Mike Swierczewski

Apple Inc. (AAPL)

Sector: Consumer Goods
Industry: Electrical Equipment
Ethical Screen
Apple passes our social screen for the portfolio. Since Tim Cook took over the CEO position of

Apple they have taken a more active foot in becoming a socially responsible company. Since Cook has

come aboard Apple has joined the Fair Labor Association after having problems under Jobs with the

Foxconn workforce having members committing suicide because of the demand their jobs had. Cook is

highlighting the importance of social efforts: LGBT rights, philanthropy, corporate diversity, renewable

energy, and improving manufacturing condition abroad.

Apple has many programs that show Cooks change to Apple. They are involved in a Global

Volunteer Program to encourage their employees to volunteer in local communities. They have an

education and development program offered for free by 18 factories where more than 280,000 workers

have taken various courses. They have a Supplier Code of Conduct said to be one of the toughest in the

electronics industry that involves investigations of abuses of foreign workers. They have the Apple

Supplier EHS Academy which is an 18-month program designed for employee health and safety. And

they have also been noticed by Greenpeace as an environmentally friendly company with a Clean Energy

Index of 100%. The one factor that poses for controversy is that Apple wont release the privacy of its

phone users to the FBI which can be seen as protecting the rights of their clients confidentiality.
Porters Five Force for Apple

1. Competitive Rivalry
High: The competition in the technology sector is very high even though Apple is on top

of it presently. Due to them being this top dog of the tech sector, many are aiming to take

away some of their customers and even attempt to recreate their products as better ones.

Another fear after Jobs has come away is that Apple will fail to innovate into new

products while others may begin to pass them up with the next big thing.
2. Consumer Bargaining Power
Moderate- Bargaining power of consumers is one of the more relevant forces for Apple to

consider. Individual bargaining is a weak force by itself because the loss of one buyer
 wont result in a heavy detriment to Apples very high revenues but collective bargaining

does play a factor. If many customers begin to switch to say Microsoft products due to

defects then that could be more effective towards lessening Apples revenues. Apple has a

good deal of money in capital expenditure and R&D to counteract those possibilities

though which adds to their brand recognition.

3. Supplier Bargaining Power
Low- The bargaining of suppliers for Apple is pretty weak because of the high number of

potential suppliers they could switch over to if one backs out. This is due to the fact that

those supplying markets themselves are very competitive themselves. So this force isnt a

major consideration for Apple or the general technology market.

4. Threat of New Entrants
This is due to the extremely high cost of establishing a company within the industry and

also establishing brand name recognition which is crucial in the tech industry because of

reliability being associated with brands. Because of this need for heavy brand recognition

the likelihood of new entrants in the near future is doubtful.

5. Availability of Substitutes
Low- There is no real threat of substitute products or services for Apple to be entirely

worried about. They deal heavily in smart phones and one possibility to substitute would

be landline telephones or mailing letters which are falling out of existence themselves

because of smart phones substituting in for them. There is an issue though that the

technology industry is untapped territory and we dont know what kind of products that

will come out next to possibly be a swap for the telephone.

Economic Moats
When looking at economic moats or financial buffers for companies in the modern day business

world, Apple has to be one of the top companies to consider. If a black swan event were to hit the market

tomorrow Apple would have enough money to cover it and then possibly help out other companies as

well if they wished to. As of September 2016 they had $67.155 billion in cash or cash equivalents

meaning they are very liquid to be able to handle disaster if it does so arise. Another form of economic

moat they have has to be there brand reputation. Apple is consider the leader in technology industry in
many segments and has brand loyalty spanning heavily into their phone industry and iPod and iTunes

stores.
Free Cash Flow to the Firm Valuation
As of 5/1/17, Apples stock price ended the day at $146.58 a share. Looking at the free cash flow

to the firm valuation (FCFF) we can see that Apple is still undervalued a little bit based on a growth rate

of 9.07% going into 2017 and a price of $156.78.

Looking into how the numbers were gotten in figure 2, the growth rate comes from average out

the past 4 years of growth in revenues which came out to the 9.07%. This is an accurate growth for 2017

because Apple had an off year going from 2015-2016 by having a -7.73% growth due to the outlying

growth coming from the year before of 27.86% from 2014-2015. Apple is still a company that is focused

on growth into the future and the 9.07% reflects that accurately based upon the amount of new generation

coming into technology earlier in their lives. Kids are starting to get younger and younger and buying

Apple products much earlier than they did in the past and Apple has that brand recognition and brand

loyalty that has credibility amongst the many in the markets. This growth rate accurately reflects how

much it should grow after the two outlying years prior. The 9.07% is used as a constant growth rate which

is generous and yet only yields an undervalued stock of $10.20.

The same thing was done on the right column in figure 2 but with a margin of safety of 15% with

the growth rate causing it to be 7.7% instead of 9.07% dropping the price down to $121.27 per share. This

raises some alarms for having this stock too long because it has shown heavy growth in the past year and

may begin to falter soon.

Relative Valuation
Looking at relative valuations is a tricky thing when looking at Apple in the tech industry. The

biggest reason for this is that although it does have a lot of competitors, Apple is a company that is much

more diverse than many others in regards to what type of technology it sells. Microsoft and Google are

two different companies in the way that they operate but both can be seen as two of Apples biggest

competitors.
Seeing figure 2, Apple has a significantly lower P/E ratio than both Microsoft and Google which

speaks well for Apple because they have a low ratio in accordance to the tech industry. But, alarms still

could be raised because of the relevance of the stock market being in a tech bubble right now that doesnt
appear to be bursting in the near future but still might. The PEG ratio shows that Apple is in the middle of

the pack in regards to PE and possible growth in the future. This could be alarming since growth is one of

the biggest factors in regards to wanting to invest in a company. In the industry the dividend yield can be

seen as normal at just .02 which is the same as Microsofts while Google doesnt have dividends at all.

Since Apples enterprise value is so high its enterprise value to EBITDA is significantly lower than both

Microsofts and Googles.

Recommendation/ Action
Sell a high to medium portion of the stocks invested into Apple because of the heavy amounts of

uncertainty surrounding it. Also to save the profits that have been made off of it already.
 Appendix
Figure 1

Figure 2