Real Client Managed Portfolio Memorandum
TO: Real Client Managed Portfolio, Fall 2011 Class
FROM: Tyler Haida, Fankie Damian, Honglu Liu
SUBJECT: Apple Inc.
DATE: March 13, 2012
RECOMMENDATION: Buy
Company Overview
Apple Inc. and its subsidiaries designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players. Apple also develops and sells related software, services, peripherals, networking solutions, and third party digital content worldwide. Its products and services include iPhone, iPad, iPod, Mac, Apple TV, iOS and Mac OS X operating systems, iCloud, and various accessories and support offerings, along with a wide range of customer and professional software applications. Apple sells its products and services to customers, small and medium sized businesses, education, enterprise, and government customers through its retail stores, online stores, and direct sales forces. It also sells its products through third party cellular network carriers, wholesalers, retailers, and value-added resellers. Apple also offers various third party iPhone, iPad, Mac, and iPod compatible products including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals through its online and retail stores. It also sells third party digital content and applications through iTunes store, App Store, iBookstore, and Mac App Store. As of September 24, 2011 Apple had 357 retail stores, 245 in the United States and 112 internationally.
Industry
Apple is considered to be in the Personal Computers Industry, but because Apple operates in many other business segments it is difficult to define them by just one industry. We like to consider Apple to be in the “consumer electronics” industry. They don't have a single competitor that operates in all of the same business segments as they do which is why it becomes difficult to not only put them in one single industry but also define competitors. The consumer electronics industry is very competitive and demand is driven by the desire that the consumers have for these new products. The industry could be viewed as sort of a luxury industry; although we rely on computers and communication these days’ competitors offer similar products as Apple at a much lower cost to the customers. This where we are introduced an economic term called “the moat”, which references to a companies ability to fend off competitors from taking away its market share incase of missing or “flopping” on a new product. We believe that if you look at the track record of Apple in the last 5 years, when the company and share price have really taken off, they have the ability to retain their current market share and gain more. Considering that the last 5 years presented us with the worst economic conditions since the Great Depressions and that is when Apple, being in the consumer electronics industry which we view to be a luxury industry, has taken off we think that when normal economic conditions return that Apple will continue to prosper in the industry.
Recommendation
Multiple valuations give the estimated price of $650, although we did not give this value much weight because like we said earlier Apple does not have a true competitor so using comps wouldn't provide an adequate valuation. Using the Discounted Cash Flow valuation (DCF) we got a value per share of $704. The closing price on March 19, 2012 was $601.10. We believe Apple is very undervalued and although this might not be the optimal time to buy it is still a good time to buy. Because we were more on the conservative side with our projections we feel that this is more on the low end of valuation and we would recommend to buy 100 shares at the market.