals Funds UW Cyclicals Funds OW Near-Cyclicals Funds UW Near-Cyclicals Funds OW Defensives Funds UW Defensives

Funds

AUM

$417,548 100% $146,130 35% $207,344 50% $67,896 16% $194,559 47% $54,459 13% $210,785 50%

50% of funds are UW Cyclicals.

Source: J.P. Morgan and Bloomberg. Based on funds which reported holdings as of Nov, Dec, or Jan.

Overview: Given upturn in global growth, Cyclicals are leading


As for Sector weightings: 61% of Large-Cap Funds are UW Technology
We also zoomed in more closely on the four Cyclical sectors to determine what is driving the UW positions by active managers.
Technology has the least amount of funds OW the sector of all of the Cyclicals, with only 16% of funds OW Technology. The differential in performance between OW Technology and UW Technology is the greatest, with funds OW Technology

outperforming funds UW Technology by 70bp YTD.


61% of fund managers are UW Technology, a strikingly high level given the strong performance of YTD.
61% of Funds are Underweight Technology
Shaded rows indicate a Cyclical Tilt Strategy; OW (UW) defined as fund having weighting of sector that is 100bp greater (less) than weighting in Russell 1000

Fund Sample Size YTD Perf % of Total Category All Funds Funds OW Industrials Funds UW Industrials Funds OW Discretionary Funds UW Discretionary Funds OW Materials Funds UW Materials Total AUM of Funds Funds AUM $417,548 100% $220,100 53% $64,016 15% $163,445 39% $71,401 17% $126,286 30% $66,340 16% $64,839 16% $253,054 61% Avg YTD Relative Total Return 0.0% 0.2% 0.1% 0.1% 0.2% 0.3% 0.0% 0.5% -0.2%

% of Funds Beating & Missing Diffusion (% % Funds % Funds missing beating by by 250bp 250bp 9% 9% 14% 8% 13% 13% 11% 5% 13% 8% 13% 8% 10% 13% 17% 8% 8% 10% beating minus % missing) -1% 4% -5% 2% 0% 4% -2% 3% -3%

2) The differential in performance between OW and UW Tech is greatest for Technology at 70bp.

1) Of all Cyclicals, fund managers are least OW Technology at only 16% of funds.

Funds OW Technology Funds UW Technology

Source: J.P. Morgan and Bloomberg. Based on funds which reported holdings as of Nov, Dec, or Jan.

3) 61% of funds are UW Technology, an extremely high level given the outperformance of Technology YTD.
6

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


7

Apple Focus #1: A Sector unto itself


In understanding the mechanics of continuing Cyclical outperformance, we looked at the key players that will likely be driving the rally further. We ranked the top 10 Cyclical stocks in terms of weighting in the S&P 500. AAPL, with 3.7%, is the largest single stock by weighting, and its influence on the markets has been generating significant buzz.
To put the sheer magnitude of AAPLs weighting in the S&P 500 in perspective, we have compared AAPLs weighting

against the 65 GICs Level 3 Industries and the 10 Sectors. When ranked as an Industry, AAPL is the 6th largest Industry by weighting.
As a Sector, AAPL is larger than Materials, Utilities, and Telecom.

Weighting of AAPL in S&P 500 vs. Cyclical stocks, Sectors, and Industries
% of S&P 500 market cap

If AAPL were
a Cyclical Stock
AAPL is the largest single 1 stock in the S&P 2 500. 3
4 5 6 7 8 9 10 Rank Cyclical Stocks Apple Inc. Microsoft Corp. General Electric Co. Google Inc. Cl A Oracle Corp. Intel Corp. Cisco Systems Inc. QUALCOMM Inc. McDonald's Corp. Top 10 Cycl Stocks All Cyclical Stocks
Source: J.P. Morgan and FactSet

an Industry
Rank Industry 1 2 3 4 Pharmaceuticals Computers & Peripherals Software IT Services Apple Inc. Insurance Food & Staples Retailing Media Top 10 Weighting 5.7% 5.2% 4.2% 3.8% 3.7% 3.4% 3.1% 2.8% 44.9%
Rank 1 2 3 4 5 6 7 8 9 10 11

a Sector
Weighting Technology Financials Energy Staples Health Care Discretionary Inustrials Apple Inc. Materials Utilities Telecom 20.2% 14.2% 11.9% 11.5% 11.2% 10.8% 10.6% 3.7% 3.6% 3.4% 2.6%

Weighting 3.7% 2.1% 1.6% 1.3% 1.2% 1.1% 0.9% 0.8% 0.8% 15.3% 45.2%

Oil Gas & Consumable Fuels 9.8%

International Business Machines Corp. 1.8%

AAPL is 5 basically an 6 industry by 7 itself.


8 9 10

Diversified Financial Services 3.0%

AAPL is basically a sector by itself, and is larger than 3 of the 10 Sectors.

Apple Focus #1: A Sector unto itself


AAPL has been a top contributor to the S&P 500 point gain since Oct low and YTD, even when compared to overall sectors and industries
At the stock level, AAPL has been the #1 driver (out of 500 stocks) of the S&P 500's rally both since the October low and

YTD, contributing 14 points to the rally since October (37% rise for AAPL) and 11 points to the YTD rally (27% rise for AAPL). This large contribution is widely known at this point, however
AAPLs contribution to the rally is also significant even when compared to aggregated industries. Out of the 65 GICS

Level 3 industries, AAPL would be the 2nd-ranked industry since October and 1st-ranked industry YTD based on point contribution to the S&P 500's rally. Think about that, AAPL has contributed more to the S&P 500 rally YTD than any of the 65 industries.
If we view AAPL as its own sector, it is still a meaningful contributor. AAPL has contributed more points to S&P 500 rally

since October than three sectors (Materials, Utilities, and Telecom). YTD, AAPLs contribution is even greater, with AAPLs point-gain contribution ranking higher than six sectors (Energy, Materials, HealthCare, Staples, Telecom, and Utilities).
Contribution to S&P 500 point gain
S&P 500 points

Since October low


Change since October low Price at October low $375 1,099 Price Now $515 1,362 Contribution to S&P 500 Point Delta 14 263 Rank of Contribution to S&P 500 Point Delta Rank out Rank out Rank out of 500 of 66 of 11 Stocks Industries Sectors 1 2 8 YTD Change Price at Start of 2012 $405 1,258 Price Now $515 1,362

2012 YTD
Rank of Contribution to S&P 500 Point Delta Contribution to S&P 500 Point Delta 11 105 Rank out Rank out Rank out of 500 of 66 of 11 Stocks Industries Sectors 1 1 5

Apple Inc. S&P 500

Delta % chg $140 37% 263 24%

Apple Inc. S&P 500

Delta % chg $110 27% 105 8%

Source: J.P. Morgan and FactSet. Note: Ranking excludes AAPL from the Computer & Peripherals industry and from the Technology sector in order to avoid double-counting the impact of AAPL.

AAPL has contributed more points to the S&P 500s rally YTD than any other industry.

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


10

Apple Focus #2: Top 10 driver of earnings


AAPL and other outliers have meaningful effect on 4Q11
As we discussed two weeks ago, there has been frequent discussion about the outsized role Apples (AAPL-OW) results have had on S&P 500 earnings overall.
AAPLs earnings growth in 4Q11 of 121% contributed 3.5% of the 8.0% YoY earnings for the S&P 500. In other words, 44%

of the S&P 500's earnings growth in 4Q11 came from AAPL.


Apple is not the only stock having a disproportionate impact on the S&P 500 results, however. In 4Q11, the Top 10 stocks

accounted for 7.3% of the S&P 500s 8.0% EPS growth (or $1.65 of the $1.80 YoY increase in 4Q11 EPS), or 92% of earnings growth.
Top 10 Positive Contributors to YoY Delta in 4Q11 EPS
Revenue and Net Income $ in mm

Contribution to S&P 500 EPS Contr to S&P 500 EPS Rank Ticker Name 1 2 3 4 5 6 7 8 9 10 4Q10 4Q11 $1.45 $0.12 $0.18 $0.30 $0.43 $0.17 $0.08 $0.18 $0.17 $3.69 Delta % chg $0.79 121% $0.36 $0.09 113% $0.08 $0.08 40% 22% Growth 3.5% 1.6% 0.4% 0.4% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 7.3% 8.0% AAPL Apple Inc. $0.65 AIG American International Group Inc. -$0.24 BAC COP WFC CAT ALL OXY IBM SLB Bank of America Corp. ConocoPhillips Wells Fargo & Co. Caterpillar Inc. Allstate Corp. $0.08 $0.21 $0.35 $0.11 $0.03

Revenue Contr to S&P 500 Rev Growth 0.9% -0.4% 0.1% 0.4% 0.0% 0.2% 0.0% 0.0% 0.0% 0.1% 1.3% 7.8%

$0.07 62% $0.05 181% $0.04 $0.05 $0.04 $1.65 $1.80 29% 8% 30% 81% 8%

Occidental Petroleum Corp. $0.14 Schlumberger Ltd. Sub-Total S&P 500 $0.13 $2.03

AAPL contributed 3.5% of the S&P 500s 8.0% YoY earnings growth in 4Q11, or 44% of the indexs total earnings growth.

International Business Machines Corp. $0.57 $0.62

$22.55 $24.35

Source: J.P. Morgan and FactSet

11

Apple Focus #2: Top 10 driver of earnings


Contribution of outliers to earnings growth in 2011 is not extraordinary in a historical context
To put the contribution to earnings growth of outliers in 2011 in perspective, we looked at the historical contribution to earnings growth from the top 10 stocks relative to overall S&P 500 earnings growth.
The top 10 outliers have contributed 16% to earnings growth on average over the past 20 years.
Given that overall S&P 500 earnings growth has been only 7-10% on average over the past 20 years, the implication is that

earnings growth overall would actually be flat or negative without the boost provided by the top 10 stocks. This subset of 490 stocks from the S&P 500 has actually seen NEGATIVE 3.3% earnings growth on average over the past 20 years.
Contribution to S&P 500 Earnings Growth from Top 10 Stocks
%; Top 10 stocks based on contribution to YoY delta in S&P 500 net income
75.7%
Top 10 Stocks LT Avg

S&P 500 Earnings Growth Excluding Top 10 Stocks


Since 1990; Top 10 and Bottom 10 stocks based on contribution to YoY delta in S&P 500 net income
22.9% 22.5% 29.2% 2008 -69.1%
-3.7%

S&P 500 excl Top 10


14.6% 9.0%
5.8%

LT Avg
13.9% 13.8%
8.4%

2.9%

41.1%

46.2%

-1.9%

1.9%

Top 10 stocks have historically contributed 16% of S&P 500 earnings growth

-13.8%

-17.9%

13.0%

13.8%

11.8%

10.8%

9.7%

10.0%

10.1%

7.4%

6.9%

8.3%

6.7%

8.9%

5.6%

6.1%

5.4%

4.3%

6.5%

-27.1%

17.0%

17.4%

LT Avg 16.0%

-14.9%

LT Avg -3.3%

-6.2%

4.2%

S&P 500 earnings growth is negative on avg without the boost from the top 10 stocks
1991 1993 1994 1996 1997 1999 2000
1990 1992 1995 1998

but in 2011, EPS was still positive at 7.5% even without the top 10 stocks..
2010 2011
2009

-62.8%

2002

2003

2004

2005

1991

1992

1993

1994

1997

1998

1999

2000

2002

2003

2004

2005

2008

2009

2010

but in 2011, top 10 stocks contributed 6.5% to S&P 500 earnings growth, implying that outliers were less of a driver.
Source: J.P. Morgan and FactSet Source: J.P. Morgan and FactSet

2011

1990

1995

1996

2001

2006

2007

12

2007

2001

2006

7.5%

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


13

Apple Focus #3: Superior comparative fundamentals


There is a strong fundamental case supporting AAPL, with sales growth, EPS growth, ROE, and P/E all currently attractive for AAPL. The stock also ranks extremely well on these metrics compared to all S&P 500 stocks, industries, and sectors.
AAPL has the 6th strongest 2012 Sales Growth (out of 500 stocks) with 45% growth. Ranked as both an Industry" and as

a Sector, AAPL's 2012 Sales Growth outpaces all 65 GICS Level 3 Industries and all 10 Sectors.
At 56%, AAPLs 2012 EPS Growth outpaces 471 other stocks in the S&P 500, and when measured against the 65

Industries, it is ranked 5th strongest. On a Sector level, AAPL has the second strongest 2012 EPS Growth, behind Telecom.
In terms of ROE, AAPL is ranked 28th among the 500 constituents of the S&P 500, and 3rd among the 65 Industries.

Ranked among Sectors, AAPL has the strongest ROE.


APPLs 2012 P/E of 12.0x makes it the 130th cheapest stock in the S&P 500, roughly within the top quartile of cheapest

stocks. Compared to the 65 GICS Level 3 Industries, it is the 16th cheapest, which would again put it in the top quartile. On the Sector level, AAPL is more expensive than only 2 Sectors: Financials (10.8x) and Energy (11.3x).
The main takeaway is that AAPL has a strong fundamental case supporting it from several perspectives, which is likely to

help support a continued rally in the stock and thus a continued rally for Cyclicals.
The Attractiveness of AAPL across 4 Metrics

If AAPL was a Stock Rank among 500 (Quartile) 6, (1) 29, (1) 28, (1) 130, (2) Industry Rank among 66 1 5 3 16 Sector Rank among 11 1 2 1 3

Sales growth at 45%, EPS growth at 56%, ROE at 42%, and P/E at 12.0x are all extremely attractive for AAPL currently.

2012 Sales Growth 2012 EPS Growth ROE P/E (2012) (rank 1 = cheapest)

Current Value 45% 56% 42% 12.0x

AAPL is top ranked relative to the 10 sectors on sales growth, EPS growth, ROE, and P/E.

Source: J.P. Morgan and FactSet

14

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


15

Apple Focus #4: Still underowned


We compiled a similar analysis to the earlier analysis looking at large-cap mutual fund sector weightings, but instead zoomed in further on the weighting of AAPL within large-cap mutual funds.
40% of large-cap funds do not have AAPL as a top position. Surprisingly, 40% of large-cap funds do not have AAPL as

one of their top 10 positions, despite the stock being the largest stock in the Russell 1000. These 112 funds without a large position in AAPL are also underperforming their benchmark by 60bp YTD. On the other hand, the 60% of funds that do have AAPL as a top 10 holding are underperforming their benchmark by a much smaller margin of only 10bp. Thus, funds that have a large position in AAPL have outperformed those funds without a large position in AAPL by 50bp YTD.
For the funds that have a significant OW position in AAPL (at least 75bp greater weighting within the fund than AAPL's

weighting within the Russell 1000), these funds are actually outperforming by 30bp on average YTD. Thus, being OW AAPL has been a driver of outperformance for mutual funds YTD.
The key takeaway from this analysis is that funds that hold a position in AAPL have seen better performance YTD, and

funds that hold a significant position in AAPL have seen even better performance. Given that we expect further outperformance for Cyclicals such as AAPL over the next several months, this trend of outperformance for funds holding AAPL is likely to continue.
AAPL contribution to Russell 1000 Mutual Funds
AUM in $mm

Fund Sample Size Total

YTD Perf Median YTD Median YTD Relative Total Return Total Return 7.9% -0.2% 8.5% 7.6% 7.8% 8.0% 8.1% 7.6% 0.3% -0.6% -0.4% -0.2% -0.1% -0.6%

% Funds Beating & Missing % Funds % Funds missing beating by by 250bp 250bp 8% 8% 9% 0% 0% 5% 4% 14% 9% 2% 7% 7% 6% 10%

Category All Funds Funds OW AAPL by at least 75bp Fund OW AAPL by 25bp-75bp Funds OW AAPL by 0bp-25bp Funds OW AAPL AAPL in Top 10 Holdings AAPL not in Top 10 Holdings

# of Funds 282 78 45 15 138 170 112

% of All Funds 100% 28% 16% 5% 49% 60% 40%

AUM of % of Total Funds AUM $498,085 100% $132,755 $102,508 $17,863 $253,126 $393,832 $104,253 27% 21% 4% 51% 79% 21%

Mutual funds that are OW AAPL (vs. weighting in Russell 1000) are outperforming their benchmark so far YTD.

40% of funds do not have AAPL as a top 10 position, despite AAPL being the largest stock in the Russell 1000.

Having a large position in AAPL has led to 50bp of relative performance YTD (-10bp minus -60bp). 16

Source: J.P. Morgan and Bloomberg. Note: Data above on weighting of AAPL focuses on funds that had AAPL in the top 10 holdings within the fund, as these funds disclosed this data more easily.

Apple Focus #4: Still underowned


Institutional Ownership of AAPL low, leaving room for increased ownership
Currently, only 72% of AAPLs shares are held by institutional investors.
This is 415bp below the 77% institutional ownership of the S&P 500, meaning Institutional Investors are more UW

AAPL than they are the S&P 500 in general. To compound the UW AAPL effect here, Institutional Ownership of AAPL is actually 500bp below that of the Technology sector, suggesting room for institutional investors to increase their position in AAPL over the coming months.

As a Sector: % of Market Cap Held by Institutional Investors Relative to the S&P 500
% of company market cap, relative to S&P 500 % institutional ownership

Relative % Institutional Ownership


694bp 527bp 440bp
113bp

Absolute % Institutional Ownership


83%

82%

81%

AAPL is UW by 500bp relative to the Technology sector.


72%

59bp

47bp

78%

77%

77%

77% 73% 72%


66%

AAPL is under-owned by institutional investors compared to the S&P 500.


Discretionary HealthCare Technology
Industrials

-385bp -415bp -465bp -1019bp

59%

Discretionary

HealthCare

Financials

Materials

Industrials

S&P 500

Staples

AAPL

Financials

Materials

Source: J.P. Morgan and FactSet

Telecom

Utilities

Energy

17

Energy

-1782bp

Telecom

Tech

Staples

AAPL

Utilities

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


18

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of the points gain into YE
Apple is potentially one of the larger drivers of points gains into YE (to reach 1430, or 70 points from here). The other being Financials.
For starters, every $100 increase in AAPLs price adds 10 points to the S&P 500. On a valuation basis, if AAPLs relative P/E shifts to 164% of the S&P 500 P/E (which is the historical avg relative P/E for

AAPL since 2005), this would represent 74% upside for AAPL, and add 38 points to the S&P 500, or a 2.8% rise for the overall index.
Using analyst target prices as another scenario, if AAPL were to rise to the price target of $625 from Mark Moskowitz, J.P.

Morgans IT Hardware analyst, this would represent 21% upside for AAPL, which would add 11 points to the S&P 500, or 0.8% upside for the overall index.
Theoretical Impact on AAPL and S&P 500 under different scenarios
Market Cap in $mm; Drivers are shaded
Driver Calculation Implied Methodology Price 1 Each $100 change in AAPL Valuation 2 Trade to Historical Relative P/E of 164% Trades to Historical Relative PEG of 39%
Historical AAPL P/E relativ e to SPX P/E (since 2005) Historical AAPL PEG relativ e to SPX PEG (since 2005) 39% 164% AAPL's P/E rises to 20.9x to reach 164% Rel P/E to the S&P's P/E of 12.7x AAPL's PEG ratio rises to 0.6 from 0.4 to reach the Historical Av erage Relativ e PEG ratio of 39% (S&P 500 currently has a 1.65 PEG ratio)
24%= 39%* 0.4/1 .65 0.4=0.6

A $100 increase in AAPL price adds 10 points to the S&P 500


AAPL Price Implied % S&P 500 Price Implied %

Description
$100 Delta in AAPL price

Value
$100

Description
AAPL trades $10 higher than the current price

Current Value Delta $513 $523 $100

Current Value Delta Chg $513 $613 $100 19%

Current Value Delta Chg 1,358 1,368 10 1%

94%

164% 6951bp

$513

$893

$380 74%

1,358

1,396

38

3%

24%

39%

1476bp

$513

$829

$316 62%

1,358

1,389

32

2%

Moving to historical average adds 32-39 points to the S&P 500, or half of the projected gains of the S&P 500 into YE.
$112 $513 $625 $112 22% 1,358 1,369 11 1%

Analyst Target 4 Moskowitz's Price Target


Target Price Set by JPM Analy st $625 AAPL's Price rises to Moskow tiz's $625 price target

$513

$625

Source: J.P. Morgan and FactSet

19

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of the points gain into YE
AAPL is currently undervalued on both absolute and relative P/E
AAPL at its current valuation is undervalued on both an absolute P/E (12.0x vs. 12.7x S&P 500) and a relative P/E (94% vs. historical average of 164%). We plotted the NTM P/E of both the S&P 500 and AAPL below and looked at the discount or premium of AAPL relative to the market:
While AAPL has historically traded at a premium to the S&P 500, this relationship has become dislocated recently with

AAPL now trading at similar multiples despite its strong growth rate.
On a relative P/E basis, at 94%, AAPL is now trading at a 7000bp discount to its historical long term average of 164%.

Absolute NTM P/E for S&P 500 and AAPL


NTM, since 2005

Relative NTM P/E for AAPL


NTM, since 2005

SPX NTM P/E

AAPL NTM P/E

Rel AAPL NTM P/E

Long Term Avg

50.0x 45.0x 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x

300%

but now trading at similar multiples despite its still strong growth rate. AAPL used to trade at a big premium

250% 200%

Long Term Avg 164%

150%
2/24/12 12.7x 2/24/12 12.0x 100% 50%

7000bps cheaper than historical avg 2/24/12


94%

0.0x 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

0%
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

Source: J.P. Morgan, FactSet, Bloomberg

Source: J.P. Morgan, FactSet, Bloomberg

20

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of the points gain into YE
And similarly, PEG ratios also indicate that AAPL is trading at a discount
To further advance the point that AAPL is currently undervalued, consider its absolute PEG and relative PEG ratios:
Historically, AAPLs PEG ratio has been at similar multiples or at a premium to the S&P 500. However, at current

valuations, AAPL is undervalued relative to the S&P 500 on a PEG ratio basis.
When we consider AAPLs relative PEG ratio, (PEG of AAPL relative to PEG of S&P 500), AAPL is currently trading

1500bps below its historical average.


Any move from this point to return to fair value can potentially lead to 30 points of upside for the S&P500, which is half the

points needed to drive us closer towards out 1430 YE Target.

Absolute NTM PEG Ratio for S&P 500 and AAPL


NTM, since 2005

Relative PEG for AAPL


NTM, since 2005

SPX PEG

AAPL PEG 2/24/12 1.65

Rel PEG

Long Term Average

3.00
2.00 1.00

150%
100% 50%

Long Term Average 39%

0.00
-1.00 -2.00

2/24/12 0.40

0%
(50%) (100%)

AAPL is undervalued on a Rel PEG basis by 2/24/12 1500bps 24%

AAPL is undervalued on PEG ratio

-3.00
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

(150%)
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

Source: J.P. Morgan, FactSet, Bloomberg

Source: J.P. Morgan, FactSet, Bloomberg

21

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


22

16 Technology Stock Ideas Highly Correlated with Apple


We compiled a list of 16 stocks, based on names highly correlated to Apple. We thought about compiling a list of companies in the Apple value chain, made up of component suppliers and beneficiaries of the end markets, but this ended up identifying a lot of foreign corporations. Instead, we asked our derivatives team to identify stocks highly correlated to Apple and we further narrowed this using the following criteria:
(i) Stocks in the Technology sector; (ii) 1-year historical correlation to Apple stock > 55%; (iii) 2012 P/E ratio <15.0x;

(iv) Rated Overweight or Neutral by J.P. Morgan; and (v) Market Value >$1bn.
These 16 stocks have an average 60% 1yr historical correlation to Apple stock, an implied upside to J.P. Morgan analysts

target prices of 8%, and a 2012 average P/E of 11.7x.


J.P. Morgan Derivatives & Delta One Strategy has also created a basket for investors who would like to leverage this

theme. The basket can be found on Bloomberg under ticker JPUSAAPL Index.
16 Technology Stocks Highly Correlated with AAPL
Priced as of 02/22/2012

JPM Coverage Ticker NCR VSH DELL CA Current Price $21.58 $12.57 $17.15 $26.93 $46.52 $9.04 $12.90 $8.33 $30.77 $61.32 $39.56 $25.69 $7.14 Market Cap $3,401 $1,807 $30,810 $13,078 $1,853 $4,066 $16,696 $4,694 $5,266 $2,377 $9,294 $5,383 $4,976 JPM Rtg JPM Analyst OW Paul Coster, CFA OW Steven J. O'Brien OW Mark Moskowitz OW John DiFucci OW Paul Coster, CFA OW Doug Anmuth OW Christopher Danely N Christopher Blansett OW Mark Moskowitz N Harlan Sur N Sterling Auty, CFA N Tien-tsin Huang, CFA N Mark Moskowitz OW Steven J. O'Brien N Christopher Danely N Christopher Danely Target Implied Price Upside $27.00 $15.50 $21.00 $32.00 $52.50 $686.00 $10.00 $14.00 $210.00 $9.00 $33.00 $61.00 $39.00 $25.00 $25.00 $6.00 25% 23% 22% 19% 13% 13% 11% 9% 8% 8% 7% -1% -1% -3% -6% -16% 8%

ValuationAAPL Correlation 2012 P/E 9.0x 12.8x 8.2x 10.8x 12.1x 14.3x 14.1x 13.5x 13.0x 14.4x 11.7x 14.4x 6.9x 10.0x 11.1x 11.0x 11.7x 1yr 67% 59% 62% 55% 58% 64% 65% 57% 61% 62% 68% 59% 58% 56% 60% 57% 60% 5yr 49% 54% 54% 48% 43% 65% 55% 51% 57% 42% 37% 33% 52% 50% 53% 46% 49%

Name 1 NCR Corp. 2 Vishay Intertechnology Inc. 3 Dell Inc. 4 CA Inc. 5 Itron Inc. 6 Google Inc. Cl A 7 ON Semiconductor Corp. 8 Applied Materials Inc. 10 LSI Corp. 11 Amdocs Ltd. 12 Wright Express Corp. 13 Western Digital Corp. 14 Jabil Circuit Inc. 15 Intel Corp. 16 Advanced Micro Devices Inc. Average
Source: J.P. Morgan estimates and FactSet.

Sub-Industry Computer Hardware Electronic Components Computer Hardware Systems Software Internet Software & Services Semiconductors Semiconductor Equipment Semiconductors IT Consulting & Other Services Computer Storage & Peripherals Semiconductors Semiconductors

Electronic Equipment & Instruments ITRI ONNN AMAT IBM LSI DOX WDC INTC AMD

GOOG $607.94 $156,825

9 International Business Machines Corp. Consulting & Other Services IT

$193.87 $224,889

Data Processing & Outsourced Services WXS Electronic Manufacturing Services JBL

$26.73 $136,109

23

Outline

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz


24

Fundamental case for Apple: Still Catalysts


In Its Own Orbit: Low Penetration Rates and Social Networking Enablement to Sustain High-Growth
With Apple (AAPL, $516.39), we reiterate our Overweight rating and Dec-12 price target of $625. The stock remains on the J.P. Morgan Analyst Focus List. Although the stock is trading north of $500, we think that there is substantial appreciation potential from current levels. In our view, the best part of Apples risk-reward profile is that plenty more upside potential exists, likely elevating Apple's revenue and earnings growth to a completely new orbit. In other words, Apple is in a league of its own.
Apple continues to disrupt the tech playing field. With its optimized smartphone, tablet, and notebook PC form factors,

complemented by its iTunes/App Store ecosystem, the company single-handily has disrupted the technology playing field. The supply chain has been impacted, and there also has been a splintering of the Wintel and Android-based camps. As a result, we expect many industry participants to be left scrambling to restore relevance in the next few years.
Low penetration rates to sustain high-growth stature. Apples penetration rates in its end markets and customer

verticals have plenty of upside, in our view. For example, in smartphones, Apples global market share is 19%, versus 30% in the U.S. In PCs, Apples global market share is 5%, versus 11% in the U.S. As Apple begins to drive another halo-effect with the iPhone and iPad in China and later in Latin America, we believe Apple device sales stand to exhibit a series of growth spurts. Plus, there is still the relatively untapped opportunity of the enterprise.
Social media/networking enablement is a long-term tailwind. We believe that Apples portfolio of feature rich devices

should be a lead beneficiary of the social media/networking adoption curve. In our view, Apple's devices enable users to easily access and participate in social media/networking experiences. While other device vendors stand to benefit as well, we believe that Apple's devices should lead the charge, given ease-of-use, reliability, and Apples common user interface.
Dividend could create a scarcity issue. We believe that the initiation of a dividend program could create a scarcity issue

with respect to Apple shares. Reason being, Apple is under-owned institutionally. Apple is the largest stock in the Russell 1000, but 40% of mutual funds indexed to the Russell 1000 do not have Apple as a top 10 holding. Plus, in the event of a dividend initiation, many income-based funds would be forced to scramble to build positions, likely creating a scarcity issue.

25

Fundamental case for Apple: Still Catalysts


Investment Thesis
With Apple, we reiterate our Overweight rating and Dec-12 price target of $625. The stock remains on the J.P. Morgan Analyst Focus List. Although the stock is trading north of $500, we think that there is substantial appreciation potential from current levels. In our view, the best part of Apples risk-reward profile is that plenty more upside potential exists, likely elevating Apple's revenue and earnings growth to a completely new orbit. In other words, Apple is in a league of its own. Key growth drivers include 1) Apples low market penetration rates in tablets, PCs, China, and the enterprise, 2) the relative growth prospects of its key end markets versus other tech segments, and 3) Apples role in enabling the social media/networking adoption curve. In total, we believe that these drivers can sustain the relative outperformance of Apple's operating model and stock, as illustrated in the below figure.

Apple Stock Price Performance versus Large Cap Tech and Broader Market Indices
January 3, 2007 to February 22, 2012
700

600

500

400

300

200

100

0 Jan-07

Sep-07

Jun-08

Mar-09

Dec-09

Sep-10

May-11

Feb-12

Apple

Large Cap

NASDAQ

S&P 500

Note: Large Cap index includes: AAPL, EMC, DELL, HPQ, IBM, LXK, NTAP, and XRX. Source: Bloomberg.

26

Fundamental case for Apple: Still Catalysts


Apple continues to disrupt the technology playing field
In our view, Apple has become the leader of the mobility age from a device and content perspective. With its optimized smartphone, tablet, and notebook PC form factors, complemented by its iTunes/App Store ecosystem, the company singlehandily has disrupted the technology playing field. The supply chain has been impacted, and there also has been a splintering of the Wintel and Android-based camps. As a result, we expect many industry participants to be left scrambling to restore relevance in the next few years. It is no secret that a tenacious focus on both innovation and design has helped Apple cement its leadership in offering userfriendly, content-driven device experiences. A critical driver to Apples success has been the company's focus on owning the hardware and software platforms. Plus, the company steadily has become tightly integrated with the supply chain, due to 1) its above-market growth attributes and 2) strategic investments in the capital equipment footprints of key suppliers. All of these factors have combined to propel Apples growth trajectory relative to its end markets. As the below table illustrates (Table 1), the company has delivered above-peer growth in smartphones, tablets, and Mac.

Table 1: Apple Segment Unit Growth Rates vs. Broader Tech Segments
Annual percentage growth based on calendar year units

2007 iPhone Smartphone mkt growth % iPad Tablet market growth % Mac PC market growth % 37.3% 14.3% -53.6%

2008 269.2% 26.1%

2009 83.6% 11.5%

2010 89.2% 73.4%

2011 96.1% 53.5% 173.8% 228.1%

2012E 38.3% 43.2% 44.8% 55.2% 16.3% -1.4%

2013E 17.6% 32.2% 27.1% 33.5% 16.0% NA

27.8% 10.7%

13.2% 5.5%

28.5% 13.8%

23.3% 0.5%

Source: Company reports and J.P. Morgan estimates.

27

Fundamental case for Apple: Still Catalysts


Apple continues to disrupt the technology playing field
Plus, as the two tables below illustrate, Apples overall revenue and earnings growth trajectories and how they have outpaced the large cap technology peers by a wide margin. We expect these trend-lines to continue in Apples favor.
Table 2: Revenue Growth YoY - Apple versus Technology Peer Group
Annual revenue growth percentage

Apple Amazon Cisco Dell EMC Google HP IBM Microsoft Oracle RIM Samsung Peer Group Avg. (Ex. Apple)

2007 35% 39% 18% 6% 19% 13% 8% 26% 24% 90% 14%

2008 40% 29% 5% 0% 12% 0% 5% 7% 17% 88% -9%

2009 20% 28% -10% -13% -6% 9% -10% -8% -5% -2% 51% 22% -1%

2010 63% 40% 19% 16% 21% 24% 9% 4% 14% 39% 29% 18% 16%

2011 68% 41% 6% 1% 18% 29% -2% 7% 8% 14% 8% 3% 7%

2012E 27% 29% 7% 1% 10% 18% -2% 1% 7% 4% -12% 18% 7%

2013E 15% 27% 7% 4% 9% 17% 2% 4% 8% 8% -1% 7% 8%

CAGR 37% 33% 7% 2% 12% 19% 1% 3% 9% 14% 31% 10% 7%

Table 3: Non-GAAP EPS Growth YoY - Apple versus Technology Peer Group
Annual non-GAAP EPS growth percentage

Apple Amazon Cisco Dell EMC Google HP IBM Microsoft Oracle RIM Samsung Peer Group Avg. (Ex. Apple)

2007 67% 134% 23% 15% 32% 34% 18% 50% 32% 88% -7%

2008 62% 30% 2% 10% 3% 10% 25% 1% 22% 73% -48%

2009 37% 47% -13% -28% -17% 19% 4% 13% -4% 7% 24% 69% 35%

2010 75% 20% 19% 52% 51% 28% 22% 16% 31% 27% 45% 89% 56%

2011 96% -20% 6% 34% 21% 22% -9% 15% 17% 21% -11% -12% -1%

2012E 27% -4% 15% 1% 16% 15% -7% 11% 2% 3% -45% 35% 21%

2013E 11% 44% 15% 10% 17% 18% 5% 11% 15% 12% 5% 11% 13%

CAGR 51% 29% 9% 11% 16% 20% 8% 15% 15% 17% 17% 11% 23%

Source: Company reports, J.P. Morgan estimates and Bloomberg.

28

Fundamental case for Apple: Still Catalysts


Apple continues to disrupt the technology playing field
Below, we also present the trend-line of Apples margin expansion during the company's major revenue growth phase. The key message is that with Apple, revenue growth does not come at the expense of profit growth, and we do not expect this approach to change.

Table 4: Apple Operating Metrics The Trends Tell the Story of Profitable Growth
%, based on calendar year

2007 Revenue growth % Gross margin % Operating margin % EPS growth % 34.8% 33.5% 18.9% 66.6%

2008 39.6% 36.7% 23.7% 61.9%

2009 19.9% 40.9% 28.6% 37.3%

2010 63.3% 38.8% 28.2% 74.8%

2011 67.6% 42.4% 33.9% 96.0%

2012E 27.2% 43.1% 34.4% 26.6%

2013E 14.8% 42.5% 33.8% 11.4%

Source: Company reports, J.P. Morgan estimates and Bloomberg.

29

Fundamental case for Apple: Still Catalysts


Low penetration rates to sustain high-growth stature
We believe that Apple can continue to outgrow its technology peers beyond the near term. The companys penetration rates in its end markets and customer verticals have plenty of upside, in our view. For example, in smartphones, Apples global market share is 19%, versus 30% in the U.S (Table 5). In PCs, Apples global market share is 5%, versus 11% in the U.S. As Apple begins to drive another halo-effect with the iPhone and iPad in China and later in Latin America, we believe Apple device sales stand to exhibit a series of growth spurts.

In China and other parts of Asia, it is important to note that the company is just getting started. China alone represents 20% of global tech spending. There is also India, and after that, we expect Latin America to be a focal point in coming years due to the economic expansion of that region, as affirmed by the future Olympics and World Cup selections. Plus, there is still the relatively untapped opportunity of the enterprise for all geographies. Recently, General Electric and Halliburton announced ongoing initiatives or plans to use more Apple devices, which we think could set the stage for greater sales of Macs in addition to iPhones and iPads.
In smartphones, Apple has enjoyed a meaningful rise in global market share based on units. While we do not have explicit market share for revenue, we estimate that the $200-plus premium in subsidy rates attached to the iPhone versus competitive smartphones has enabled Apple to possess revenue share more than 2 times that of its unit market share.
Table 5: Apple Worldwide Smartphone Market Share
Percentage based on total units

2008 Global smartphone market share U.S. smartphone market share Asia-Pacific smartphone market share
Source: Gartner.

2009 14.4% 24.4% 7.6%

2010 15.6% 22.9% 12.9%

2011 18.9% 30.1% 14.6%

8.2% 19.0% 2.8%

Table 6: Apple PC Market Share Summary


Percentage based on total units

2007 Global PC market share U.S. PC market share Asia-Pacific PC market share
Source: Gartner.

2008 3.4% 8.4% 0.9%

2009 3.6% 8.2% 1.0%

2010 4.1% 9.1% 1.6%

2011 5.0% 11.2% 2.5%

2.9% 6.8% 0.8%

30

Fundamental case for Apple: Still Catalysts


Valuation
Our price target is derived from a weighted blend of EV/EBITDA and P/E scenarios utilizing historical peak/trough multiples. With Apple, we think it is time for the value stock valuation multiples to be re-rated higher. Our revenue and EPS growth estimates position Apple as the lone star in large cap tech. Currently, Apple trades at 11.6x our C2012 EPS estimate, versus the peer group average of 12.1x. In our view, Apple is trading like a distressed value stock and not as the high-growth story in large cap tech. We expect Apple to continue outperforming on both top- and bottom-line growth metrics relative to the peers as the companys rapid growth phenomena of the iPhone and iPad intensify. Plus, do not forget about the Mac business, we think that the companys incremental market penetration opportunities can help the Mac become a major contributor to overall company growth in the coming years.
Table 7: Apple Inc. P&L Scenarios
$ in millions, except per share data, C2012
Worst Case $147,017 15.0% $42,635 29.0% 500 $43,135 $10,875 25.2% $33.97 -3.2% 950 $3,250 $45,885 31.2% Base Case $162,579 27.2% $55,941 34.4% 500 $56,441 $14,229 25.2% $44.45 26.6% 950 $3,250 $59,191 36.4% Best Case $171,946 34.5% $65,340 38.0% 500 $65,840 $16,599 25.2% $51.86 47.7% 950 $3,250 $68,590 39.9%

Table 8: Apple Inc. EV/EBITDA


$ in millions, except per share data, C2012
Worst Case 8.5x $390,026 ($133,762) $523,788 $551.62 20% $597.44 Base Case 7.5x $443,934 ($133,762) $577,696 $608.39 60% Best Case 6.5x $445,834 ($133,762) $579,596 $610.40 20%

Sales Y/Y growth % Operating profit % of sales Interest/other inc. (exp.) Pre-tax income Income taxes Tax rate EPS Y/Y growth % Diluted shares D&A EBITDA % of sales

EV/EBITDA multiple Implied enterprise value Net debt Implied market cap Implied stock price Probability Average stock price

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.

Table 9: Apple Inc. Forward P/E


P/E Multiple Implied stock price Probability Average stock price Worst Case 16.5x $560.58 20% $652.23 Base Case 15.0x $666.82 60% Best Case 13.5x $700.08 20%

Table 10: Apple Inc. Blended Price Target


EV/EBITDA P/E Average stock price
Source: J.P. Morgan estimates.

Price $597.44 $652.23 $625.00

Weight 50% 50%

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.

31

Fundamental case for Apple: Still Catalysts


Risks to Rating and Price Target
Macroeconomic and secular conditions
We assume that Apple possesses partial buffers to any shocks in the macroeconomic environment or the ASP challenges in the PC or smartphones markets. Should incremental weakness blunt end market demand more than expected or slow Apples International and retail store expansion, then our view and estimates could be at risk.

Competitive dynamics
We assume that Apple will continue to outgrow the market in smartphones, tablets, and PCs. Should competitive responses in these three segments disrupt Apples business, then our view could be at risk to the downside.

Gross margin
Our view assumes that Apples gross margin profile hovers near the 39-40% threshold as component pricing eases and manufacturing yields on newer products improve. Should these dynamics not manifest, then our view and estimates could have risk to the downside.

Rate of new product cycles


We expect Apple to sustain its rigid cycle of new product refreshes. Should the company begin to slow in its technology improvements and frequency of refreshes, the companys image as a provider for leading-edge solutions could take a hit. In such a case, we fear that investors could begin to lose interest in the story.

32

Disclosures
Important Disclosures

Market Maker: JPMS makes a market in the stock of Apple Inc.. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Apple Inc.. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the
following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Apple Inc..

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or
services other than investment banking from Apple Inc.. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgancovered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing research.disclosure.inquiries@jpmorgan.com with your request.

33

Disclosures
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgancovered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing research.disclosure.inquiries@jpmorgan.com with your request. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and midcap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

34

Disclosures
Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA,SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 032/01/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

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Disclosures
Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. "Other Disclosures" last revised January 6, 2012. Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.

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