Corporate Valuation Model Analysis: Apple, IBM & Samsung - Case Study Example

Corporate Valuation Model Analysis: Apple, IBM & Samsung Student’s Name Institution Introduction The focus of this report is on utilizing corporate valuation models to a selected electronic consumer company; Apple Inc, while still comparing its financial performance with other selected competitors that include; Samsung & IBM. It is important to note that the corporate valuation models in use for the overall performance analysis include; Net Operating Profit after Taxes (NOPAT), Free Cash Flow (FCF), Return on Invested Capital (ROIC), Market Added Value (MVA), Economic Value Added (EVA), and Enterprise Value (EV). Company Profile: Apple Inc Apple Incorporated was established in 1977 in Cupertino, California and engages in the designing, production and marketing of mobile communication and distinctive media devices, PCs, Apple watches and such other products like digital content music players on a global platform (Yahoo Finance, 2014). Consequently, the company is also engaged in the selling of other related software products, services and applications through both their online and physical stores positioned across most of the world’s developed economies. Some perfect examples of products offered include; iPod, iPads and Apple Smart watches. The recently launched product of the company is the Apple TV, which serves a consumer and professional software platform of applications (Yahoo Finance, 2014). Additionally, the corporation provides numerous Apple-related brands and third-party Mac-compatible and iOS-compatible accessories that include; headphones, cases and displays. Subsequently, it also got involved in the selling and delivering of imminent digital content as well as proper applications through such popular platform as iTunes Store, App Store, iBooks Store as well as Mac App Stores (Yahoo Finance, 2014). Notwithstanding, apart from both online and physical stores, the company also conducts selling through direct sales force and, also through a third-party cellular network carriers and value-added forms of resellers (Yahoo Finance, 2014). Industry Analysis: Electric Equipment Industry The global electronic equipment industry is made up of companies that engage in the direct manufacture of a wider range of products and services for a diversified range of IT-sensitive customers (MacWilliams, 2012). It is important to note that the entire industry is fragmented however; there are few firms that enjoy substantial amounts of sales revenues from the overall market niche. The industry has grown exponentially outside of their host and home countries to other manufacturing centers in such other Asian countries like Taiwan, China and India (MacWilliams, 2012). Notably, currently, the most high volume production and assembly of electronics is conducted in the East while elements attributed to design and R&D activities have taken a center stage of development within these areas as well. The industry is experiencing intensive paradigm shifts in such aspects as technological advancements, labour as well as matters related to economics. Other ever-changing areas relate to the current concerns directed towards guarding of intellectual properties and skill retention strategies so that no single area of the industry can be said to have attained a significant point of predictability (MacWilliams, 2012). In the United States and the North American section as a whole, the electronics industry is set to continue playing a significant role in the future growth and development of the economy as a whole especially in relation to such factors as provision of job opportunities. On the contrary, research indicates that there has been an intensive outsourcing activity being directed towards China, which has led to definite infrastructural problems and economical bias. As a result of this bias, the North American production capacity and skill prowess has diminished to an unrecoverable point (MacWilliams, 2012). In Europe, the industry has been restructured to accommodate a definite focus on regional markets as well as many of niche sub-markets. The Japanese industry is still deemed to be strong given that it has ensured to automate most of production processess in order to guarantee of strategic markets however; competition still emanates from other Asian regions like South Korea, which remains to the home country of one of the largest electronics company; Samsung (MacWilliams, 2012). Corporate Valuation Theoretical Review There are six formulae that are employed in the course of conducting corporate valuation model. They are discussed as follows; A. Net Operating Profit After Taxes(NOPAT) The formula is used to measure the extent of a firm’s immediate earnings level after it is established that it has met its fundamental obligations of debt clearance (Liu & Magan, 2011). It is computed by multiplying the Earnings before interests and taxes by the difference gotten as a result of the tax rate incurred within a given period as shown below; NOPAT = EBIT*(1 – Tax Rate) B. Free Cash Flow(FCF) The FCF is a valuation formula that explains the remainder of cash resources left with a firm after meeting all of expenditure commitments in order to ensure smooth operations and in other cases, promotes expansion activities of a business (Liu & Magan, 2011). It is a model that ensures that businesses pay-off their respective debts, dividends to existing shareholders, engage in such programs as buy-back stock options as a way of ascertaining a firm’s decision making prowess as well as pursue possible expansion-based activities not yet engaged (Liu & Magan, 2011). It is computed by way of lessening the exact amounts of cash that is used up by a firm from its NOPAT like net working capital, depreciation, amortization among others. There are quite a number of formulas used for computing FCF and they are represented as below; Free Cash Flow (FCF) = NOPAT – Net Investment on Working Capital (NIOC) NIOC = Operating Capital CURRENT YEAR – Operating Capital PREVIOUS YEAR Operating Capital (OC) = Net Operating Working Capital (NOWC) + Fixed Assets Net Operating Working Capital (NOWC) = Operating Current Assets (CA) – Operating Current Liabilities (CL) The overall series formulae can however; be simplified as below FCF = NOPAT – ((CA2014 – CL2014) + Fixed Assets2014) – (CA2013 – CL2013) + Fixed Assets2013)) C. Return on Invested Capital(ROIC) ROIC represents that level of cash amount a firm is capable of generating from a given available cash resource that have been already invested by the existing shareholders. Results from this component are used to ascertain the overall health of a company (Liu & Magan, 2011). A healthy operating firm should have a ROIC that is far greater to the Weighted Average Cost of Capital (WACC). The formula for computing ROIC is depicted as below; 𝐑𝐎𝐈𝐂= 𝐍𝐎𝐏𝐀𝐓/𝐎𝐂 =𝐄𝐁𝐈𝐓(𝟏−𝐓𝐚𝐱 𝐫𝐚𝐭𝐞)((𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐂𝐀−𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐂𝐋)+𝐅𝐢𝐱𝐞𝐝 𝐀𝐬𝐬𝐞𝐭𝐬) D. Economic Value Added (EVA) EVA is a metric representation that is employed by a specific form of investors in order to establish the degree of effectiveness of a company’s immediate management. It is able to establish whether or not a firm is creating imminent value for its existing shareholders (Liu & Magan, 2011). Furthermore, it portrays the actual and concise amounts of profits produced by a firm over a given period. Subsequently, this metric can be used to ascertain whether or not the existing employees are, in any way, adding value to the company. It is calculated as follows; Or rather in simple terms as follows; E. Market Value Added (MVA) This is a metric that portrays the immediate differences that occurs between a market value of a given company and its overall book value (Liu & Magan, 2011). It is important to ascertain that the book value is basically the amount of cash resources that a firm has managed to generate for its existing stockholders since its inception. Below is how MVA is computed; F. Enterprise Value (EV) This is a metric that represents a firm’s immediate FCF to its resent values (Liu & Magan, 2011). It shows the real value for any given firm and it is calculated as below; Corporate Valuation Model Analysis: Apple, Samsung& IBM A. NOPAT Year 2012 “(Millions)” 2013 “(Millions)” 2014 “(Millions)” EBIT 55,241 48,999 52,503 Tax Rate 0.3 0.30 0.30 NOPAT 38,668.7 34,299.3 36,752.1 Year 2012 “Millions” 2013 “(Millions)” 2014 “(Millions)” Samsung: EBIT 25,426.9 34,943.492 23,772.272 Tax Rate 0.3 0.30 0.30 NOPAT 17,798.83 24,460.44 16,640.59 Year 2012 “Millions” 2013 “(Millions)” 2014 “(Millions)” IBM: EBIT 22,802.0 20,244 19,986 Tax Rate 0.3 0.30 0.30 NOPAT 15,961.4 14,170.8 13,990.2 Assumed tax rate is 30% and WACC is 8.5% Interpretation: Apple’s NOPAT increases in the period between 2013 and 2014 as opposed to both Samsung and IBM whose ratio decreases indicating that Apple; unlike its competitors enjoys substantial cash base from its previous years even after ensuring that it has paid off its debt commitments, which is a good indication altogether. B. Free Cash Flow Company/ Year Apple 2012 2013 2014 NOPAT 38,668.7 34,299.3 36,752.1 Current Assets 57,653.0 73,286.0 68,531.0 Current Liabilities 38,542.0 43,658.0 63,448.0 NOWC 19,111 29,628 5,083 Fixed Assets 15,452.0 16,597.0 20,624.0 OC 34,563 46,225 25,707 NIOC 11,662 -20,518 FCF 22,637.3 16,234 Competitors: Company/ Year Samsung 2012 2013 2014 NOPAT 17,798.83 24,460.44 16,640.59 Current Assets 76,430.2 97,003.8 100,844.9 Current Liabilities 41,104.0 44,942.0 45,553.8 NOWC 35,326 52,061.8 55,291.1 Fixed Assets 59,978.9 66,119.7 70,828.5 OC 95,304.9 118,181.5 126,119.6 NIOC 22,876.6 7,938.1 FCF 1,583.84 8,702.49 Company/ Year IBM 2012 2013 2014 NOPAT 15,961.4 14,170.8 13,990.2 Current Assets 49,433.0 51,350.0 49,422.0 Current Liabilities 43,625.0 40,154.0 39,600.0 NOWC 5,808 11,196 9,822 Fixed Assets 13,996.0 13,821.0 10,771.0 OC 19,804 25,017 20,593 NIOC 5,213 -4,424 FCF 8,957 9,566.2 Interpretation: Apple’s FCF decreases within the two-year period from 22,637.3 to 16,234 in 2013 and 2014 respectively. Despite the decrease, the FCF still stands high and above its immediate competitors; Samsung and IBM, within the same period. The favourable value is an indication that Apple’s is able to manage its finances despite a decrease in the level of revenues posted. The positive FCF value postulates a good sign since it means that the firm has made significant improvements on its management and performance strategies hence assured of substantial amounts of cash at hand to conduct reinvestment options or even pay for any foreseeable dividends. C. Return on Invested Capital (ROIC) Company/ Year Apple 2012 2013 2014 NOPAT 38,668.7 34,299.3 36,752.1 OC 34,563 46,225 25,707 ROIC 1.12 0.74 1.43 ROIC% 112% 74% 143% Competitors Company/ Year Samsung 2012 2013 2014 NOPAT 17,798.83 24,460.44 16,640.59 OC 95,304.9 118,181.5 126,119.6 ROIC 0.187 0.21 0.131 ROIC% 18.7% 21% 13.1% Company/ Year IBM 2012 2013 2014 NOPAT 15,961.4 14,170.8 13,990.2 OC 19,804 25,017 20,593 ROIC 0.81 0.57 0.68 ROIC% 81% 57% 68% Interpretation Apple’s ROIC increased significantly within the three-year period in comparison to the other two competitors, which is a good and positive sign as it means that it is highly positioned to earn returns on shareholder’s funds. D. Economic Value Added Company/Year Apple 2012 2013 2014 NOPAT 38,668.7 34,299.3 36,752.1 WACC 0.085 0.085 0.085 OC 34,563 46,225 25,707 EVA 35,730.8 30,370.2 34,567.0 Competitors: Company/Year Samsung 2012 2013 2014 NOPAT 17,798.83 24,460.44 16,640.59 WACC 0.085 0.085 0.085 OC 95,304.9 118,181.5 126,119.6 EVA 9,697.9 14,415.0 5,920.4 Company/Year IBM 2012 2013 2014 NOPAT 15,961.4 14,170.8 13,990.2 WACC 0.085 0.085 0.085 OC 19,804 25,017 20,593 EVA 14,278.06 12,044.4 12,239.8 Interpretation: Apple’s EVA decreased slightly within the three-year period but still, it performed way better in comparison to its competitors. This is a good sign since it means it made significant profits necessary for paying off its business costs. E. Market Value Added (MVA) Year/ Company Apple 2012 2013 2014 #shares outstanding 135,740 135,740 286,512 Book value per share 17.98 19.63 19.02 Book value of equity 2,440,605.2 2,664,576.2 5.449,458.24 Market price per share 56.8 68.43 98.46 Market value of equity 7,710,032 9,288,688.2 28,209,971.52 Interpretation: Apple’s MVA increases within the three-year period in comparison to its competitors. This is a good sign as it means that it is fairly positioned to make more profits/revenues as compared to competition. F. Enterprise Value (EV) Year/Company Apple Inc. 2012 2013 2014 FCF - 22,637.3 16,234 WACC 0.085 0.085 0.085 EV - 20,863.9 14,962.2 Competition: Year/Company Samsung 2012 2013 2014 FCF - 1,583.84 8,702.49 WACC 0.085 0.085 0.085 EV - 1,459.8 8,020.7 Year/Company IBM 2012 2013 2014 FCF - 8,957 9,566.2 WACC 0.085 0.085 0.085 EV - 8,255.3 8,816.8 Interpretation: Apple’s EV decreases between the two-year period but still stands in a good position in comparison to both IBM and Samsung. It means that Apple stock options have been favorably valued hence performing better. Conclusion It can be noted that Apple maintains a favorable corporate value in comparison to its immediate competitors, with NOPAT, EV, MVA, FCF and others being positioned high and above the competition. This is despite the fact that some of these values decrease within certain periods. It thus goes without saying that Apple’s management has improved on its strategies of conducting business thereby improving overall profits and revenues. References Bloomberg. (2014). Apple Inc Financials. Retrieved from http://www.bloomberg.com/research/stocks/financials/ratios.asp?ticker=AAPL Bloomberg. (2014). Samsung Financials. Retrieved from http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker=SSNLF&dataset=balanceSheet&period=A¤cy=US%20Dollar Bloomberg (2014). IBM Financials. Retrieved from http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker=IBM&dataset=balanceSheet&period=A¤cy=native Liu, M & Magan, M. (2011). Self-dealing regulations, ownership wedge and corporate valuation: International evidence. Corporate Governance: An International Review, 19(2), 99-115. MacWilliams, J. (2012). US electronic industry faces major challenges. Retrieved from http://www.electroline.com.au/content/business/article/us-electronics-industry-faces-major-challenges-1377348905 Yahoo Finance! (2014). Apple Company profile. Retrieved from http://finance.yahoo.com/q/pr?s=AAPL+Profile Appendices: Read More