Investing in Apple Inc.
Instructions:-
- Imagine that you are a financial manager researching investments for your client. Use the Strayer Learning Resource Center to research the stock of any U.S. publicly traded company that you may consider as an investment opportunity for your client. Your investment should align with your client’s investment goals. (Note: Please ensure that you are able to find enough information about this company in order to complete this assignment. You will create an appendix, in which you will insert related information.)
The assignment covers the following topics:
- Rationale for choosing the company in which to invest
- Ratio analysis
- Stock price analysis
- Recommendations
Refer to the following resources to assist with completing your assignment:
Stock Selection
Forbes – “Six Rules to Follow When Picking Stocks”
CNN Money – “Stocks: Investing in stocks”
The Motley Fool – “13 Steps to Investing Foolishly”
Seeking Alpha – “The Graham And Dodd Method For Valuing Stocks”
Investopedia – “Guide to Stock-Picking Strategies”
Seeking Alpha – “Get Your Smart Beta Here! Dividend Growth Stocks As ‘Strategic Beta’ Investments”
Market and Company Information
U.S. Securities and Exchange Commission –
Mergent Online (Note: This resource is also available through the Strayer Learning Resource Center.)
Seeking Alpha (Note: Also available through the Android or iTunes App store.)
Morningstar (Note: You can create a no-cost Basic Access account.)Research Hub, located in the left menu of your course in Blackboard.
Write a ten to fifteen (10-15) page paper in which you:
- Provide a rationale for the stock that you selected, indicating the significant economic, financial, and other factors that led you to consider this stock.
- Suggest the primary reasons why the selected stock is a suitable investment for your client. Include a description of your client’s profile.
- Select any five (5) financial ratios that you have learned about in the text. Analyze the past three (3) years of the selected financial ratios for the company; you may obtain this information from the company’s financial statements. Determine the company’s financial health. (Note: Suggested ratios include, but are not limited to, current ratio, quick ratio, earnings per share, and price earnings ratio.)
- Based on your financial review, determine the risk level of the stock from your investor’s point of view. Indicate key strategies that you may use in order to minimize these perceived risks.
- Provide your recommendations of this stock as an investment opportunity. Support your rationale with resources, such as peer-reviewed articles, material from the Strayer Learning Resource Center, and reviews by market analysts.
- Use at least five (5) quality academic resources in this assignment. Note: Wikipedia and other similar websites do not qualify as academic resources.
Solution
Investing in Apple Inc.
Introduction
Apple Inc. is among the leading publicly traded companies globally, with its ticker being AAPL. Apple manufactures and sales a variety of electronic consumer products such as personal computers, smartphones of the iPhone series, iPads, and televisions. Besides, the company also operates online music store known as the iTunes. The company’s products are unique in the market as they operate with the company’s own software known as the IOS, and have innovated features (Johnson et al. 2012). The products of the company have become popular which in turn has enabled the company to grow and consequently resulting in the company becoming one of the leading publicly traded companies. The paper, therefore, presents an analysis of Apple’s stock as an investment opportunity, by providing the rationale for choosing the company, the company’s ratio analysis, stock price analysis, and the recommendations for investing in the company.
The Rationale for Choosing Apple Inc.
Apple has a strong ecosystem (Johnson et al., 2012). One of the company’s products selling point is how the products seamlessly relate and work with each other. For instance, customers can view the iMessages not only in the iPhones but also in the iPads. The iTunes, iCloud, and apps’ contents can be accessed across the devices with no difficulty. Such features keep users locked in and hopelessly reliant on the company’s products thus ensuring that the company continues to make huge sustainable sales.
Additionally, Apple’s revenue in the service segment keeps growing. The revenue from AppleCare, Apple Play, the AppStore, iTunes and the software segment have grown to become the second largest division of the company by revenue after the iPhone. The growing service revenue is great for shareholders since services are associated with much higher margins than other business segments (Martinez et al., 2017). Therefore, the company’s overall margins would increase.
The company has also invested in research and development. Apple’s increased spending on research and development depicts its commitment to innovate and evolve new technology that improves and expands its current product range. For instance, the company has placed focus on advanced technological areas such as artificial intelligence, machine learning, and automation.
Another factor that drives interest in investing in Apple Inc. is its dividends. The company has maintained solid and sustainable dividends to shareholders. In 2012, AAPL stock started to pay quarterly dividends. Since then, the company has routinely increased its dividend yearly. Noteworthy, Apple has more than enough earnings power to support a steadily rising cash dividend.
Primary Reasons for Selecting Apple Stock and Client Profile
The primary reasons for selecting Apple stock is that it has a valuation discount to NASDAQ. The comparison of Apple to the overall NASDAQ index depicts an attractive investment basing on past market performance. The company continues to make massive profits and still trades at a historical discount. The current stock price of Apple Inc. is $174.07 per company financials (NASDAQ, 2017). The price is far reached from the 2001 share price of only $1.47. In the last decade, Apple Inc. has managed to keep its price to earnings ratio ahead of its market share.
After the release of iPhone 8, the company remains a valuable investment for the client. Apple is anticipated to continue rising in stock price and revenue.
Apple was chosen to accurately and lucratively align with the client’s needs. While there are investors that prefer short-term investments to earn quick profits, others prefer long-term investments to see their value increase over time. The profile of the client indicates that they want to invest for long-term gains and not a short time. The investor is seeking a time consuming and logical investment. Furthermore, the investor plans to buy stocks and hold on to them for years to see the value upsurge. Therefore, Apple is a perfect choice. Besides, the client plans that if things don’t turn out as expected, they will refer to their capital for relief. The benefit of having capital is that it enables investors to take risks. Since the client has a considerable amount of capital investing in Apple Inc. appears to be a good option, and takes away the worry of the decrease in stock value.
Another significant aspect of the client is that the client shows interest in both value and growth stocks. The reason behind the case is that Apple’s stock is presently undervalued, which makes it be a valuable stock selected. Additionally, the firm is a leader in the technology industry particularly in the segment of innovation. The scenario gives the company the capability to generate large amounts of cash quicker than other firms in the industry, thus enabling Apple Inc. stock to be considered a growth stock.
Ratio Analysis
Ratio analysis helps to determine the weaknesses and strengths by assessing the financial health of the firms. To make the right decision, investors should evaluate the companies’ financial health without which it becomes difficult to make the decision to invest in the business.
Current Ratio
The current ratio measures an enterprise’s capability to offset near-term liabilities by the use of current assets. The ratio is found using the formula;
Current ratio = current assets/ current liabilities.
Apple Inc.’s current ratio for the last three years are calculated as follows:
For the year 2017, current assets = $128,643,000, current liabilities = $100,814,000
Therefore, Current Ratio = $128,643,000/$100,814,000
= 1.28
For the year 2016, current assets = $106,869,000 and current liabilities = $ 79,006,000.
Therefore, Current Ratio = $106,869,000/$ 79,006,000
= 1.35
For the year 2015, current assets were $89,378,000, and current liabilities $80,610,000.
Therefore, Current Ratio = $89,378,000/$80,610,000
= 1.11
The current ratio matches the current assets to the current liabilities and shows whether current liabilities can be settled with the current assets. A current ratio of 1 or more suggests that current enterprise assets exceed near-term liabilities. The case signifies that the company does not have any liquidity problems. Therefore, the current ratio of Apple Inc. for the last three years is slightly above 1, which implies that the company is in a good liquidity state and that the investor is at a low risk of losing their investments.
Quick Ratio
The quick ratio is a degree of the capability of an enterprise to pay its near-term debts by the use of assets that can be readily transformed into cash. The key elements of current assets that are included in the quick ratio are marketable securities, accounts receivable, and cash. In short, inventory is excluded from the calculations. The measure is found using the formula;
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
For the year 2017, current assets = $128,645,000, inventory =$4,855,000, near-term debts = $100,814,000
Therefore, Quick Ratio = ($128,645,000 – $4,855,000)/$100,814,000
= $123,790,000/$100,814,000
= $1.23
For the year 2016, current assets = $106,869,000, inventory = $2,132,000, short-term debts = $79,006,000
Therefore, Quick Ratio = ($106,869,000 – $2,132,000)/ $79,006,000
= $104,737,000/$79,006,000
= 1.33
For the year 2015, current assets = $89,378,000, inventory = $2,349,000, near-term debts = $80,610,000
Therefore, Quick Ratio = ($89,378,000 – $2,349,000)/ $80,610,000
= $87,029,000/$80,610,000
= 1.08
A quick ratio of 1 or more indicates that the business can offset near-term debts without converting long-term assets into cash. The increases of the ratio translate to an increase in liquidity. The scenario is a good for investors as the risk of losing investments becomes lower. In regards to Apple’s quick ratios for the last three years, the ratio has been 1 and slightly above one which implies that the company has a stable liquidity state and can easily pay its near-term debts without selling fixed assets.
Earnings per Share (EPS)
EPS is the percentage of the business’ proceeds that is apportioned to each outstanding share of common stock. The ratio serves as a pointer to the business productivity thus enables investors to make the right decision. The ratio is found by the formula;
EPS = (Net Income – Preferred Dividends)/Average outstanding shares
In the year 2017, Apple’s net income = $48,351,000, preferred dividends = $0 common stock outstanding = $35,867,000
Therefore, EPS = ($48,351,000 – $0)/ $35,867,000
=$48,351,000/$35,867,000
= 1.35
In the year 2016, Net income = $45,687,000, preferred dividends = $0, and common stock outstanding = $31,251,000
Therefore, EPS = ($45,687,000 – $0)/ $31,251,000
=$45,687,000/$31,251,000
= 1.46
In the year 2015, Net income = $53,394,000, preferred dividends = $0, and common stock outstanding = $27,416,000
Therefore, EPS = ($53,394,000 – $0)/$27,416,000
= $53,394,000/$27,416,000
= 1.95
Higher EPS indicate higher earnings, the strong financial position of the company and therefore a reliable company to invest one’s money. Besides, a consistent improvement in the earnings per share indicates a continuous improvement in the company’s earning power. The calculations show that Apple has a low EPS. However, that does not imply that the company is bad investment choice. Apple Inc. is still experiencing growth, much of the proceeds are reinvested in areas such as research and development, innovation, product enhancement, and marketing, having a low EPS. In future, however, the company’s EPS is expected to rise. Given that the client seeks a long-term investment that would have an increase in stock value, Apple becomes a fit choice.
Return on Assets (ROA)
The ROA measures the percentage of proceeds generated in relation to the company’s assets (Heikal, Khaddafi & Ummah, 2014). In other words, it determines how efficient a business utilizes its resources to generate income. The formula for the ratio is;
ROA = Annual Net Income/Average Total Assets
For the year 2017, annual net income = $48,351,000, sum of assets at the commencement of the period = $321,686,000, sum of assets at the end of the period = $375,319,000
Therefore, ROA = $48,351,000/ [($321,686,000+$375,319,000)/2]
= $48,351,000/ ($697,005,000/2)
=$48,351,000/$348,502,500
= 0.14*100=14%
For the year 2016, annual net income = $45,687,000, sum of assets at the commencement of the period = $290,479,000, sum of assets at the closure of the period = $321,686,000
Therefore, ROA = $45,687,000/ [($290,479,000+$321,686,000)/2]
= $45,687,000/ ($612,165,000/2)
= $45,687,000/$306,082,500
= 0.15*100=15%
For the year 2015, net annual income = $53,394,000, sum of assets at the commencement of the period = $231,839,000, sum of assets at the closure of the period = $290,479,000
Therefore, ROA = $53,394,000/ [($231,839,000+$290,479,000)/2]
= $53,394,000/ ($522,318,000/2)
= $53,394,000/$261,159,000
= 0.20*100=20%
Higher ROA values indicate that the entity is more profitable. However, this ratio is used when making a comparison to other firms in the same industry. The calculations show that Apple’s ROA has been declining for the last three years. The decline is associated with the company’s capital intensive structure. Currently, Apple has been investing intensively in numerous segments such as the service sector. Its manufacturing expenses have also increased due to the introduction of more products. However, this indicates growth and makes Apple a viable investment option.
Operating Profit Margin
Operating profit margin indicates the quantity of income that is left after operating expenses have been deducted. The ratio is important to investors as it helps to determine how profitable the company is. The ratio is found by the formula;
Operating Profit Margin = Operating income/Net sales
For the year 2017, operating income = $61,344,000, net sales = $88,186,000
Therefore, operating profit margin = $61,344,000/$88,186,000
= 0.7*100 = 70%
For the year 2016, operating income = $60,024,000, net sales = $84,263,000
Therefore, operating profit margin = $60,024,000/$84,263,000
= 0.71*100 = 71%
For the year 2015, operating income = $71,230,000, net sales = $93,626,000
Therefore, operating profit margin = $71,230,000/$93,626,000
= 0.76*100 = 76%
The calculations depict that Apple Inc. has a high operating profit margin which simultaneously depicts that the firm is earning more per dollar of sales. The case shows that Apple Inc. has a higher profitability thus can generate sustainable proceeds when the client invests their money.
Risk Level of Stock
When making the decision to make investments in an enterprise, it is vital for investors to understand the risks associated with the investments due to factors that cannot be predicted. However, there exist strategies that can help to mitigate such risks and earn the best possible profits from the investments. The analysis of financial ratios depicts a healthy financial position for the company. From an investor’s point of view, the risk level is found to be moderate. The reason for the moderate risk is that the earning power of Apple depends on innovation which demands constant research and development to be carried out. When the innovation of the company reduces, the earning power also decreases. Therefore, if innovation fails to take place as expected, the company’s profits would decline. Also, since the investor plans to make a long-term investment, the risk becomes moderate and not high. The investor intends to hold the investment for years and not to actively trade the stock.
One of the best strategies that the investor could use to mitigate the risk is diversification. The diversification approach entails mixing a variety of investments within a portfolio (Gurrib & Alshahrani, 2012). The approach would enable the investor to mitigate the risk that could come from the decline of the value of Apple stock. In particular, when Apple fails to innovate and its stock price reduces, the investor would still gain from other investments that they place in other companies or industries.
Another technique for risk mitigation is asset allocation. With this technique, the investor divides the asset portfolio into different asset classes. The aim is to balance the risks against the rewards of each investment by altering each asset’s percentage in the investment portfolio by the investment period, goals, as well as risk tolerance.
Dollar-cost-averaging is another risk mitigation strategy. With this approach, the effects of market fluctuations can be smoothened. The strategy entails the application of a specific dollar amount towards the purchase of stock on a regular basis. The investor purchases few shares during the time of high prices and more shares during the time of low prices. Over time, the average cost will be lower thus reducing the severity of losses. The technique assists investors to mentally navigate the proverbial concern of going all in (Luskin, 2017).
Recommendations
Apple Inc. is a
good long-term investment. The company would give the investor an opportunity
to experience sustainable profits for a longer period. The company has a good
financial health which signifies that it
has no chances of facing liquidity issues or experiencing losses. Besides, the
risk level is moderate and is majorly associated with the company’s ability to
innovate. Since the firm continues to focus on innovation by investing heavily
in research and development, there are prospects of enhancing innovation which
also translates to a sustainable business. Furthermore, the company is still
growing despite being a market leader in the industry. Therefore, there are
still more prospects for the company to expand further and become more
profitable. The stock value is thus expected to increase over time which makes
it a good investment option.
Appendix A
Apple Inc. Income Statement
| Revenue | 9/30/2017 | 9/24/2016 | 9/26/2015 |
| Total Revenue | 229,234,000 | 215,639,000 | 233,715,000 |
| Cost of Revenue | 141,048,000 | 131,376,000 | 140,089,000 |
| Gross Profit | 88,186,000 | 84,263,000 | 93,626,000 |
| Operating Expenses | |||
| Research Development | 11,581,000 | 10,045,000 | 8,067,000 |
| Selling General and Administrative | 15,261,000 | 14,194,000 | 14,329,000 |
| Non Recurring | – | – | – |
| Others | – | – | – |
| Total Operating Expenses | – | – | – |
| Operating Income or Loss | 61,344,000 | 60,024,000 | 71,230,000 |
| Income from Continuing Operations | |||
| Total Other Income/Expenses Net | 2,745,000 | 1,348,000 | 1,285,000 |
| Earnings Before Interest and Taxes | 64,089,000 | 61,372,000 | 72,515,000 |
| Interest Expense | – | – | – |
| Income Before Tax | 64,089,000 | 61,372,000 | 72,515,000 |
| Income Tax Expense | 15,738,000 | 15,685,000 | 19,121,000 |
| Minority Interest | – | – | – |
| Net Income From Continuing Ops | 48,351,000 | 45,687,000 | 53,394,000 |
| Non-recurring Events | |||
| Discontinued Operations | – | – | – |
| Extraordinary Items | – | – | – |
| Effect Of Accounting Changes | – | – | – |
| Other Items | – | – | – |
| Net Income | |||
| Net Income | 48,351,000 | 45,687,000 | 53,394,000 |
| Preferred Stock And Other Adjustments | – | – | – |
| Net Income Applicable To Common Shares | 48,351,000 | 45,687,000 | 53,394,000 |
Appendix B
Apple Inc. Balance Sheet
| Period Ending: | Trend | 9/30/2017 | 9/24/2016 | 9/26/2015 | 9/27/2014 |
| Current Assets | |||||
| Cash and Cash Equivalents | $20,289,000 | $20,484,000 | $21,120,000 | $13,844,000 | |
| Short-Term Investments | $53,892,000 | $46,671,000 | $20,481,000 | $11,233,000 | |
| Net Receivables | $35,673,000 | $29,299,000 | $30,343,000 | $31,537,000 | |
| Inventory | $4,855,000 | $2,132,000 | $2,349,000 | $2,111,000 | |
| Other Current Assets | $13,936,000 | $8,283,000 | $15,085,000 | $9,806,000 | |
| Total Current Assets | $128,645,000 | $106,869,000 | $89,378,000 | $68,531,000 | |
| Long-Term Assets | |||||
| Long-Term Investments | $194,714,000 | $170,430,000 | $164,065,000 | $130,162,000 | |
| Fixed Assets | $33,783,000 | $27,010,000 | $22,471,000 | $20,624,000 | |
| Goodwill | $5,717,000 | $5,414,000 | $5,116,000 | $4,616,000 | |
| Intangible Assets | $2,298,000 | $3,206,000 | $3,893,000 | $4,142,000 | |
| Other Assets | $10,162,000 | $8,757,000 | $5,422,000 | $3,764,000 | |
| Deferred Asset Charges | $0 | $0 | $0 | $0 | |
| Total Assets | $375,319,000 | $321,686,000 | $290,345,000 | $231,839,000 | |
| Current Liabilities | |||||
| Accounts Payable | $74,793,000 | $59,321,000 | $60,671,000 | $48,649,000 | |
| Short-Term Debt / Current Portion of Long-Term Debt | $18,473,000 | $11,605,000 | $10,999,000 | $6,308,000 | |
| Other Current Liabilities | $7,548,000 | $8,080,000 | $8,940,000 | $8,491,000 | |
| Total Current Liabilities | $100,814,000 | $79,006,000 | $80,610,000 | $63,448,000 | |
| Long-Term Debt | $97,207,000 | $75,427,000 | $53,329,000 | $28,987,000 | |
| Other Liabilities | $40,415,000 | $36,074,000 | $33,427,000 | $24,826,000 | |
| Deferred Liability Charges | $2,836,000 | $2,930,000 | $3,624,000 | $3,031,000 | |
| Misc. Stocks | $0 | $0 | $0 | $0 | |
| Minority Interest | $0 | $0 | $0 | $0 | |
| Total Liabilities | $241,272,000 | $193,437,000 | $170,990,000 | $120,292,000 | |
| Stock Holders Equity | |||||
| Common Stocks | $35,867,000 | $31,251,000 | $27,416,000 | $23,313,000 | |
| Capital Surplus | $0 | $0 | $0 | $0 | |
| Retained Earnings | $98,330,000 | $96,364,000 | $92,284,000 | $87,152,000 | |
| Treasury Stock | $0 | $0 | $0 | $0 | |
| Other Equity | ($150,000) | $634,000 | ($345,000) | $1,082,000 | |
| Total Equity | $134,047,000 | $128,249,000 | $119,355,000 | $111,547,000 | |
| Total Liabilities & Equity | $375,319,000 | $321,686,000 | $290,345,000 | $231,839,000 |
References
Gurrib, I. & Alshahrani, S. (2012). Diversification in Portfolio Risk Management: The Case of the UAE Financial Market. International Journal of Trade, Economics, and Finance, 3(6), 445-449.
Heikal, M., Khaddafi, M. & Ummah, A. (2014). Influence Analysis of Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Debt To Equity Ratio (DER), and current ratio (CR), Against Corporate Profit Growth In Automotive In Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101-114.
Johnson, K., Li, Y., Phan, H., Singer, J. & Trinh, H. (2012). The Innovative Success that is Apple, Inc. 1-42.
Luskin, J. (2017). Dollar-Cost Averaging Using the CAPE Ratio: An Identifiable Trend Influencing Outperformance. Journal of Financial Planning, 54-60.
Martinez V., Neely A., Velu C, Leinster-Evans S. & Bisessar D. (2017). Exploring the journey to services. Special issue in Service Implementation on manufacturing firms: Strategy, Economics, and Practice. International, Journal of Production Economics, 1-29.
NASDAQ (2017). Apple Inc. common stock quote and summary data. Retrieved 28 November 2017, from http://www.nasdaq.com/symbol/aapl