Mike Swierczewski 4/25/17

Life Portfolio Loras College

Quantitative Analysis
Free Cash Flow to the Firm Valuation
As of 4/25/17, Apples stock price ended the day at $144.53 a share. Looking at

the free cash flow to the firm valuation (FCFF) we can see that Apple is still undervalued

a little bit based on a growth rate of 9.07% going into 2017. In figure 1 in the Appendix,

the previous five years of financials ranging from 2012 to 2016 can be seen for Apple.

This shows revenues, operating cash flow, sales, EBIT, taxes, depreciation and

amortization, working capital investment and capital expenditures in each of those years

along with them as either percentages of EBIT or of sales based on the FCFF

principles. It also shows the amount of growth the revenues have from year to year

which will end up signifying how the growth rate was come up with in figure 2.
Looking into how the numbers were gotten in figure 2, the growth rate comes

from average out the past 4 years of growth in revenues which came out to the 9.07%.

This is an accurate growth for 2017 because Apple had an off year going from 2015-

2016 by having a -7.73% growth due to the outlying growth coming from the year before

of 27.86% from 2014-2015. Apple is still a company that is focused on growth into the

future and the 9.07% reflects that accurately based upon the amount of new generation

coming into technology earlier in their lives. Kids are starting to get younger and

younger and buying Apple products much earlier than they did in the past and Apple has

that brand recognition and brand loyalty that has credibility amongst the many in the

markets. This growth rate accurately reflects how much it should grow after the two

outlying years prior. Other than the growth rate the averages for operating margin

percentage, tax as percent of EBIT, depreciation and amortization as percentage of

sales, working capital investment as percent of sales, and capital expenditure as

percent of sales were average over the past five years as well. Since there werent

many fluctuations in these numbers over those years the calculations should be

accurately in the range of what they will be in 2017. These averages led to the projected

FCFF calculated by having EBIT - Tax bill + Deprec. And Amort. working capital

capital expenditures. Then taking the WACC of the company which was 14.37%, there

is the ability to find the value of the firm. Adding up the enterprise value + cash and

subtracting the market capitalization was how the value of debt was found allowing for

the value of equity to be found by taking the value of the firm the value of debt. To find

the price of $156.78 per share, that value of equity calculated was $823,084,785,430.76

and was divided by 5,250,000,000 shares outstanding.

The same thing was done on the right column in figure 2 but with a margin of

safety of 15% with the growth rate causing it to be 7.7% instead of 9.07% dropping the

price down to $121.27 per share. This raises some alarms for having this stock to long

because it has shown heavy growth in the past year in regards to how much the stock

has made the portfolio, but the time is now to start to sell off some of the stocks and

accepting the profit that has been had so far which is substantial. We should still hold on

to some shares because of the fact that is still undervalued in this evaluation but in

regards to the 15% margin of safety, we might be risking those profits the longer it is

held.

Relative Valuations
Looking at relative valuations is a tricky thing when looking at Apple in the tech

industry. The biggest reason for this is that although it does have a lot of competitors,

Apple is a company that is much more diverse than many others in regards to what type
of technology it sells. Microsoft and Google are two different companies in the way that

they operate but both can be seen as two of Apples biggest competitors.
Seeing figure 3, Apple has a significantly lower P/E ratio than both Microsoft and

Google which speaks well for Apple because they have a low ratio in accordance to the

tech industry. But, alarms still could be raised because of the relevance of the stock

market being in a tech bubble right now that doesnt appear to be bursting in the near

future but still might. The PEG ratio shows that Apple is in the middle of the pack in

regards to PE and possible growth in the future. This could be alarming since growth is

one of the biggest factors in regards to wanting to invest in a company. In the industry

the dividend yield can be seen as normal at just .02 which is the same as Microsofts

while Google doesnt have dividends at all. Since Apples enterprise value is so high its

enterprise value to EBITDA is significantly lower than both Microsofts and Googles.
 Appendix
Figure 1

(Apples numbers from 2012-2016 that are used in the free cash flow to the firm model

and percentages that they make up of net income and sales.)

Figure 2
(Apples free cash flow to the firm valuation. The left column shows the actual valuation I

found that resulted in $156.78 for 2017. The column on the right represents a 15%

margin of safety with the growth rate and brings the valuation all the way down to

$121.27 and brings the growth rate from 9.07% to 7.7 %.)

Figure 3
(This figure shows Apples relative valuation methods in regards to two of its lead

competitors of Microsoft and Google.)