Apple’s financial performance continued to strengthen over the last several quarters. In the most recent earnings announcement, Apple reported significant growth in net revenues driven by the strong performance of its iPod product line. Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2nd quarter 2005 results. Net income increased by 41% to $410 million. (Apple Reports)The iPod product line continues to drive the financial performance of the company. In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase over the 5.3 million units sold in the 2nd quarter of the prior year.
Mac sales showed slight growth of only 4%. (Apple Reports)Apple’s year-to-date revenues total just over $10 billion and earnings total just under $1 billion. For the 3rd quarter, CFO Peter Oppenheimer stated, “…we expect revenue of about $4.2 to $4.4 billion” which will push total sales above last term’s annual numbers. (Apple Reports)Historical PerformanceAlthough sales remained stagnant during 1998-2002, sales more than doubled since (see graph below). This dramatic shift in performance is primarily due to the increase in sales from the iPod product line.
(Apple Computer, 2005)Stock Price PerformanceAnother interesting way to consider the financial performance is to evaluate how Apple’s stock price performed against the market and against its main competitors. As we see from the chart above, Apple’s performance has been inconsistent over the last 20 years compared to the S&P 500. It also has not performed at the same level as its main competitors, Dell and Microsoft. However, performance improved since 2003.
Profitability MeasuresApple substantially improved in its key measures of profitability in the last few fiscal years. In terms of return on assets, return on equity and profit margin, Apple strengthened financially and now has similar ratios to that of its competitors and the overall computer hardware industry (see table below).
Liquidity and Leverage MeasuresApple historically held very little long-term debt. The table below compares Apple’s liquidity measures to their competitors, their industry, and the general market. During the period of strong financial performance, Apple accumulated cash. This strengthens Apple’s position should they choose to access the capital markets.
200320042005Microsoft ’05Dell ’05Industry ’05S&P 500Current Ratio2.52.632.881.111.811.82Quick Ratio2.472.592.92.851.081.451.31Product Unit SalesIn the last several years, there have been dramatic changes to Apple’s product sales by category. Apple breaks its unit sales into four primary categories: desktops, notebooks, iPods, and peripherals. The graph below shows the product mix for Apple in 2002. Note the domination by desktops and notebooks and the small contribution by iPods. (Apple Computer)When you compare the same graph for 2005, you see dramatic differences in the product mix for Apple. The iPod sales now account for 32.5% compared to 2.5% for 2002. The combined sales of computers (desktop/notebook) lost share, dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s product mix, not their global computer market share (which remains stable in the 2-3% range).
Meanwhile, sales of peripherals (including wireless connectivity and networking solutions), remained stable. (Hoover’s)Operating SegmentsApple breaks its sales into five “operating segments”. The chart below shows the sales by segment for each year 2002-2005. On a percentage basis, only the retail segment appears to be outperforming the others. (Apple Computer, Hoover’s)Net sales in the retail segment grew to $2.35 billion in 2005. In the 1st quarter 2006, sales growth continued in the retail segment to $1.1 billion (a 91% increase over the same period last year). This increase was due to growth in the number of stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q)
Although the retail segment was the only segment to realize growth as a percentage of total sales, all of the segments had solid growth. In the Americas, sales increased 65% and continued to represent approximately 47% of total worldwide sales. Sales in Japan and Europe grew by 92% and 47%, respectively. (1st Quarter 10Q)Market Value AnalysisWe used Discounted Cash Flow (DCF) analysis to assess the appropriate equity value of Apple. To complete this analysis, we developed a pro-forma income statement and extracted free cash flow. We then discounted these cash flows using a calculated Weighted Average Cost of Capital (WACC). Apple’s WACC equaled their cost of equity since they carry no long-term debt. We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity.
CAPM consists of a risk-free rate, a market risk premium, and a company Beta. The yield on the 10-year Treasury is the standard for a risk-free rate. To determine the market risk premium, we used the average return that an investor would require for an investment with average risk. (Higgins) We used data available online to determine Apple’s Beta, projected to be 1.46. (Google, 4/21/06) The below chart summarizes Apple’s cost of equity.
Cost of Equity/WACCNoteValueRisk Free Rate10 Yr Treasury5.12Market Risk Premium(Analysis)4BetaFrom Google1.46Adjusted Apple Risk Premium 5.84Cost of Equity/WACC 10.96Pro-Forma Income StatementWe made several key assumptions in compiling a pro-forma income statement. First, to complete the estimate for the 2006 data, we merely annualized the earnings for the first two quarters. We then projected a declining rate of growth in sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively. We do not believe that the growth in iPods is sustainable for the long-term. We also used the percent-of-sales method to calculate cost of goods sold, research & development, SG&A, and interest. We applied the 2005 tax rate for all future periods. As the table below shows, the mid-term earnings growth is positive.
Apple Computer (2006). Corporate Web Site retrieved 29 March 2006 fromhttp://www.apple.com/macmini/Apple Computer, Inc 1st Quarter 10Q. Retrieved March 19, 2006 fromhttp://www.apple.com.htmlApple Computer Inc. Q2 2006 Unaudited Summary Data. Retrieved from http://images.apple.com/pr/pdf/q206data_sum.pdf on 5/6/06.
Apple Reports Second Quarter Results. Retrieved April 23, 2006