FIN53407: Financial Management, Final Research Paper- Apple Stock

Introduction

The purpose of this final research report is to analyze the best possible investment for a client or investor. In order to select a publicly traded company, a rationale must be determined that will be beneficial for the investor. The investment has to be arranged followed by determining the investors profile to determine if the company selected could be the best fit. Upon researching the publicly traded company, financial ratios used to determine the financial health of the company selected for investment is covered. The final phase of the research involves investigation and information on the level of risk involved in the investment and the strategies used to minimize the risk impact. While reviewing the final phase, recommendations for the investment choice provided for the investment opportunity.

Provide a rationale for the U.S. publicly traded company that you selected, indicating the

significant factors driving your decision as a financial manager

Taking on the role as a financial manager, it is my responsibility to research investments for my clients that coordinate with their investment goals. During my research, I have determined that Apple Inc. would be a great stock investment for my investor. There are many reasons and explanations why I recommended Apple Inc. to my investor. One reason Apple Inc. was chosen as the investment opportunity was due to their 2016 sales. According to the Fourth Quarter Results for Apple Inc., Services Revenue Grows 24% to All-Time Quarterly Record of $6.3 Billion (Huguet, 2017). Over the past 10 years, the stock has soared over the competition in the market. Apple Inc. is an emotional stock and customers get very excited about the products that Apple manufacture. Apple has been able to appeal to their customer’s eagerness to be on trend and purchase the new hottest gadgets. The past ten years show that Apple Inc. stock is reliable for current and future investment. In prior years Apple has been known as a growth stock, the rate of stock was always above average in reference to the market. “Technology companies are typically good examples of growth stocks because the opportunity for advancement is virtually limitless (Investopedia, 2017)”. .As a recommendation for my investors, Apple is a valuable investment option. According to Birger (2012), Apple’s price/earnings ratio of 13 is near a 10-year low, and Apple now has a lower valuation than large-cap peers with inferior earnings growth. Even though Apple’s stock took a considerable drop from their historic past high dollar value, the investment is still the right choice and reliable.

Prior to Apple’s continued success, the company was undervalued. After billionaires made the support for the product line public, Apple’s stock jumped 4.75 percent bring Apple’s market value up by 17.1 billion. Apple is an innovative and groundbreaking company that has manufactured some of the most interesting and amazing technology available today. In recent years if you noticed Apple has been taking their current product line and upgrading them. The perfect example of this is the iPhone; it started as the iPhone, then the iPhone 3, and so on until now the iphone7. Apple has been able to capitalize on the need from their consumers to want bigger and newer things. For example, their recent product lines of the iPhone brand have different options. Like there was an iPhone 6, iPhone 6s, iPhone 6 Plus and iPhone 6s Plus. All of the phones have similar options for customers with a slightly different feature. Some features include camera quality, amount of storage, and the size of the phone. Apple has been able to price each phone differently based on the features available. This is how Apple is steadily increasing their sales and growing as a giant in the market. They appeal to the consumers need to be slightly different from the next person and the price increase does not seem to deter any of the consumers from purchasing their product.

Suggest the primary reasons why the selected stock is a suitable investment for your client.

Include a description of your client’s profile.

Choosing Apple Inc., as an investment choice that was easy to make considering Apple Inc.’s continued success in the tech market. Apple Inc. has had success in rising stock prices, expanding customer satisfaction and loyalty, in addition to the company’s continued commitment to technological innovation. Apple has achieved this not by simply launching expansive amounts of new products. Rather, Apple Inc. has innovatively decided to improve models of existing products and “re-launching” the products as an upgraded version. Apple has continued to grow, becoming the largest tech company in the entire world in addition to becoming the 12th largest company to publicly trade in the world. Apple is more of an interesting stock in to invest in because of these continued increases in share price. The growth of this company has risen over the years making the stock very valuable. As of 2017, Apple has become the largest traded stock in the world within estimated value of $750 billion. Apple has been able to continue to launch new updates to the iPhone brand that is known worldwide. Most recently, the iPhone 8 has been scheduled for release in the fall of 2017. Because of the recent promotions regarding Apple’s iPhone 8, Apple Inc. is avalue play investment for my client in regards of the value of Apple stock. The iPhone 8 release has sparked many rumors regarding the newest model to the iPhone family.

Apple Inc is a successful company for my client to invest in was my client’s own profile. This would ensure that the company chosen would accurately and lucratively align with my client’s needs. While there are certain investors that prefer short term investments to turn a quick profit, there are others who prefer long-term investments to see their value increase over time. It was necessary to ascertain which type of investor my client was before choosing a company. My client is one that prefers the long-term investment. My client will want to know the overall growth of the company from beginning to the current stock profile. It is imperative for me to explain the benefits of the investment. The Apple stock was undervalued in the beginning and overtime the company has proving that it is worth investing in. Apple Inc. is a company that has proven that they are innovators and able to give the consumers what they want. My client will be pleased with the choice to invest in Apple stock. The overall stock is valuable and will continue to be valuable from the way things are going. According to Dierking, there are four benefits for holding onto long-term investments: Better Long-Term Returns, Opportunity to Ride out Highs and Lows, Investors are Poor Market Timers and Lower Capital Gains Tax Rate (2017). It will be more beneficial for the investor to reap from the Apple stock. The long-term investment will allow the investor to reap the benefits no matter what occurs within the company. After completing the research on Apple and matching the results with my client’s profile, this will be a great investment opportunity.

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

Apple Inc. has been a successful worldwide brand for many years. The company has been able to increase their rate of return and increase stock prices over time. In order for investors to make the right choice, they must take in to account the ratios that could help make the best decision. For my client, I looked at five financial ratios to solidify my decision on bringing the Apple stock to their attention. The financial ratios I used were working capital, earnings per share, debt-equity, and return on equity ratios. These ratios provided a better understanding of the Apple Company as a whole and allowed me to bring my findings to the investor. The ratios help to establish the financial health of the company from different angles. The working capital ratios is the main one used in order to choose Apple as the best stock option opportunity. The working capital and other ratios listed have been crucial in determining if the Apple stock is worth investing in. In the past three years, Apple has continued to see steady growth over all aspects of the company.

Financials

2007-09 2008-09 2009-09 2010-09 2011-09 2012-09 2013-09 2014-09 2015-09 2016-0 Revenue USD Mil 24,578 37,491 42,905 65,225 108,249 156,508 170,910 182,795 233,715

Gross Margin % 33.2 35.2 40.1 39.4 40.5 43.9 37.6 38.6 40.1

Operating Income USD Mil 4,407 8,327 11,740 18,385 33,790 55,241 48,999 52,503 71,230

Operating Margin % 17.9 22.2 27.4 28.2 31.2 35.3 28.7 28.7 30.5

Net Income USD Mil 3,495 6,119 8,235 14,013 25,922 41,733 37,037 39,510 53,394

Earnings Per Share USD 0.56 0.97 1.30 2.16 3.95 6.31 5.68 6.45 9.22

Dividends USD — — — — — 0.38 1.63 1.81 1.98

Payout Ratio % * — — — — — — 27.4 28.5 22.3

Shares Mil 6,225 6,315 6,349 6,473 6,557 6,617 6,522 6,123 5,793

Book Value Per Share * USD 2.20 3.39 5.02 7.45 11.78 16.99 19.60 20.62 22.53

Operating Cash Flow USD Mil 5,470 9,596 10,159 18,595 37,529 50,856 53,666 59,713 81,266

Cap Spending USD Mil -986 -1,199 -1,213 -2,121 -7,452 -9,402 -9,076 -9,813 -11,488

2008-09 2009-09 2010-09 2011-09 2012-09 2013-09 2014-09 2015-09 2016-0

2007-09

Free Cash Flow USD Mil 4,484 8,397 8,946 16,474 30,077 41,454 44,590 49,900 69,778

Free Cash Flow Per Share * USD 0.63 1.33 1.41 2.54 4.59 6.31 6.46 7.73 11.82

Working Capital USD Mil 12,657 20,598 20,049 20,956 17,018 19,111 29,628 5,083 8,768

Key Ratios

Efficiency 2007-09 2008-09 2009-09 2010-09 2011-09 2012-09 2013-09

Days Sales Outstanding 21.96 22.81 24.60 24.82 18.34 19.01 25.66

Days Inventory 7.09 7.31 6.85 6.95 5.17 3.26 4.37

Payables Period 96.25 89.74 79.02 81.30 75.48 74.38 74.54

Cash Conversion Cycle -67.19 -59.61 -47.58 -49.53 -51.96 -52.13 -44.50

Receivables Turnover 16.62 16.00 14.84 14.71 19.90 19.20 14.22

Inventory Turnover 51.47 49.90 53.28 52.51 70.53 112.12 83.45

Fixed Assets Turnover 15.42 15.15 15.86 16.89 17.26 13.48 10.67

Asset Turnover 1.13 1.00 0.99 1.06 1.13 1.07 0.89

(Apple Inc., n.d.)

From the above chart of the financials over the years, it is evident that the company has had years that are more successful. The difficulties could be from any rumors regarding the product line or change in the economy. Overall, the financials show a very successful financial history. This information is what I used in order to convince my investors to look at the long-term stock investment for Apple Inc. Apple has remained profitable and is a great investment opportunity for investors looking for a long-term investment.

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

When deciding to invest in a stock it is crucial for the investor to understand the risks that go along with that investment. It is also important to note that no matter how safe an investment may seem there will always be risk involved because the market has many variables. Investors must realize that you can try to plan for all variables, but the market is unpredictable. With all the risk, there are still steps that the investor can take to mitigate the risks and give themselves the best chance at the results they want to achieve. After covering the five financial ratios that were determined to give the best description of the financial health of Apple Inc., the risk level from the investor’s point of view would be reasonable.There are several reasons why the investor may feel that investing in Apple Inc. comes with a reasonable risk. The main reason is that many of Apple’s earning power lies with innovation. Currently they have been able to manage their profits through updating current product lines. As the past years have shown us with the large decrease in share prices, this will only carry them so far. Being majorly impacted by innovation, can be an unpredictable variable that could cause concern with the investors. If the innovation does not take place as the company expects it to, Apple’s profits may continue to decline over time. The investor has determined that Apple is a reasonable risk because they understand that even though the five ratios used have given a large picture of the financial health of Apple Inc., there are still underlying variables that may not be addressed. In addition, the investor realizes the disadvantage of using the current ratio to help determine the financial health of Apple Inc. Finally, the investor feels that their risk is reasonable and not high because they plan on investing for the long-term. The investor does not intend to trade the stock that they would purchase in Apple because the goal is to keep the stocks for years. This will help to lower the overall risk of the stock to a moderate level. The investor has determined that Apple would be a reasonable investment risk and now it is important to come up with strategies to help reduce the risk that the investor sees. Out of all the options to assist with reducing risk, my suggestion is diversification. According to Scott Turner, “Diversification spreads risks across many securities or stocks, so those that perform well offset those that do poorly. Though diversification protects you from devastating losses, it also costs you in average annual returns (2017).” Diversification is virtually the idea of having more than one investments in order to decrease risk. This will allow the investors to set out their investments to reduce the risk that could come from the Apple stock severely dropping in value suddenly. Diversification will also help with the possible lack of innovation at Apple causing the company to fail.

Provide your recommendations of this stock as an investment opportunity.

Investing in the Apple Inc. is a bit risky, but a great long-term investment overall. Investing in Apple will be a beneficial investment for my investors and will bring a high rate of return. The Apple Company has been able to maintain their success by re-launching products within their product-line. They have cornered the market on utilizing their own products to introduce new concepts that appeal to their target market. This idea of re-launching can be great for a company, but it can only last for so long before the consumers are looking for something new. Although the tech market is steadily changing, Apple has been able to remain current on the latest trends. The company has been able to stay innovative and introduce new products to the market. Apple has been successful worldwide and appear to be on a steady successful path of growth. Apple is a great investment opportunity and will be mutually beneficial for my investors and myself.

Recommend the Apple stock because it is highly affordable and highly profitable. With the new product lines that they have developed, the company continues to rank number one in the Tech Market. The latest release is the iPhone 8, which is one the most anticipated phone releases in

2017. The iPhone 8’s release has sparked many conversations because it is being released on the 10th anniversary of the Apple iPhone’s first release. The upcoming release will have many consumers pre-ordering and standing in line to be the first to see what new things have been added to the famous iPhone. The overall risk associated with the Apple Company is reasonable. The company has proven over the years that the company can be successful regardless of the difficulties that may occur. Apple Inc. is a powerhouse in the tech market and has been an overall stable stock in the stock market. This will increase the value of the stock and this is a perfect time to invest.

Conclusion

In conclusion, Apple Inc is a very successful company that is very innovative. The company has been able to stay stable and continue to grow through all the changes that may come. There are some variables that may be unaccounted for, but the risk associated with the company is reasonable. The risk is reasonable due to the target market for Apple Inc. The consumers are steadily increasing and foot traffic has never been better. By re-launching the product line, Apple has been able to keep the consumers happy with slight changes to the product. The Apple brand is synonymous w it being an innovative giant. Their success is marked by their financial growth and ability to stay relevant in an ever-changing market. Apple Inc is the best fit for my investors’ long-term investment goals.

References

Apple Inc. (n.d.). Retrieved September 01, 2017, from http://financials.morningstar.com/ratios/r.html?t=AAPL

Birger, J. (2012, December 06). Why you're right to be obsessed with Apple stock. Retrieved September 02, 2017, from http://fortune.com/2012/12/06/why-youre-right-to-be-obsessed-withapple-stock/

Dierking, D. (2016, May 22). 4 Benefits of Holding Stocks for the Long Term. Retrieved September 02, 2017, from http://www.investopedia.com/articles/investing/052216/4-benefitsholding-stocks-long-term.asp

Huguet, K. (2017, August 30). Apple Reports Fourth Quarter Results. Retrieved September 01, 2017, from https://www.apple.com/newsroom/2016/10/apple-reports-fourthquarter-results/

Staff, I. (2016, May 20). Growth Stock. Retrieved September 01, 2017, from http://www.investopedia.com/terms/g/growthstock.asp

Turner, S. (2017, February 14) Diversification Is Important In Investing Because….. Retrieved September 03, 2017, from https://scottalanturner.com/diversification-important-investing/