Apple Stock - Research Paper Example

 Executive Summary Apple Inc. is a United States based company that designs, manufactures and sells personal computers, consumer electronics like mobile communication devices, digital music and video players and a variety of consumer software (Forbes). Apple is the world’s third largest mobile phone maker only behind Samsung and Nokia. In the years 2008 to 2012 it was named as the world’s most admired company by Fortune magazine. (Wikipedia) This paper seeks to analyze a number of aspects of Apple Inc. A projection of its future earnings will be made taking into account factors that affect these earnings, for example, corporate performance, the economic or political environment the company operates in and the performance of the stock within the market. The projection will look at the company’s earnings for the next three years using the last 3-4 years as a base for computation. For years now Apple Inc. has been synonymous to innovation and it has been named as the most innovative company in the world. From incorporation to date, Apple’s key products and services have included Macintosh computers, iPod, iPhone, iPad, Xserve and Apple TV. The company also provides a range of software like the Mac OS X, iOS operating systems and other consumer and professional software applications. (Harvard Business Review) The industry in which Apple operates in can be characterized into external features using Michael Porter’s five forces framework. Firstly, the industry has barriers to entry due to the significant capital requirements needed to enter. The degree of competition that the industry faces also limits entry of newcomers and the brand identity that each player in the industry creates bars new entrants since they would struggle for any significant market share due to their lack of any brand identity. Secondly, there is the constant threat of substitutes that the company faces due to the higher prices that the company imposes on its products as compared to its competitors. Generally, Apple products are highly priced than other similar products in the market, therefore there is that threat that consumers might opt to go for a lower priced commodity from Apple’s rivals. The threat of substitutes is also created due to the nature of the company business which is a closed ecosystem and is therefore difficult to switch to any other form of business (Forbes). Another external force that Apple is predisposed to is the bargaining power of buyers. Apple users demand value for their money hence forcing Apple to constantly produce quality products that meet their clients’ demand. There is also the supplier power that Apple as a corporation holds. The company always creates quality products making the company have the power to bargain for a higher price for their products in relation to their competitors. Finally, there is the threat from rivals. Apple has a number of rivals in the market who produce similar products. This competition is a threat to the company since it has to constantly find ways to gain a competitive advantage over its competitors. Failure to do so may predispose the company to lose its market share in the market due to that laxity. Apple Inc. is one of the most valuable companies in the world and much of its success is attributed to the sustainable competitive advantage it has created over the years. Gaining a sustainable competitive advantage over your competitors is one of the ultimate goals of any company and Apple has achieved this tremendously. The principal strategy Apple has used to gain this advantage has been the differentiation advantage strategy. Most if not all of the products that Apple has brought to the market have been unique and pacesetters. A strong promotional campaign also backs the quality of Apple products and their goal is to emphasize on the differences with other products (Yahoo Finance). Through excellent Research and Development (R&D), Apple has made numerous innovations further enhancing their competitive advantage. Their products are designed from scratch with fantastic attention to detail and emphasis is given to the user interface so as to produce quality easy-to-use products to the market. Another strategic competitive advantage that Apple had was the strategic decisions that the late Steve Jobs, former CEO and co-founder, brought to the table. Steve Jobs had the uncanny ability to capitalize on competitive advantage and stressed on the need not to focus or compete on product price. He accentuated on the product; a good quality product will sell regardless of the price – Steve Jobs. Economic Forecast Oxford Economics estimated the U.S GDP growth in 2010 as 3.4%. There are signs that the economy would solidly continue to grow evidenced by the strength in the ISM indexes, industrial production and the number of manufacturers’ orders (Oxford Economics 2011). However, the GDP growth in Europe will be hit by the debt crisis which has had a ripple effect on the U.S economy and would still prove to be a barrier of GDP growth. Unemployment rates have also been relatively high, recording 9.4% in 2011 and 9.0% in 2011 (LA Times 2011). These unemployment rates would adversely affect the economy in the coming years since a number of people would struggle to hold down a job. GDP growth in Asia is expected to be relatively good over the next few years and therefore Apple Inc. could try and target this market since it would be of benefit to them. Some critics on the other hand consider the economy of Asia and in particular China, to be at risk due to their efforts to spur growth using investment that could cause excess capacity (Bloomberg 2011). The overall U.S economy is expected to be hardly hit by the unemployment rate and the Euro debt crisis which will massively hinder the growth of the U.S GDP growth rate. The table below is a summary of the GDP growth rates for the past years and the forecasted rates for the years to come in the major world markets. Summary of GDP Growth Rates 2011 2012 2013 2014 2015 NORTH AMERICA United States 3.8 3.5 3.0 3.1 3.3 Canada 3.2 4.3 4.1 4.1 4.0 EUROPE EuroZone 1.3 1.9 2.1 2.0 2.2 Germany 1.7 1.9 2.2 2.3 2.2 France 1.7 2.2 2.1 2.2 2.4 Italy 0.7 1.3 1.6 1.5 1.7 UK 2.3 2.9 3.5 3.4 3.4 EU27 1.6 2.3 2.6 2.7 2.7 ASIA Japan 1.4 2.1 2.0 2.2 2.4 Emerging Asia, excl Japan 7.3 7.7 7.6 7.8 7.7 China 8.9 8.9 8.9 9.0 9.0 India 8.3 9.0 8.8 8.9 8.9 Stock Market Forecast It is of great importance to ascertain the stock market forecasts. The forecasts in 2012 in particular show a lot of promise as analysts estimate that the U.S stocks will gain anywhere from 5% to 15% (U.S Today 2011). These forecasts have taken into consideration the safer investments that investors are expected to take like Treasury bonds other than investing in U.S stock. The change in S&P in 2012 is 3.9% and an average P/E of 17.2. The next few years will be characterized by an increase in DOW and S&P due to the pessimism of investors on the economic crisis. This will mean that they will currently invest less now and thus have more money to invest in the future. The negative impact that the Euro debt crisis has had on the U.S stock has led to the losses made on the U.S stock index futures. Italy, Greece and Spain have specifically been hit by the debt crisis hence resulting to the American economy taking a blow as well (Reuters 2012). Despite all these however, Apple Inc. stock prices have been increasing. Recently, Apple recorded an all-time high $700 price per share. This made Apple the most valuable company in the world by share value. Sector and Industry Forecast The mobile and consumer electronics market is a fiercely competitive market with a number of players in it. It is estimated that there are 6.6 billion connected mobile phones with annual revenues averaging $1.5 trillion. The GSM Association, which is the world’s leading body of mobile operators and device makers, predicts that by 2015 the revenues would increase to $1.9 trillion and mobile connections to rise to 9.1 billion (The Australian 2012). The major companies in this industry are Samsung, Apple, Nokia, Motorolla, HTC and LG. Apple’s share of the smartphone market is 31.9%, which is only second to Google’s Android platform as of May 2012 (Comscore 2012). When it comes to the total mobile subscribers (both smartphone and non-smartphone), Apple is third behind Samsung and LG with 15% of the total market share. The industry’s growth in recent times has been fuelled by the increase in the use of smartphones. Consumers worldwide have been demanding for smartphones due to the practical utility they provide and the ability to download applications from the Internet. Despite the growth in the use of smartphones, there is a challenge due to the amount of traffic that is growing in mobile networks (The Australian 2012). Ratio Analysis APPLE’S ANALYSIS OF PROFITABILITY AND SOLVENCY As of September 29, 2012 Source: Apple’s 10K Apple Samsung Revenue Growth 0.44 0.25 Operating Margin 0.35 0.13 Net Margin 0.26 0.12 Current Ratio 1.50 1.45 Quick Ratio 1.48 1.26 Apple and Samsung are the biggest companies in consumer electronics. Apple recorded a higher revenue growth than Samsung which could have been as a result of the increase in sales in iPhones due to the recent launch of the iPhone 5. Sale of iPhones went up 58%, iPads’ sales increased by 26%, Macs increased by 1% while there was a 19% decline in the sale of iPods. Profitability of a company is measured by the operating and the net margins. Both the operating margin and net margin for Apple were higher than those of Samsung. This means Apple was able to make a profit out of their revenues much more effectively after considering their cost of goods sold and operating expenses, than Samsung was able to do. Regarding liquidity, Apple had a higher current ratio than Samsung. Current ratio is the ratio of total current assets to total current liabilities and it is a measure of how effective a company is at paying off its current liabilities using its current assets. Therefore, Apple is better equipped to pay back its short term obligations using current assets than Samsung. Quick ratio is similar to current ratio but the total current assets do not include stock/inventory. Therefore, quick ratio is a ratio of the difference between total current assets and inventory to total current liabilities. Apple has a higher quick ratio than Samsung meaning that it has less closing inventory than its rival probably due to effective inventory turnover techniques or poor inventory management on Samsung’s part. Apple Financial Forecast and Valuation An analysis of Apple Inc. is done on the table below. The table shows the revenues the company made for the three years 2009 to 2011 and the current and projected revenues for the company over the next three years. The revenue growth rate for each of these years is also calculated as is the gross margin and gross profit for the past three years as well as the expected margins and profits for the next three years. Operating income and margin plus the net margin and profit for the past three years and those expected in the next three years are also considered. The company’s earnings per share are also determined from 2009 through to 2015. 2015 2014 2013 2012 2011 2010 2009 Revenues (Millions) 356,988 324,534 225,371 156,508 108,249 65,225 42,905 Revenue growth 0.1 0.44 0.44 0.44 0.65 0.52 - Gross Margin 0.4 0.42 0.42 0.43 0.4 0.39 0.4 Gross Profit 164,824 132,516 92,431 68,662 43,818 25,684 17,222 Operating Margin 0.41 0.39 0.38 0.35 0.31 0.28 0.27 Operating Income 205,054 128,159 88,385 55,241 33,790 18,385 11,740 Net Margin 0.33 0.31 0.28 0.26 0.24 0.21 0.19 Net Profit 101,795 76,538 58,426 41,733 25,922 14,013 8,235 EPS 138.54 98.96 70.64 44.15 27.68 15.15 9.08 NOTES: Discussions have begun over whether Apple is a growth stock or an investment stock. It seems that with the increase in foreign markets, and the short lifespan and ability of the company to create new products, it is likely that the company could see significant market growth, even in a weak economy. Discussion With the release of the iPad mini and the iPhone 5, Apple has shown that they will continue to be an important player in the personal technology field. It is presumable that with increased demand in foreign markets, and a pattern of successful releases, the revenue growth rate should continue, with the company experiencing contracted growth in 2015 due to material shortage and limited consumer demand (a saturated world market.) One factor mitigating this growth could be the change in cycle that is expected in 12 months or so. Also, supplier issues at Apple could have a negative impact on demand. Operating margin is on a steady growth trend and should continue. Economic conditions should barely affect Apple, because of their position as a prestige brand which people buy with cultish abandon. The year 2012 has seen Apple record a staggering $41.9 billion in profits over the four quarters. This figure is $7 billion more than the profit posted by Microsoft, Google, Facebook, Amazon, Yahoo and eBay, all combined. To put it into perspective, Apple’s profit was more than double the $19.4 billion earned by Intel, HP, Asus, Lenovo, Acer, IBM and Dell combined. Basically, Apple was more than twice as profitable as the entire PC industry (Yahoo Finance). Better still looking at Apple’s smartphone and tablet rivals, Samsung, HTC, Nokia and RIM, these companies only made combined profits of $12.8 billion; just over a quarter of Apple’s profits posted in the same period. Apple’s stock price hit a record of $700 in September 2012 but the price fell to around $550 in November 2012 (Yahoo Finance). Social Responsibility Corporate Social Responsibility (CSR) is a self-regulating mechanism in which a company ensures that it is compliant with the rules and regulations set, international or societal norms and other ethical standards. Social responsibility ensures that businesses embrace for the actions they take and that a positive impact is fostered through its activities on all stakeholders and the environment. Stakeholders include consumers, suppliers, investors and the general public. Apple Inc. has particularly ensured that high standards are set wherever its products are made by insisting that its suppliers provide safe working conditions, using environmentally acceptable manufacturing methods and treating workers with dignity and respect. (Forbes) The company requires that for suppliers to do business with them they have to commit to the set standards and principles of the company’s Supplier Code of Conduct. The supplier responsibility that Apple has initiated has a number of issues it strongly upholds. First is the labor and human rights that all suppliers must preserve by ensuring that involuntary labor, excessive work hours, discrimination or underage labor are not tolerated. Worker health and safety must also be enforced by all suppliers to create an environment that is healthy and safe to their workers. Thirdly, the environmental impact that each supplier’s processes have are strictly examined. Suppliers must use environmentally conscious processes, manage harmful substances, limit air emissions and treat wastewater. In addition, Apple has also set a strict audit program to ascertain that responsibility is upheld across its entire supply chain. Finally, the company ensures that its suppliers’ workers are educated on their rights and the protection they are entitled to (Supplier Responsibility). The company also takes action against unethical practices amongst its suppliers. Most recently, there was the use of underage workers in ten facilities, four facilities had also falsified audit materials and one other facility had a case of bribery. (Forbes) Apple strongly condemns and prevents such irresponsible actions and has implemented strict disciplinary rules against such occurrences. Final Recommend Apple Inc. is one of the Fortune 500 companies, the most admired company in the world and one of the most valuable companies on earth. These facts alone make Apple’s stock worth buying! In addition, the company’s revenues and profits have consistently been on the increase in the recent past and projections also show that the revenues and profits for the company will continue to rise in the years to come. The company has consistently proven that its products are unique and of high quality which has been aided by the intensive Research and Development that has been undertaken in each of the company’s products. If this trend continues, then the company will have a wide range of products that are unmatched and incomparable to no other in the market hence aiding in the profitability of the company. Apple’s stock hit a record $700 in September 2012 which shows the heights that the company has the potential to reach in future. Despite the fall in the company’s stock price in the months following due to the sale of fewer new tablets than expected, there is still the anticipation that the company’s stock price will increase. Furthermore, the company declared a cash dividend of $2.65 per share in 2012. This is a high reward to the company’s shareholders which even entices the purchase of its stock even more. According to a guru with NADSAQ, Jeffrey Gundlach CEO of Doubleline Capital, he expects Apple’s stock to continue declining due to the apparent inability of the company to innovate; the fundamental attribute to the company’s success over the years. The stocks are expected to slip as low as $425 given that they have now declined 20% since September when they posted their highest ever price. The recently launched 7.9-inch iPad was viewed by most as a lacking in innovation by the company since the product was not new; it was just a larger size to an earlier product and this led to fewer sales of the tablet than was expected. The deficiency in innovation was worrying to investors, particularly coming from a company that had built its brand as the ultimate innovator, thus the persistent decline in the stock price over recent months is expected to continue (Silobreaker 2012). Works Cited Apple Inc. Apple Inc. Annual Report Form 10-K for 2012 Apple Supplier Responsibility Bingemann, M. (2012) The mobile phone industry is growing at an incredible pace and is not slowing down. The Australian. Comscore Reports (2012) U.S Mobile Subscriber Market Share. Don, L. (2011) White House Forecasts High Unemployment Through 2012. Los Angeles Times. Klein, P. (2011) Where is Apple’s Social Purpose. Forbes. Krudy, E. (2012) US Stocks Euro Zone Debt Worries Set to Punish Stocks, Again. Reuters. Musil, S. (2012) Apple’s stock price will fall to $425. Silobreaker. Rampell, C. (2011) The Euro Zone Crisis and the U.S.A Primer. New York Times. Samsung Electronics Co., Ltd Annual Reports for 2012 Shamim, A. (2011) Roubini Says ‘Perfect Storm’ May Threaten Global Economy. Bloomberg New York. Smith, C. (2012) Apple’s yearly profits eclipse the entire PC industry. Yahoo Finance. Thomke, S. and Feinberg, B. (2011) Design Thinking and Innovation at Apple. Harvard Business Review. US Weekly Economic Briefing. Oxford Economics 2011 2011. usatoday 12 12 2010, n. pag. Web. 15 Nov. 2011. Read More