Cr-1 Apple Computer (aapl) Example United States Computers

Market Value ($mns): $6,842.00

Apple 2003 Price/Earnings: 95.4x

S&P500 2003 Market PE (Sep.) 19.8x

Company Type: Asset Play

PE Relative Fair Value Range: .80-1.20

Intrinsic Value: $3.84 (-85%) Recommendation: Sell
Summary:

Apple Computer (AAPL) is a sell. It will have a difficult time due to weaker earnings, higher charges, a weaker economic environment, greater competition, and the need for new products. While cash is 48% of market value in 2002 and the new operating system will help, Apple must come out with either superb new products or change its direction to remain viable.

Apple Computer, established in 1977, designs, manufactures and markets personal computers (PCs) and related communications solutions to the consumer, education, creative, and business markets. Sales are from its Apple Macintosh-line of PCs and related software and peripherals. AAPL manages its business primarily on a geographic basis, and has operations in the Americas (57% of 2002 sales and 46% of operating profits), Europe (22% and 20%), Japan (7% and 14%), Retail (5% and -4%) and Other (7% and 14% respectively).

1 The company has a war chest of cash. Its cash and marketable securities are estimated to represent nearly 48% of total market value (or $11.99 per share) in FY2002. While Apple is likely looking for a major investment to move the company’s strategic direction away from the volatile consumer computer market, it is quickly becoming a take-over target due to its large cash position.

1. 
   Apple is expensive. It is trading at a prospective 2003 and 2004 PE of 95.4x and 68.2x, a 381% and 275% premium to the market. Sales are likely to remain subdued and earnings negative due to similar reasons as 2002: slower growth in key market segments, lower sales on newer products, shifting mix toward cheaper products, and difficulties due to outsourcing.
   

2. 
   Innovation is critical. Apple must continue to innovate to maintain its place in the industry. While it continues to support R&D, it must deliver new and better products to maintain viability, or it will become another failed computer manufacturer. The Company's future operating results are substantially dependent on its ability to continue to make improvements to the Macintosh platform to maintain perceived functional/design advantages over competing platforms.
   

3. 
   Apple suffers from earlier management decisions. Its early decision to keep its operating system proprietary has left the company with less support from the programming community. Moreover, with the current progress of Microsoft Windows the differences between the Apple operating systems and Windows have lessened considerably. Should the new operating system not be received as well as expected, it could have a major negative impact on investor sentiment.
   

4. 
   Rapid technological advances are critical. Advances in both hardware and software development are drivers for the industry. This has resulted in the more frequent introduction of new products with significant technological advances, at significant price reductions. Apple’s must continue to innovate to stay ahead of the competition.
   

5. 
   Control over production and distribution is declining. While the outsourcing of production and distribution has reduced manufacturing costs, it has also reduced direct control over production and distribution, and reduced its ability to respond to changing market conditions.
   

6. Entrance into the retail segment has entailed substantial investment in equipment and commitment of resources. This is an extremely competitive area, which is not expected to be profitable for some time. Should this decision prove short-sighted, it will require substantial funds to terminate these stores and long-term contracts.

Growth of PC sales, reception of the new OS, announcement of major acquisitions.

Bryan Sudweeks .20 .28 9/8

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Tom Weisel partners .18 .32 9/8

Zacks Mean (std. dev.).19 (.02) .36 (.09) 9/8