Company Analysis - Research Paper Example

Table of Contents Contents Page Executive Summary…………………………………………..2 2. Introduction…………………………………………………..3 3. Qualitative Analysis…………………………………………4 3.1 Competition………………………………………..4 3.2 PEST………………………………………………..4 3.3 BCG Matrix………………………………………...6 3.4 Marketing Strategy…………………………………7 3.5 SWOT……………………………………………..7 4. Financial Analysis…………………………………………..9 4.1 Balance Sheet……………………………………...9 4.2 Income statement………………………………….11 4.3 Financial Ratios…………………………………...12 5. Recommendations………………………………………….14 6. References………………………………………………….16 7. Appendices…………………………………………………17 Executive Summary Apple Inc. is a world-renown innovative leader with high-tech electronic products that target affluent consumers who want to look hip. Through its global expansion strategy, innovative genius, and strong brand image, Apple Inc. has been able to gain reputable market popularity among high-end customers all over the world. This paper focuses on analyzing the inherent investment opportunities and risks at Apple Inc. via describing its investment profitability for a potential investor. It will provide both financial and non-financial information to meet this end. Apple Inc. is in a highly competitive market that includes Dell and HP. However, it has a major advantage in its innovative panache and strong brand image that is known the world over. This allows it to maintain a highly visible presence that threatens to overshadow its competition. The paper begins by giving the corporation’s background in order to give a fair picture of its stability through the years, showing that, despite earlier instability, the return of Steve jobs had a big impact on the company. Although its mission statement is vague and ambiguous, it leaves the reader feeling closer to the company and its outlook. The qualitative analysis in the paper seeks to show the external and internal environment that Apple is in and indicates that its strengths and opportunities heavier compared to its weaknesses and threats. Its products are innovative, fresh, and normally take the industry years to copy. Their marketing strategy is also effective and allows Apple to access high-end markets in a way that is both innovative and successful. Financial statements from sources like Forbes show that the company has maintained steady stability and its financial ratios indicate a highly profitable company. Their revenue has also been on an upward trajectory for the past seven years. Introduction Apple Inc. is an American technology company that dedicates its operations to the design and manufacture of consumer electronics, personal computers, and computer software. The corporation is best known for its iPad, iPhone, iPod, and Mac computer line hardware products, as well as production suites, iWork, iLife, Safari web browser, iTunes browser, and iOS operating systems and OS X. Apple was founded in 1976, being incorporated in 1977. It deleted “computer” in 2007 as a way to reflect its strategic shift from general electronics to consumer electronics with the advent of the iPhone. The corporation targets upper and middle-income consumers using Apple retail stores to sell its product. The corporation also has a global vision with its products and retail stores now operating in over 50 countries worldwide. As an investor, it is vital to observe the financial and financial factors inherent in Apple presently, in the past, as well as future projections to determine its potential for investment. This paper focuses on an analysis of the investment risks and opportunities of Apple Inc. via a description of its financial and non-financial profiles. First, it will provide a qualitative analysis by of the corporation by first observing its development history to ascertain its customer base and management record before analyzing its competition to ascertain its position in the consumer electronics industry. Its business strategy will also be analyzed before assessing its macro and microenvironment so as to have a clear picture of its present and future prospects. Next, the paper will examine the future and present financial position, as this is crucial in the determination of the profitability of investing in the corporation. This paper will examine Apple’s by analyzing its balance sheet and income statement, the paper seeks to examine the corporation’s financial status. It seeks to determine whether a competitive advantage can be maintained in the long-term. Qualitative Analysis Apples mission statement states that; Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork, and professional software... Apple leads the digital music revolution with its iPods and iTunes online store... Apple reinvented the mobile phone with its revolutionary iPhone and App Store, and has recently introduced its magical iPad, which is defining the future of mobile media and computing devices (O'Grady 11). This mission statement is not a mission statement as such since it is not descriptive of its people and does not indicate its corporate responsibility. It also does not inspire imagination concerning its future plans. Competition Apple Inc. has three major competitors in IBM, Hewlett-Packard, and Dell in the hardware market. In the software market, Apple’s biggest competitor is Microsoft. Dell has very low cost strategies for production and is the biggest computer manufacturer. It has also entered the music retail business with Jukebox (O'Grady 13). Hewlett-Packard is a leading technology provider and a big brand name. Together with IBM, Apple holds the largest market for computer technology hardware with the entry of Lenovo making IBM a serious competitor. Pest Analysis This analysis should help the investor determine the present situation of Apple Inc., as well as provision of a glimpse into Apple Inc.’s future. Political Environment As of 2010, 52% of all Apple Inc.’s sales were in the international market (O'Grady 48). Some influential factors under the political environment could include terrorism acts and souring of international relationships. Since Apple produces most of its products and parts outside the US, political conflicts involving the US and some strategic partners like China could have significant impacts on its operations. Economic Environment The recent financial crisis could have a significant impact on the corporation. With high rates of inflation, high unemployment rates, and stagnating income levels have had an impact on spending power, especially with luxury products (O'Grady 48). However, even with the loss of the dollar value, the corporation is not economically endangered. It has buffered itself against inflation effects through buying foreign currency. The depreciation of the dollar has actually increased their revenue abroad. Socio-cultural Environments The world today cannot be imagined sans the technological advances that aid in interaction of people, for instance, mobile phones and computers. Globally, Apple is the market leader with the IPhone. The music industry has also moved into cyberspace, which Apple has taken advantage of via iTunes. While web piracy may be a threat, the low cost of buying quality music at their store should help them overcome it (O'Grady 49). Technological Environment The market for mobile and computer technology is at all time high and has seen intense competition in the industry. Technological changes and innovations ensure that products have a short shelf life. By investing in R&D, Apple has managed to be a market leader in innovative products. Their technology is a reference for most of its competitors, making its innovation a big part of its brand position (O'Grady 49). BCG Matrix The BCG matrix should give an investor a clear idea of the products that Apple deals in will have the desired effect on its bottom line that will result in investor appeal. Star The iPad has a big share of the tablet market. However, because it is in its growth phase as far as its PLC goes, it should lose some advantage as a first-mover as the competition begins to deal in tablets (O'Grady 59). Apple could invest, in the marketing of the iPad, to help grow their sales. This product has all the ingredients of being a source of income to fund other SBUs. Question Mark Despite their best efforts, personal computers with Microsoft OS have continued to be the market leader. This can be put down to Microsoft’s strong marketing (business to business) and the high costs for consumers wanting to switch to Mac software (O'Grady 59). Apple intends to divest, build, and hold, as a strategy to improve Mac software fortunes. Cash Cow The iPhone and iPad are certainly their best income source with Apple being market leaders in both markets. With the iPod reaching its PLC saturation point, Apple is now harvesting their product. They are set to maintain their iPhone market share in the future, as consumers need upgrades with their app store driving future market dominance (O'Grady 60). Dog Apple TV that lets the consumer play iTunes media files has not caught on as initially thought. However, they have launched 2nd and 3rd generation has shown their commitment to the project. Unless the market improves; however, Apple looks more likely to seek profits by divesting the product (O'Grady 62). Marketing strategy In one word, Apple’s marketing strategy can be defined as differentiation. Apple’s product strategy incorporates superior design to ensure that it stands out in the competitive market (O'Grady 65). This strategy has proved phenomenally successful. Apart, from hardware, Apple also develops software to ensure, the consumer has the best experience possible, which has led to customer loyalty. Apple is also a high price leader, although it has recently come up with relatively lower cost products. Apple tends to use prices that are higher than its competition in order to target early adopters. It then launches versions with fewer features at lower costs by adopting a skimming strategy. Apple also spends significant resources with an aim to expand stores and gets the undivided attention of its prospects. With more than three hundred worldwide stores, their distribution strategy should see it maintain high profitability (O'Grady 65). SWOT Analysis The SWOT analysis should help the investor have a clearer comprehension of the internal and external factors that should affect the corporation’s future strategies and thus its investment attractiveness. Strengths Innovative technology to build innovative products Stylish products Diversified products Brand loyalty of Apple computers Loyalty from customers Virus free systems Introduction of firewire and USB digital connection Interactive technology using computers with human-like senses Weaknesses High inventory and manufacturing costs Unstable management Low share of the software market Lack of compatibility features in its options Declining sales for iMac Opportunities Expansion on the basis of its high sales Could open more stores around the world Targeting educational and government institutions Making of compatible software Introduction of a speech recognition program They could begin making micro-processor chips Threats Acquisitions and mergers involving their competitors In the future, their high costs could be a limitation Microsoft Windows high market share Increase of competition in sites for music downloads Financial Analysis Balance Sheet Asset Structure Total Current Assets 2012 2011 2010 $57,653,000 $44,988,000 $41,678,000 Total Assets 2012 2011 2010 $176,064,000 $116,371,000 $75,183,000 The data shown above indicates that the total assets for Apple Inc. have steadily increased in the last three years. In 2010, the total assets held by Apple Inc. were worth over seventy five million dollars, which increased significantly to over $116 million before the growth went on abated to over $176 million. The major factor that led to the high growth in assets can be accounted for by the significant increase in property and plant equipment and long term investments as shown, in the appendix A. The subsequent increased growth in assets had to do with similar increases in long-term investments. The total cash and cash equivalents fluctuated, decreasing from 2010-2011 before increasing in 2012. This is a good sign of increasing solvency. The assets in Apple Inc. have maintained an upward trajectory, and they are indicative of a growing company. Liabilities and Equity Growth Total Current Liabilities 2012 2011 2010 $38,542,000 $27,970,000 $20,722,000 Non-current Liabilities 2012 2011 2010 $16,664,000 $101,100,000 $5,531,000 Total Liabilities 2012 2011 2010 $57,854,000 $39,756,000 $29,392,000 Total Shareholder Equity 2012 2011 2010 $118,210,00 $76,615,000 $47,791,000 In contrast to Dell and other major competitors, the corporation has no long-term debt for the 2010-2012 periods. Their total liability is much higher than for its competitors HP and Dell. According to their common size balance sheet, Apple Inc.’s Equity has steadily maintained an average percentage from 2010-2012. For retained earnings, as for the analyzed period, saw growth because of an overall growth in their profits. For the year 2012, their retained earnings came in at thirty percent of Apple Inc.’s total equity and liabilities that were lower than the industry average that came in at forty three percent with Dell having sixty percent retained earnings as a percentage of its total equity and liabilities. Income Statement Total Revenues 2012 2011 2010 $155.97 $108.6B $65.07B Gross Profit 2012 2011 2010 $68.2B $44.52B $25.57B Net Income 2012 2011 2010 $41.73B $25.92B $14.01B The income statement aids in the provision of information regarding the profitability of Apple Inc. over a period. The tables used above are meant to compare the net income and the total revenue from the consolidated incomes of the years 2010-2012. The total revenues have increased at a steady value from 2010 to 2012which is indicative of a significant growth in sales over that period. Both the net income and the gross profit have increased exponentially over the same period, which can be explained by the phenomenal increase in revenues that were able to mask a growing cost of revenue. Without the phenomenal growth in revenue, the net profit and gross income would have been adversely affected by the increasing cost of revenue over the three-year period (see Appendix B). Additionally, the percentage of increase for cost of revenue also dropped form one financial year to the next. The overall income statement suggests a company in incredible health that is well managed and stable with profitable returns. Financial ratios Financial component Apple Dell (major competitor) Comments Current price $532.4 $10.455 Their current price is phenomenally above that of Dell and the industry average, showing that it is a highly profitable company. Investment would require a significant amount of money. Moving average 611.35 11.01 Apple Inc.’s high 200 day moving average is indicative of its high momentum, signaling increasing profitability for the company. Quick ratio 1:2 0:9 Analysis of the trends shows that the two ratios remained relatively stable and were above their next biggest rival in Dell. This also shows that these ratios were above the industry average, which is a positive signal that shows that Apple Inc. has no major problems in fulfilling their obligations over the short term. Current ratio 1:5 1:2 Inventory turnover 107.9 32.7 The high rate of inventory could be a negative sign that shows the fact that Apple Inc. is holding inventory in excess. However, when compared to its major competitor in Dell, the inventory turn was over three times what Dell recorded, which is excellent as an indicator. Accounts payable $21.18B $10.556M ROE 32.1% 42.8% The same trend is true for this ratio. In 2007 Apple’s ROE reached 16.5 % - the highest level in the period. ROA 20.8% 7.6% This ratio has had a upward trajectory for Apple Inc., and when compared to the market’s next largest corporation in Dell, the ROA was way above their values, as well as above the mandatory 5%. This speaks volumes about the efficient manner in which the corporation is utilizing its assets so as to generate increased earnings. The large difference with Dell is indicative of how adept they are use of their assets, which should be a good investment indicator. Profit margin 23.4% 4.3% Gross profit margin 42.9% 20.5% Over the period of analysis, this ratio remained steady and had a positive trend. Its Gross profit margin was way above that of Dell, which, again, indicates that Apple is a significantly profitable company that heavily outperforms its rivals. Debt/equity 0.00% 0.57% The ratio was below 2:1, which is the recommended range. EPS ratio 12.41 1.48 Their earnings grew to massive proportions at $532.4, which indicates a positive and strong trend. PE ratio 12:1 7.1 While it is well within the recommended range, the P/E ratio is comparable to that of Dell, which indicates that both companies have a similar outlook as far as growth is concerned. PEG ratio 0.52 1.08 Its PEG ratio is at the recommended range, which cannot be said about Dell. This shows that they have a higher growth trajectory than Dell. P/S 3:996 0:31 This ratio is well within the recommended range and is over half less of its major competitor, showing positive growth. Recommendations Based on the collated findings from the above report, especially as far as Apple’s internal and external environment, as well as its financial analysis, its performance is and is expected to remain above average in the short and medium term. The analysis of its balance sheet showed that growth in total assets, retained earnings, and common equity were all above its major competitors and, thus, above the industry average. Analysis of its income statement indicates that its growth in gross income and net sales was above its major competition and the industry. Based on the analysis, Apple Inc. is in a strong and healthy position financially. The company has undergone phenomenal growth over the past five years. Apple has been able to finance their operations through its current liabilities alone. The corporation has an outstanding financial structure that has 100% equity and has no long-term debt. This makes Apple Inc. financially independent. The corporation’s net income and revenues have been on an upward trajectory for the past three years, and its retained earnings hit $10 billion in cash and equivalent. Therefore, the company is capable of carrying out future acquisitions. Over the analyzed period, Apple has also improved its key profitability measures such as profit margins, ROE, and ROA, which have strengthened it financially and given it ratios that far outstrip their competitors and the computer industry. Based on the collated data, it is clear that Apple Inc. is performing far better than its rivals and the industry as a whole. The dramatic level of success can be attributed to the sales from its iPod products and the iPhone revolution. The future at Apple looks bright as the company has positively significant momentum behind it. It possesses a massive brand power, a strong portfolio, which it uses to leverage its individual products to increase consumer demand for other products, and an innovative product design. I believe that Apple will, in the future, continue to operate with no long term debt. I also believe that they will continue with no significant alterations in their capital expenditures or net working capital. Because of the constant and never-ending development of their innovative technologies, Apple’s revenues do not seem to be in danger of decreasing dismally in the near future. I also expect Apple Inc. to demonstrate a much higher margin of earnings with their dogged attempts to push through the Apple TV, especially since their move into the sector will take advantage of an untapped market that is ready for massive growth. Remaining lower in the personal computer margin will also leave them to focus on the smaller electronics business. While, there is a chance that their stock price will fall due to its unusually high valuation, it should bounce back with the new iPhone 5s, which has seen enthusiastic reception from its consumers. The company’s continued profitability and growth does not show signs of abating with new models of the iPhone on the horizon and it is expected that they will continue to outdo their competition in innovative technology, at least for the foreseeable future. References Forbes.com. APPLE INC (NASDAQ: AAPL) . 2012. Web 10 December 2012 www.finapps.forbes.com/finapps/jsp/finance/compinfo/FinancialIndustrial.jsp?tkr=aapl&period=qtr O'Grady, & Jason D. Apple Inc. Westport : Greenwood Press, 2012. Print. Appendix A: Income Statement Period Ending 29-Sep-2012 24-Sep-2011 25-Sep-2010 Total Revenue 156,508,000   108,249,000   65,225,000   Cost of Revenue 87,846,000   64,431,000   39,541,000   Gross Profit 68,662,000 43,818,000 25,684,000 Operating Expenses - - - Research Development 3,381,000 2,429,000 1,782,000 Selling General and Administrative 10,040,000 7,599,000 5,517,000 Non Recurring - - - Others - - - Total Operating Expenses - - - Operating Income or Loss 55,241,000   33,790,000   18,385,000   Income from Continuing Operations Total Other Income/Expenses Net 522,000   415,000   155,000   Earnings Before Interest And Taxes 55,763,000   34,205,000   18,540,000   Interest Expense -   -   -   Income Before Tax 55,763,000   34,205,000   18,540,000   Income Tax Expense 14,030,000   8,283,000   4,527,000   Minority Interest -   -   -   Net Income From Continuing Ops 41,733,000   25,922,000   14,013,000   Non-recurring Events Discontinued Operations -   -   -   Extraordinary Items -   -   -   Effect Of Accounting Changes -   -   -   Other Items -   -   -   Net Income 41,733,000   25,922,000   14,013,000   Preferred Stock And Other Adjustments -   -   -   Net Income Applicable To Common Shares 41,733,000   25,922,000   14,013,000   (Forbes.com 1) Appendix B: Balance Sheet Period Ending 29-Sep-2012 24-Sep-2011 25-Sep-2010 Assets Current Assets Cash And Cash Equivalents 10,746,000   9,815,000   11,261,000   Short Term Investments 18,383,000   16,137,000   14,359,000   Net Receivables 21,275,000   13,731,000   11,560,000   Inventory 791,000   776,000   1,051,000   Other Current Assets 6,458,000   4,529,000   3,447,000   Total Current Assets 57,653,000   44,988,000   41,678,000   Long Term Investments 92,122,000   55,618,000   25,391,000   Property Plant and Equipment 15,452,000   7,777,000   4,768,000   Goodwill 1,135,000   896,000   741,000   Intangible Assets 4,224,000   3,536,000   342,000   Accumulated Amortization -   -   -   Other Assets 5,478,000   3,556,000   2,263,000   Deferred Long Term Asset Charges -   -   -   Total Assets 176,064,000   116,371,000   75,183,000   Liabilities Current Liabilities Accounts Payable 32,589,000   23,879,000   17,738,000   Short/Current Long Term Debt -   -   -   Other Current Liabilities 5,953,000   4,091,000   2,984,000   Total Current Liabilities 38,542,000   27,970,000   20,722,000   Long Term Debt -   -   -   Other Liabilities 16,664,000   10,100,000   5,531,000   Deferred Long Term Liability Charges 2,648,000   1,686,000   1,139,000   Minority Interest -   -   -   Negative Goodwill -   -   -   Total Liabilities 57,854,000   39,756,000   27,392,000   Stockholders' Equity Misc Stocks Options Warrants -   -   -   Redeemable Preferred Stock -   -   -   Preferred Stock -   -   -   Common Stock 16,422,000   13,331,000   10,668,000   Retained Earnings 101,289,000   62,841,000   37,169,000   Treasury Stock -   -   -   Capital Surplus -   -   -   Other Stockholder Equity 499,000   443,000   (46,000) Total Stockholder Equity 118,210,000   76,615,000   47,791,000   Net Tangible Assets 112,851,000   72,183,000   46,708,000   (Forbes.com1) Read More