Investment and Portfolio Analysis of Apple Inc - Essay Example

Investment and Portfolio Analysis EXECUTIVE SUMMARY The investment style of an individual varies from another depending on various opportunities and investment constraints. Individuals generally invest a certain portion of the surplus left after all necessary expenditures are carried out. The most common objective however is to maximize their return on investment. The overall objective of this investment analysis is to long the asset at cheap (by identifying when the stock is undervalued) and then it short it when it reaches target price with the objective of making profit. Markets are made of people and the sentiments created from their emotions gives investors a clue regarding the ‘Next Big’ movement in stocks. The understandings of market sentiments are very important for technical analysts and day-traders who try to maximize profits from stock price movement. The analysis of balance sheet of the company is found that the company has strong fundamentals including sufficient assets to cover its liabilities and there are no concerns regarding debt, payables, or inventory. With the help of several technical indicators, an investor will be able to analyze the relationship between price – volume and demand – supply for the overall market as well as the individual stock and make appropriate investment decisions. The company’s management has been able to successfully tackle the slow demand situation by introducing new products in the market at lower cost which increased the company’s sales volumes. With the increase in sales the company’s cost of production also increased at CAGR of 49% during the past three years. On the basis of these analysis and findings a suitable recommendation can be given to investor regarding the attractiveness of the investment. Contents EXECUTIVE SUMMARY 2 INTRODUCTION 5 SENTIMENTS 5 BALANCE SHEET 7 TECHNICALS 8 MANAGEMENT 9 VALUATION 10 FUNDAMENTALS 11 CHART 13 CONCLUSION 14 RECOMMENDATIONS 14 REFERENCES 16 APPENDIX 19 TABLE 1 – BALANCE SHEET 19 TABLE 2 – VALUATION 20 INTRODUCTION The investment style of an individual varies from another depending on various opportunities and investment constraints. Individuals generally invest a certain portion of the surplus left after all necessary expenditures are carried out. The most common objective however is to maximize their return on investment. A proper fundamental and technical analysis generally provides a basic idea regarding these aspects and helps investors make informed investment decisions. Other factors like macroeconomic scenario, industry analysis, market sentiments and management analysis also plays an important factor in giving the best idea of a long or short sale investment decision. This report discusses these important investment tools with reference to a particular stock, which will help the investors a clue of whether to long or short the stock. The stock chosen for investment analysis with reference to which these tools will be explained is Apple Inc (Ticker: AAPL). The overall objective of this investment analysis is to long the asset at cheap (by identifying when the stock is undervalued) and then it short it when it reaches target price with the objective of making profit. Hence, the report is based on the investment idea of long sale and hence the focus will be on ‘Buy’ rated assets. SENTIMENTS Markets are made of people and the sentiments created from their emotions gives investors a clue regarding the ‘Next Big’ movement in stocks. It is a discipline that is very familiar to professionals engaged in behavioral finance and economics. The understandings of market sentiments are very important for technical analysts and day-traders who try to maximize profits from stock price movement (Baker & Wurgler, 2007, pp.1-8). For instance, as the US economy is on the right track of economy progress most apparent from appreciation of dollar and slowing of quantitative easing program, many investors and analysts are betting that this recovery of world’s biggest economy might trigger a short to medium term bull runs. The annual report of Thomson Reuters gives some ideas to a novice on how to capture market sentiments in actionable approach. (Source: Thomson Reuters, 2012) These critical events will to get an idea regarding how a particular stock price is likely to react from changes in the above ongoing events. This will further help investors to make critical investment (short or long) decisions at appropriate time by analysing emotions in real-time basis (Thomson Reuters, 2012). Given the latest pullback of dollar, the market sentiments have seemingly reached its peak and it is likely that majority have now already bought in. the positive market sentiments motivated analysts to put buying ratings on Apple Inc. with target price of AAPL to $585.52, which is currently trading near $508.8. Under these circumstances the investor risk is now likely to be downside (Yahoo Finance, 2013). BALANCE SHEET The annual reports and financial statements of Apple reveal that at the end of current fiscal 2013, the company had total outstanding Accounts Payables worth $22,367 million. This value is approximately 26.8% of its total liabilities. It is an important item that is available in balance sheet of company and plays strategic role in helping business entities mitigate risk by formulating proper cash management policies and continue operating efficiently. When the annual report of previous year was researched it was found that at the end of previous fiscal year the total outstanding accounts payable of Apple was $21,175 million. This means that compared to previous fiscal the amount has decreased by approximately 5.7% further signifying that company’s management is considering quick payments to suppliers to maintain goodwill in market and not losing business to competitors. There is no significant long-term debt in the balance sheet. There are unlimited opportunities for the company to leverage the balance sheet and use debt capital for financing future expansions. This will help the investors to earn higher earnings per share because when company employs debt capital the number of outstanding capital decreases. Also not to mention that debt capital is much cheaper than equity capital and also act as tax shield for the company and interest liability is passed on to investors. Hence, considering the current scenario it may be expected that if the company announces inclusion of debt capital in their capital structure in future then the investors and the market will react positively and stocks prices of the company will rise. Hence, the analysis of balance sheet of the company is found that the company has strong fundamentals including sufficient assets to cover its liabilities and there are no concerns regarding debt, payables, or inventory. TECHNICALS With the help of several indicators, a technical investor analyzes the relationship between price – volume and demand – supply for the overall market as well as the individual stock. High volume is favorable on the upswings and consequently the numbers of shares are traded is greater than before and on the downside the number of share traded dwindles. So if the reciprocal is true, then there is a chance of trend reversals. The objective of technical analyst is to identify the trend reversal as early as possible and then gain from these movements. The most frequently used technical analysis tools are Bar-chart, candlestick chart, and ROC (rate of Change) analysis. These indicators helps analyst to identify at prior stage whether a particular stock is bottomed-out from selling pressure or currently overvalued from buying pressures. For instance, the rate of change (ROC) indicator measures the change between historical prices and current prices. It helps the technical traders to the oversold and overbought positions in scrip for a given period. The ROC can also be used to identify the trend reversals. The historic low and high values of ROC should be identified at first to locate the oversold or overbought regions. If scrip’s ROC reaches historic high values, the scrip is in overbought region and the trader may anticipate fall in price in future. (Source: Barchart.com, 2014) MANAGEMENT Many critics have questioned the growth of Apple after the untimely death of Steve Jobs; one of the co-founders who paved the path of Apple as it is today. The management has changed since the death of Jobs mostly visible from Tim Cook’s stepping out carry the torch from his predecessor. Since then, Cook has taken some very positive initiatives like expanding current distribution system into emerging economies (Brazil, China, and India), increase product lines, reshuffle executive team, and appease investors when the stock prices were taking beating in market (Myslewski, 2013). The company operates in hyper-competitive consumer technology business (Market Watch, 2012). These initiatives have helped it to become the market leader and earn the trophy of ‘the most valuable’ US company with market capitalization over $629 billion. The stocks of Apple were hovering at $378.25 level when Jobs died on October 05, 2011 which is currently trading at $502.76 to $509.46 range. VALUATION The 52 week range of Apple Inc. is $385.10 to $575.14; the average trading volume of apple is 15,922,600 and the current market capitalization of Apple is over $453.83 billon. The P/E multiple of the company is 12.61 and EPS is $40.32. The earnings per share to be received by the shareholders have undergone a marked increase as shown in the graph below: Graph 1 – Trends in EPS of Apple during Five Years On the basis of Discounted Cash Flow Model, the intrinsic value of AAPL gave a target price of $676.64. According to this model the investors are recommended to hold the AAPL stock instead of selling. Since the stock seems to be undervalued under present circumstances, there is every possibility that the stock prices will rise in future and investors can profit by selling shares at higher prices when stocks appreciates. FUNDAMENTALS Ratio analysis has immense application in interpretation of financial statements and also helps to analyze the profitability, solvency and liquidity trends over a certain period of time. Generally, the most commonly used types of ratio for financial analysis are profitability, solvency, activity and liquidity ratios. Profitability - It is a key indicator of the company’s performance in its industry of operation and also helps to measure the company’s financial position. The overall profitability trend of Apple Inc. has been stable and very marginally improving from 2010 to 2013. However, the operating profit and net margin of the company has increased at an annual rate of 0.6% and 0.3% respectively during the same period under observation. Solvency - The solvency ratios help to analyze the ability of a company to meet its long term obligations. The ratio focuses on the actual after tax income of the company by quantifying profit after taxes and other liabilities. From the above it is clear that the company had solvency ratio higher than 0.2 or 20% from 2010 to 2013 implying that it may be considered as a financially sound organization. Liquidity - The liquidity ratio measures company’s skill to meet its working capital requirements. An asset is considered liquid if it can be transformed into cash and cash equivalents in short amount of time. The current ratio is an indicator for the firm’s short term liquidity management, hence it is also known as the working capital ratio. Another popular indicator for measuring company’s short term liquidity is the Quick-ratio which is same is current ratio except that since the inventories are not very liquid as other short term assets, so it is subtracted from other current assets. The interpretation of this type of ratio indicates that inventory/stock of apple has seen improvements from 2010 to 2013 backed by launch of new products and geographical diversification. Efficiency - The efficiency ratios help to evaluate the activities level of business in terms of sales or turnover. The higher the activity, the higher would be the turnover of the business and the more business will be efficient. The financial ratios for activity of AAPL indicate that the company has not utilized its assets in most efficient way as the values have declined over the years. There is an opportunity for the company to expand its operations in emerging economies such as China or India where the market is largely untapped and holds great potential for the company to utilize its resources in new markets through diversification. CHART (Source: NASDAQ, 2014) Candlestick Chart - This chart helps to identify a shares’ open, close, low, and high. The vertical axis plots share price while the horizontal axis plots time period. If the open price of stock exceeds close price, the candle stick body is colored. When the close price exceeds open price, the candlestick body is white. The thin vertical line is called ‘wick’ and the thick portion is called the ‘body’. The chart depicts that AAPL stocks are lower than their 52 week range and there is a short-term down trend. Many analysts expect the stock prices to rise in near future given positive market sentiments dominating market movements. CONCLUSION The slowdown of US economy after the global financial crisis forced the company to adopt different marketing strategy to shield itself from the impact of global crisis. The fundamental analysis revealed that the macroeconomic conditions are improving especially in US where recovered very strongly during the previous quarter. This is apparent from the decision take by US Fed to gradually slow the ‘taper’ or monthly bond purchase program. Industry analysis shows that the company is a market leader that recently earned the title of most valued company in US. Technical analysis reveals that the share prices of AAPL have experienced up-trends and analysts expect the same to follow in near future and recommended ‘buy’ rating before the stock is bottomed-out. The company even introduced their products in absolutely new developing markets (such as India) which were not its main source of revenue. The management strategy of the company to diversify target market into emerging economies helped to increase sales volumes maintain market share (Sekhar, 2009, p.115). RECOMMENDATIONS The attractiveness of stocks of Apple Inc is revealed from different investment analysis approaches including technical analysis, fundamental analysis, sentiments and management analysis. These tools indicate that investors will be able to maximize their return on investment by investing in the stocks at present price levels. The CMP (current market price) of AAPL is $501.53 and many analysts have given the stocks ‘buy’ rating with target price close to $577.50 (NASDAQ, 2014). This means if investor buys 100 shares of AAPL with CMP, then current investment will amount to $50,153 and when share prices appreciates near target price, the value of 100 shares held by investors would be $57,750. This will earn profits worth $7,597 [$57,750-$50,153] making a ROI (return on investment) of 15.14 percent. This is much higher than any fixed income security or deposit rates. Hence, it is recommended that investors buy the shares of AAPL. REFERENCES Baker, M. & Wurgler, J. (2007). INVESTOR SENTIMENT IN THE STOCK MARKET. Retrieved from http://www.nber.org/papers/w13189.pdf?new_window=1. Barchart.com. (2014). Apple Inc (AAPL) Technical Chart. Retrieved from http://www.barchart.com/charts/stocks/AAPL&style=technical. Bloomberg. (2014). Apple Inc (AAPL: NASDAQ GS): Financial Statements. Retrieved from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=AAPL&dataset=balanceSheet&period=A¤cy=native. Bloomberg. (2014). Apple Inc AAPL: US: Stock Chart. Retrieved from http://www.bloomberg.com/quote/AAPL:US/chart. Crandall, R., Lehr, W., & Litan, R. (2007). The Effects of Broadband Deployment on Output and Employment: A Cross-Sectional Analysis of U.S. Data. Retrieved from http://www.brookings.edu/views/papers/crandall/200706litan.pdf. Grauwe, P. D. (2012). Lectures on Behavioral Macroeconomics. United States: Princeton University Press. Green, J. & Shoven, J. B. (1983). The Effects of Interest Rates on Mortgage Prepayments. Retrieved from http://dash.harvard.edu/bitstream/handle/1/3204664/green_prepayments.pdf?sequence=2. Market Watch. (2012). Has Apple suffered without Steve Jobs? Analysis: Company has largely thrived, but challenges remain. Retrieved from http://www.marketwatch.com/story/the-challenges-ahead-for-apple-2012-10-05. Myslewski, R. (2013). Two years after Steve Jobs death, hows that new CEO working out?. The Register. Retrieved from http://www.theregister.co.uk/2013/10/05/tim_cook_and_apple_two_years_after_steve_jobs_death/. NASDAQ. (2014). Apple Inc. Stock Chart. Retrieved from http://www.nasdaq.com/symbol/aapl/stock-chart?intraday=off&timeframe=3m&charttype=candlestick&splits=off&earnings=off&movingaverage=20day&lowerstudy=volume&comparison=off&index=&drilldown=off&sDefault=true. NASDAQ. (2014). Apple Inc. Stock Quote & Summary data. Retrieved from http://www.nasdaq.com/symbol/aapl. Sekhar, S. (2009). Business Policy and Strategic Management. New Delhi: I. K. International Pvt. Ltd. Thomson Reuters. (2012). What Can Market Sentiments Tell Us?. Retrieved from http://ar.thomsonreuters.com/story2.html. USA Today. (2012). Year after Jobs death, how high can Apple fly?. Retrieved from http://www.usatoday.com/story/tech/2012/10/04/steve-jobs-apple-year-later/1577271/. Yahoo Finance. (2013). Apple Inc. (AAPL): Analyst Opinion. Retrieved from http://in.finance.yahoo.com/q/ao?s=AAPL. Yahoo Finance. (2013). Market Sentiment Gives Clues to Next Big Move in Stocks. Retrieved from http://finance.yahoo.com/news/market-sentiment-gives-clues-next-162425564.html. APPENDIX TABLE 1 – BALANCE SHEET TABLE 2 – VALUATION Read More