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Land Ho: Apple Ships its Green Back from Ireland Apple NYSE: [AAPL] Ben Morgan and Josh Gutierrez February 12th, 2018

LMT Close Last Three Months ($/Share) 190

180 170

Outlook: Hold

160 150

st

On February 1 , Apple announced its FY 2018 Q1 earnings and

140

boasted record high figures for both its revenue and EPS. Quarterly revenue was posted at $88.3bn, an increase of 13% from last year’s

Last Close

result, and the quarterly earnings per diluted share was recorded at $3.89, which represents a 16% increase from FY 2017. Much of the

52 Week Range

exuberance in these results was attributed to the extremely successful

First Report

release of iPhone X in November, as well as strong performance in

Price Target

international markets, which attributed for 65% of the quarter’s revenues. While releasing the Q1 earnings, Apple’s management forecasted 2018 Q2 revenue between $60 and $62bn. Along with these fantastic results, Apple has generated headlines

$155.15 Low: $133.25 High: $180.10 $168.28

P/E Ratio

16.75

EPS (TTM)

$9.73

Shares Outstanding

5.09bn

Market Cap

$793.63bn

the near future. This announcement arrived on the heels of Apple’s plan

Last Dividend

$.63

to take advantage of the recently passed tax reform in the US, which it

Ex-Dividend

recently for announcing significant investments in the US economy in

will use to repatriate much of its overseas cash. While President Trump was an early supporter of this plan, the company’s long-term value will be significantly affected by how it decides to use this money. In addition

Date

02/09/2018

Sources: NASDAQ historical quotes, The Wall Street Journal figures as of 02/12/2018

to making long-term investments, Apple claims it can use the cash to optimize its capital structure and increase shareholder return. Furthermore, the Q1 results were mainly led by strong iPhone sales, and the company remains heavily dependent on this one product to generate its revenue. Therefore, any long-term forecast needs to consider the other markets Apple could get involved with and how the company plans to introduce new and innovative products to its consumers. Produced by First Report Economic News -- Copyright 2018

www.firstreporteconomics.com


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12 m onths Dec-31-2014A

12 m onths Dec-31-2015A

12 m onths Dec-31-2016A

12 m onths Dec-31-2017A

182,795.0

233,715.0

215,639.0

229,234.0

7.0%

27.9%

(7.7%)

6.3%

112,258.0

140,089.0

131,376.0

141,048.0

24.8%

(6.2%)

7.4%

70,537.0

93,626.0

84,263.0

88,186.0

Selling General & Admin Exp.

11,993.0

14,329.0

14,194.0

15,261.0

Income Taxes

13,973.0

19,121.0

15,685.0

15,738.0

7,946.0

11,257.0

10,505.0

10,157.0

Change in NWC

(9,113.0)

(13,152.0)

(6,793.0)

(6,548.0)

Capital Expenditure

(9,571.0)

(11,247.0)

(12,734.0)

(12,451.0)

Cashflow s

27,792.0

38,967.0

35,317.0

36,764.0

Discounted Cash Flow Model ($ millions) Total Revenue Growth Over Prior Year Cost Of Goods Sold Growth Over Prior Year Gross Profit

Depreciation & Am ort.

Discounted Cash Flow Model ($ millions) Total Revenue Growth Over Prior Year Cost Of Goods Sold Growth Over Prior Year Gross Profit

12 m onths Dec-31-2018E

12 m onths Dec-31-2019E

12 m onths Dec-31-2020E

12 m onths Dec-31-2021E

12 m onths Dec-31-2022E

263,619.1

272,845.8

281,481.3

289,447.3

297,638.6

15.00%

3.50%

3.17%

2.83%

2.83%

162,205.2

167,882.4

173,195.9

178,097.3

183,137.5

15.0%

3.5%

3.2%

2.8%

2.8%

101,413.9

104,963.39

108,285.48

111,349.96

114,501.16

Selling General & Admin Exp.

17,550.2

18,164.4

18,739.3

19,269.6

19,815.0

Income Taxes

18,098.7

18,732.2

19,325.0

19,871.9

20,434.3

Depreciation & Am ort.

11,680.6

12,089.4

12,472.0

12,825.0

13,187.9

(35,240.9)

(2,863.3)

(2,679.9)

(2,472.1)

(2,542.0)

(9,113.0)

(13,152.0)

(6,793.0)

(6,548.0)

(35,240.9)

14,567.93

48,688.80

50,503.86

52,216.77

53,694.50

Change in NWC Capital Expenditure Cashflow s

($ millions excluding share price) Tax Rate Riskfree Rate Terminal Grow th Rate Terminal Value WACC (Discount Rate) Enterprise Value

26% 2.52% 3.00% $1,085,498.29 8.09% $905,295.92

Cash

74,399.0

Debt

115,680.0

Equity Value Number of Shares Outstanding Share Price

$864,014.92 5,134,312 $168.28

Sources: Company SEC filings, investor presentations, Thomson Reuters

Produced by First Report Economic News -- Copyright 2018

www.firstreporteconomics.com


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Coming Home: Apple’s cash follows tax reform’s call home One of the most publicized provisions in the recent US tax overhaul has been the offer for large corporations to repatriate their cash held overseas for a one-time tax payment of 15.5% the amount. Apple quickly seized this opportunity, as 94% of its $285bn in cash is currently held overseas in countries such as Ireland that charge much lower corporate tax rates. This means that after Apple makes a payment of $38bn to the federal government, the largest payment ever of its kind, it will now have access to much of the cash they have long stored overseas. In light of this plan, Apple announced on January 17 that it intends to contribute more than $350bn to the US economy over the next 5 years. Included in this expected contribution will be $30bn in US-based capex spending in 2018. Much of this amount will be invested in Apple’s existing data centers, and the company also unveiled its intention to build a second US headquarters in a new city. However, analysts have pointed out that many of the announced projects were already in place before the announcement, so the real contribution Apple will make to the economy is estimated at closer to $37 mm once the repatriation fee is subtracted. To bolster the added investment spending in the US, Apple will now have the ability to use its cash to optimize its capital structure. Before the change in tax law, Apple had to issue debt each time it wanted buyback its own stock and optimize its capitalization. However, now it can use its massive net cash position to make these purchases without taking on additional debt. In the Q1 earnings call, CFO Luca Maestri said the company will wait until after its March results are announced to make any decision regarding buybacks in the near future, but he re-affirmed that the goal will be to continue returning roughly 100% of cash flow to investors. Regardless of the results in March or how beneficial the returns on the US investment are, it is clear that in bringing its cash back into US accounts, Apple improved its flexibility tremendously and curried political favor with many of the populist politicians who were unhappy with its overseas manufacturing practices and cash piles during the last election cycle. Doubtlessly, both of these factors improve the company’s long-term outlook as it looks to diversify its portfolio and remain competitive in a new age of technological development.

Produced by First Report Economic News -- Copyright 2018

www.firstreporteconomics.com


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Source: SEC Filings. Net Cash calculated as total cash, short & long term marketable securities less total debt and convertible notes.

Branching Out: Apple looks to diversify product line to lessen dependence on iPhone sales Everyone is familiar with the way Apple transformed the world when it released the iPhone in the summer of 2007. Since then, the company has continued to develop its signature product and regularly introduces new editions with differing levels of innovation. Through the years, the product has garnered a significant portion of the smart phone market and enjoyed remarkable customer loyalty through all of its updates. However, Apple’s competitors have continued to develop their own comparable products, and have been able to sell them at a markedly lower price. Therefore, we’re weary Apple could run into issues if some of these alternatives manage to court iPhone users. Clearly, Apple’s management is also aware of this risk and has made a concerted effort of late to diversify its product line. Although none of their products have achieved nearly the same level of dominance as the iPhone, Apple has substantially grown its services sector and has also seen improvement from its smart watches, laptops, and tablets. The latest iWatch has been by far the most popular edition, and 2018 Q1 service revenues reached all-time highs as offerings such as Apple Music and Apple Pay continue gaining ground in their respective marketplaces. However, before we get too bullish on the services sector, we would like to see Apple innovate unique and new products in this area rather than following the lead of its smaller competitors in the tech industry.

Produced by First Report Economic News -- Copyright 2018

www.firstreporteconomics.com


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One particularly interesting avenue of innovation Apple has mentioned from time to time has been increasing its exposure to Virtual or Alternate Reality technology. Although it has been sparse with specifics, the company has mentioned its efforts to incorporate a greater number of VR applications into its renowned App Store. We see this as an exciting opportunity for Apple to use its significant investment capability and create new and exciting projects that can promote some of the same wonder as the release of the iPhone provoked a little more than a decade ago.

Source: SEC Filings

Conclusion: Don’t bite the apple Clearly, Apple has used its long run of success to amass a formidable cash pile and assert dominance in a market that continues to grow around the world. In light of these accolades, we see the company as being fairly valued in its current state, and given its close ties to the health of the overall economy, do not recommend buying it while the market remains near its all-time highs and global economic health is strong. Therefore, we’ve designated a strong hold rating to the stock, and would urge investors to wait for either a clear signal of innovation or a more reasonable price point to increase their position in Apple. Important note: The views expressed in this report are the opinions of the analysts above. The analysts do not have FINRA licensing and are not qualified in any legal capacity for financial advisory; First Report has not and does not receive payments for these reports. None of the analysts have positions in the companies discussed in this report. We advise that readers research these subjects on their own before making investment decisions. Produced by First Report Economic News -- Copyright 2018

www.firstreporteconomics.com

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