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Apple Inc.

Innovation Bears Fruit

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A solid brand identity, strong customer loyalty and a track record of successful innovations have long characterized Apple Inc. Those business advantages have helped the company keep pace with — or stay ahead of — its rivals in the highly competitive consumer electronics industry.

Based in California’s Silicon Valley, the company has pioneered several areas of consumer electronics. Its Macintosh personal computers have long been popular with users in education, government and graphic design markets. In 2001 it branched out with the launch of its iPod digital music player, which was soon followed by the iPhone mobile communications handset and other consumer products.
Members of the magazine’s Editorial Advisory and Securities Review Committee cited Apple’s history of innovation in choosing it as the Stock to Study. They also noted the current valuation of its stock and the excellent growth the company has reported recently for several segments.

Retail Picture

Apple sells its consumer electronics through a variety of channels, including a chain of more than 250 retail stores built up since 2001. In addition to computers and handheld electronics, the company sells software and accessories, plus printers and other hardware.
In fiscal year 2008 (ended Sept. 27, 2008), Apple generated 57 percent of its revenues in the United States. Looking at its reportable segments, the Americas accounted for 45 percent of net sales. Europe (including Africa and the Middle East) produced 23 percent, followed by Japan with 5 percent. Worldwide retail operations accounted for 19 percent, and other segments produced 8 percent.
For its product categories, Apple’s 2008 revenue results broke down as follows:

•  Macintosh computers —  44 percent
•  iPod digital music players  — 28 percent
•  iTunes online digital content — 10 percent
•  iPhone mobile devices  —  6 percent
•  Computer peripheral products — 5 percent
•  Software and other products — 7 percent
For fiscal 2009 to date, management has reported strong sales growth for its noncomputer lines. Macintosh sales have been flat, however. Apple is slowing its rate of retail expansion in response to the weak economy. It plans to open about 25 retail stores in 2009, with about half of them overseas. Apple launched 46 stores in 2008.
The company has temporarily closed several stores for renovation. Apple also reduced its roster of full-time retail employees to about 14,000 in March from 15,600 in December.
Institutions owned 67.4 percent of 890.6 million shares outstanding, according to Value Line’s April report. Executive officers and board directors held less than 1 percent of the shares.
Yahoo! Finance lists as direct competitors Dell (DELL), Hewlett-Packard (HPQ) and Microsoft (MSFT). Standard & Poor’s places Apple in its computer hardware-personal computers subindustry category, which includes 3PAR (PAR), Avid Technology (AVID), Cray (CRAY), Diebold (DBD), International Business Machines (IBM), NCR (NCR), Rackable Systems (RACK), Stratasys (SSYS), Sun Microsystems (JAVA), Super Micro Computer (SMCI), Teradata (TDC) and Toshiba (Japanese exchanges).

New Products

Given the aggressive competition it faces, Apple must frequently introduce new or upgraded products to keep pace. An example is adding voice capability to the iPod shuffle, the company’s miniaturized digital music player. Other recent launches included the iPhone 3G with new and upgraded capabilities.
In 2007 the company created a new market category with Apple TV. The network device allows users to play digital content wirelessly on a widescreen television or home entertainment system.
Apple has long enjoyed significant pricing power for its computers, charging more than competitors ask for comparable models. One of its challenges is competition from netbook computers — low-cost, subcompact laptops. Management hasn’t revealed its plans in this area. Company observers suggest, however, that Apple may soon come out with a netbook or tablet computer running on software that’s similar to systems used in certain iPhone and iPod models.
Recent press reports suggest that Apple may be preparing to enter the market for games that can be played on handheld electronics. The company reportedly has been building a team of specialists in the design of graphics chips.
In 2008 Apple spent $1.1 billion — 3.4 percent of net sales — on research and development. That represented a 40.7 percent increase from the $782 million spent in 2007.
Succession Question

One issue getting attention is the role Apple co-founder and CEO Steven P. Jobs will play in the company’s future. Jobs, 54, has been on a six-month medical leave to deal with a health problem the company initially characterized as a hormonal imbalance. The CEO is scheduled to return full time at the end of June. In 2004 he was treated for pancreatic cancer.
Jobs’ status is considered important because he has been a driving force behind the company’s innovations throughout much of its history. In 1976 he teamed up with Steve Wozniak to produce personal computers. The company’s products quickly developed a following, and in 1980 Apple went public. In 1982 Apple became the first maker of personal computers to exceed $1 billion in annual sales.
In 1984 Apple launched its Macintosh line of computers. As a result of corporate infighting, Jobs left Apple the following year and subsequently launched other technology companies.
A series of missteps in the mid-1990s created ongoing management turmoil. Jobs returned as a special adviser in 1996 when the company acquired NeXT, a small technology company he had founded. The board named him CEO the following year.
The state of the co-founder’s health has drawn less attention as management’s strategies have appeared to be moving forward successfully. A member of the review committee noted that Apple’s board has potential successors who are younger than Jobs. Another committee member suggested, however, that some people are holding back on investing until the uncertainty about Jobs is resolved.

Final Notes

Value Line has granted the magazine permission to publish its most recent company and industry reports for Apple (see the online version of this article). The accompanying Stock Selection Guide (see pages 36 and 37) has been partially completed showing primarily historical information similar to that seen by the magazine’s Editorial Advisory and Securities Review Committee.
Note that the partially completed SSG shows the range of calendar-year market prices, which are taken from the Value Line report. In contrast, BetterInvesting’s S&P Stock Data Service provides fiscal-year pricing data. Here are the rounded fiscal-year price ranges for the past five years:

•  $9.60 to $19.60 (fiscal 2004)
•  $18.80 to $54.60 (fiscal 2005)
•  $47.90 to $86.40 (fiscal 2006)
•  $72.60 to $155.00 (fiscal 2007)
•  $100.60 to $203.00 (fiscal 2008)
Value Line, the source for the financial results provided in this article, doesn’t report quarterly net income. For first-quarter earnings per share, however, the Value Line and company-reported figures agree; the company’s net income totals therefore should serve for a valid comparison (see table, page 34).
The company reported having no debt at the end of 2008. Cash, cash equivalents and short-term investments totaled $24.5 billion, about 59 percent more than the $15.4 billion reported in fiscal 2007.
Shares underwent 2-for-1 splits in 1987, 2000 and 2005. The company doesn’t offer a direct stock purchase plan.
Readers are urged to perform their own studies of Apple Inc. using the BetterInvesting methodology. The Stock to Study goal is a doubling in investment value (appreciation plus dividends) within five years. No investment recommendation is intended.  

The company ranked No. 33 in the Top 200 survey of investment club holdings for 2008. A projected 796 clubs held its shares (see the April 2009 issue).
BetterInvesting hasn’t featured Apple previously. 

For localized news coverage, visit the archive of American City Business Journals. Place the company name within the archive search box.

Recent articles about Apple and its industry are available free online. To review a news story, insert the article title in the search box at the publication’s homepage. Here’s a sampling:

“iPhone Sales Cushion Apple From Recession,” BusinessWeek, April 23, 2009.

“Steve Jobs: Nobody Loves Me,” Forbes, April 22, 2009.

“Apple’s Interest in Gaming Isn’t Casual,” Forbes, May 1, 2009.

“Would You Pay $849 for a New MacBook?,” Fortune, May 3, 2009.

“What’s Apple Stock Really Worth?” Smart Money, April 22, 2009.

“Apple: Don’t Mind the Maggots,” TheStreet.com, April 23, 2009.

“Apple Blows iPhone Doors Off, Now It Needs To Fix Mac Problem,” The Tech Ticker, April 23, 2009.

Commercial database services available at some libraries provide access to articles from publications that charge fees, require registration or otherwise restrict access to their online archives. Publications and websites that have covered Apple recently and are available through such databases include the following: Barron’s, The Motley Fool and The Wall Street Journal.

For more information, contact Investor Relations, Apple Inc., 1 Infinite Loop, Cupertino, CA 95014-2083.

SSG Study Notes

During your analysis of Apple, you might consider the following comments and questions for further study:

•  Capitalization section: The company has no debt to speak of. In the Value Line report available with the online version of this article, the company’s Financial Strength rating is A++. Apple’s financial health will help it survive the recession. Common shares outstanding currently stand at about 890.6 million, but this number has increased every year since at least 1993 and is projected by Value Line to continue rising. What’s causing these increases? If you use the Preferred Procedure to estimate future earnings per share, how will this history affect your forecast?

•  Section 1 (Visual Analysis of Sales, Earnings and Price): The SSG shows the range of calendar-year market prices, which are taken from the Value Line report. In contrast, BetterInvesting’s S&P Stock Data Service provides fiscal-year pricing data. See the main text for the fiscal-year pricing. Your club might want to devote time to studying how using fiscal-year versus calendar-year prices can change the values in Section 3. Will your impression of the stock’s valuation change as the values change? Apple’s growth rates are high but inconsistent. How does this inconsistency affect your ability to assess future growth rates?

•  Section 2 (Evaluating Management): Both pre-tax profits on sales and return on equity have been increasing since 2001. Why is this the case, and why were profits and ROE much lower between 2001 and 2004 than they are today?

•  Section 3 (Price-Earnings History): The high P/E over the past five years has averaged a whopping 55.9. History shows that high P/Es such as this aren’t sustainable. What’s a realistic high P/E for the next five years? (The current P/E is 22.) Meanwhile, the low P/E has been much more stable during this time.

— Reporting by contributor Kevin Lamiman

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