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Apple Inc. Forecasting & Valuation

Apple Inc. Forecasting & Valuation. February 5, 2014 Kristen Bachteler Modules 4 & 5. Agenda. Overview of Forecasting Process Analysis of Apple & Comparables Sales Growth EATO EPM from Sales Forecasts Apple Comparables Issues with Forecasting Apple Industry

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Apple Inc. Forecasting & Valuation

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  1. Apple Inc. Forecasting & Valuation February 5,2014 Kristen Bachteler Modules 4 & 5

  2. Agenda Overview of Forecasting Process Analysis of Apple & Comparables Sales Growth EATO EPM from Sales Forecasts Apple Comparables Issues with Forecasting Apple Industry Valuation Using Discounted Cash Flows

  3. Module 4 Parsimonious Forecasting

  4. Overview of Forecasting • Return on Net Enterprise Assets • RNEA = EPAT avg(NEA) = EPAT x Sales Sales avg(NEA) = EPM x EATO • EPM = Enterprise Profit Margin • How much operating profit firm earns from each sales dollar • Higher is better • EATO = Enterprise Asset Turnover • Measures the productivity of the firm’s enterprise assets • Higher is better

  5. Sales GrowthAssuming rate of 10%

  6. Comparables’ Sales GrowthAssuming Rates of 25%, -2% & 14%

  7. EATOAssuming rate of (95.48)

  8. Comparables’ EATOAssuming Rates of 50,5, & 1.18

  9. EPM from SalesExcluded change from foreign currency translation & change from gain/losses in derivative instruments ; Assuming rate of 27.54%

  10. Comparables’ EPMAssuming Rates of 1%, -2%, & 17%

  11. The Forecasts • The sale forecast is the most crucial & difficult – all other enterprise income statement & balance sheet accounts derive- directly or indirectly- from the revenue forecast. • EPAT & NEA change with change in revenue • Stock valuation models commonly use more parsimonious methods to compute multiyear forecasts for an initial screening of prospective securities

  12. Apple’s Forecast

  13. Comparables’ Forecasts

  14. Issues with Apple • What is driving the variability in EPM? • Is it changes in the profit margin from items related to sales or peripheral items? • Tradeoff between EPM and EATO • In order to be competitive need a high EPM • Relying heavily on these assumptions • Apple’s sales spiked from 2010 to 2011 • Average of sales rates was about 40% but assumed 10% is safer • Relied on averages for EPM & EATO however both are unstable, with EPM much more volatile (however, that is generally the case)

  15. Issues with Industry • Companies are all over the place • Barnes & Noble has a negative sales growth rate • Apple’s is significantly higher • EATOs & EPMs are very inconsistent • EATO: eBay with 1.18 & Apple with (95.48) • EPM: B&N’s -2 vs. Apple’s 27.54 • Essentially, we are left asking the past two modules: • How comparable are the companies in our industry group?

  16. Module 5 Valuation Using Cash Flows

  17. Valuation Using Discounted Cash Flows

  18. Issues • Current market capitalization (2/4/14): $453.84 billion • My value is almost twice as much • Going Forward: • Need to go back and adjust forecast • EPM, Sales growth, and EPM may be too high • Since forecasting sales & performing valuation, Q1 earnings released

  19. Most Recent Earnings Release • As you can see, the stock declined nearly 8% within a day of the announcement of earnings • Company had record quarterly revenue of $57.6 billion, net profit of $13.1 billion • So if they have that amount of revenue of sales each quarter, $230 billion for the year • $60 billon more than total 2013 revenue of $170,910 million That would be a 35% increase in sales • How do I adjust my valuation?

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