Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON Company analysis and valuation of Apple Inc., Oracle Corporation, IBM Corporation and Microsoft Corporation NAME OF STUDENT ID No: 16031462 Intake 1 Supervisor: Prof. Pham Thi Hoang Anh September 2018 FINANCE DISSERTATION Name: Ngoc Uyen Luu Student no: 16031462 Supervisor: Prof. Pham Thi Hoang Anh Project title: Company analysis and valuation of Apple Inc., Oracle Corporation, IBM Corporation and Microsoft Corporation Date submission: September, 26th 2018 Word count: 2 Executive Summary This dissertation studies the 4 global leading companies in the technology sector are Apple Inc., Oracle Corporation, IBM Corporation and Microsoft Corporation. It evaluates all internal and external factors which influence these companies’ performance and prospects to give the investment recommendations to investors.
Based on the macro- economic analysis, the US and Asia- Pacific is recognised as the regions with the most potential for the development of the technology sector. Because of that, technology companies should focus on developing and increasing their presence in these markets. The industry analysis represents an intense competition between existing companies. Thus, they need to come up with more innovative tactics and spend more on R&D to compete more effective for the coming years.
In the company analysis, it can be seen that Apple Inc. and Microsoft Corporation are the companies have an outstanding performance. IBM Corporation is having trouble when its financial ratios show a worsening financial position and its sale growth is predicted to be negative in the next few years. The valuation models are applied to calculate the intrinsic values of the four companies.
The target price of Apple Inc., Oracle Corporation, IBM Corporation and Microsoft Corporation are $188. Combining all analyses, recommendations are made for each stock. 3 Acknowledgements This study was the result of a one-year process of researching and putting in writing during the year of 2017/18. First of all, in order to fulfil this study, I would like to express my great thanks to lots of people for their contribution and help during my research process.
In particular, special mention and sincere thank have to go to Prof. Pham Thi Hoang Anh, my supervisor at Banking Academy VIetnam. I could not have completed this dissertation without her careful guidance, right direction and constructive suggestions. Last but not least, I also would like to thank my lecturers, my friends and all of authors of the journal article and books that I have given references in my research.
4 Table of Contents Abbreviations. An overview on the technology market. Area of the study. Organisation of the study.
10 Chapter II: Macroeconomic analysis. Overview of the global economy in 2018. Key macroeconomic factors analysis:. Summary of the US economy:.
Key macroeconomic indicators analysis:. Summary of the European economy:. Asia- Pacific economy. Key macroeconomic indicators analysis:.
Summary of the Asia- Pacific economy:. 22 Chapter III: Industry analysis. Error! Bookmark not defined. Bargaining power of buyers.
Bargaining power of suppliers. Threat of new entrants. Threat from substitutes. Rivalry among existing players.
27 Chapter IV: Company Analysis. 87 6 Abbreviations APPL Apple Inc. CPI Consumer Price Index CSFTA China- Singapore Free Trade Agreement DPS Dividend per Share EBITDA Earnings before Interests, Taxes, Depreciation, and Amortization EPS Earnings per Share EU European Union GDP Gross Domestic Product IBM International Business Machines Corporation IMF International Monetary Fund IT Information Technology MSFT Microsoft Corporation OECD Organisation for Economic Co-operation and Development ORCL Oracle Corporation P/E Price/Earnings R&D Research and Development ROA Return on Assets ROE Return on Equity UK United Kingdoms US United States 7 Chapter I: Introduction I. An overview on the technology market The technology sector contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology (Bloomberg, 2018).
It is considered as a leading sector for growth- based investment. This sector performed well in 2017, it had increased 15.6% since the January 2017 (Sands, 2018). However, Brexit caused a decline in the performance of technology sector. It creates more risk and uncertainty for the business when just in the UK, according to KPMG report in 2018, 70 percent of tech workers are considering leaving the UK.
The technology sector is dominated by 3 leading companies, namely Apple (APPL), Microsoft (MSFT) and Facebook (FB). The stocks of these companies had returned 10.8% and 13%, respectively, in December 2017 in compared with their performance in the same period in 2016. These firms carry out their business across the world with the main driver of sales in 2017 being focused on 3 regions: Europe, Asia- Pacific and the US (Datamonitor, 2018). In 2018, the technology sector is forecasted to have an explosive growth (Bajarin, 2017).
According to researchers, there will be potential tripling of demand for tech- related goods and services over the next decade. With the growth of the importance of technology in society, the technology sector has become a bellwether of the overall stock market and economy. Area of the study This dissertation not only focuses on analysing but also assessing the intrinsic values of 4 largest firms in the technology sector are: Apple Inc., Oracle, IBM and Microsoft. The analysis consists of 3 main regions: Asia, Europe and US that these companies operate but US is more focused because this in the region that all 4 companies mainly operate.
By doing all of these 8 analyses, this study wants to understand deeply the technology sector’s leaders and provide some investment recommendations for investors who have purpose to invest in these companies. Study objectives Objectives of this study are having an overview of technology sector and provide investment recommendations 1) Providing current technology sector insights 2) Analysing crucial macroeconomic indicators of the economies in Asia, US, Europe 3) Analysing technology industry in these 3 regions 4) Base on the financial statements, gearing ratios, profitability ratios, investment ratios of Apple Inc., Oracle, IBM and Microsoft are analysed. In the next step, this paper uses the valuation models to calculate the intrinsic value of these companies. After analysing and assessing the intrinsic value, this project will provide investment recommendations.
Methodology The top- down analysis method will be used in this project. It will start with technology sector economic evaluation, consist of macroeconomic analysis and industry analysis. By evaluating these, the project wants to analyse industrial and macroeconomic condition, which are vital indicators of the firms’ potential profit. Then, it focuses on 4 companies’ performance and recommend a price, using the valuation models.
Macroeconomic analysis: This project uses PEST analysis which include: political, economic, social and culture impacts, aim at evaluating the important macroeconomic determinants: inflation, unemployment rate, GDP, exchange rate and CPI. 9 Industry analysis: This study illustrates technology sector overview before pointing out the impact of market trends on firms in this industry. The determinants affect market competition are analysed also. Company analysis and valuation: By using the financial statements of 4 companies, financial websites: IMF, MarketLine, WB and financial databases: OSIRIS, Datastream, this study will evaluate profitability and financial situation of these firms.
After that, the intrinsic values will be calculated and analysed. It combines with SWOT analysis to analyse the strengths, weaknesses, opportunities, threats of companies, give an insight into these firms. Organisation of the study This project is divided into 8 chapters. Chapter 1 provides a brief introduction to the area of the study and the objectives of the study.
The next chapter is chapter 2 evaluates global economy in the recent year and three regions: Asia, Europe and US. In the third chapter, the study aims at analysing technology industry’s vital indicators and the factors affect market competition. To examine this, Porter’s Five Forces is used as an analytical tool. From chapter 4 to chapter 7, there are brief descriptions of 4 chosen companies, their performance and their future forecast.
The calculation of intrinsic values, investment recommendations are also included in these chapters. Chapter 8 is the report summarisation. 10 Chapter II: Macroeconomic analysis This chapter presents an overview of the global economy in 2018. Not only that, by applying PEST method and analysing important macroeconomic determinants, it provides an insight into three main markets, consisting of: US, Europe and Asia.
Overview of the global economy in 2018 In 2017 the global economy has a sluggish acceleration. Weak international trade and reducing investment within other culprits tended to decrease world growth to its weakest pace since 2010. Although 2018 has a better outlook, the unusually heightened uncertainty about policy direction in some big economies may affect the recovery prospects (World Bank, 2018). IMF (International Monetary Fund) predicted the global economic growth will increase rapidly from 3.
This increase comes from the rebound of investment, manufacturing and trade. Stronger activity and expectations of more robust global demand, combined with oil supply agreed restrictions made commodity prices recover from its troughs in 2017 (IMF, 2018). The higher commodity prices, the more it helps in removing global headline inflation, and decreasing in deflationary pressures. Financial markets are buoyant and expect continued policy support in China and fiscal expansion and deregulation in the US.
When market sentiment and confidence are still strong, growth in short term could be higher than the expectation. In US, because of the rebound of manufacturing activity, the economy is predicted to grow at 2.7% in compared with last year (Amadeo, 2018). The surge of interest rate hikes in US that faster than expectation could tighten financial conditions and strengthening of US dollar could affect the emerging and developing economies rely heavily on external financing. The Europe economy is expected to grow a healthy 1.7% in 2018 when the largest economies such as Germany, Italy, and Spain are expected to grow at 2% (European 11 Commission, 2018).
In the Asia Pacific region, growth is forecasted 5.5% but warned that near term outlook has significant uncertainty and medium-term growth has to deal with the difficulties from the productivity growth slowdown of some economies. IMF raises the economic outlook of the world’s second largest economy China to 6.7% due to the policy support in public investment and expansionary credit. In the first quarter of 2018, China’s economy grew 6.9% which is higher than the target 6.5% of government for 2018. However, many economists believe that this growth is not sustainable when the growth relies on domestic credit growth, rapid growth could cause financial stability issues (Financial Times, 2018).
China has to deal with the challenge of decreasing credit growth reliance. Overall, the economic growth of global will grow in a rapid pace in 2018 as investment, trade and manufacturing rebound. In this chapter, PEST analysis is used to analyse the influences of macroeconomic on technology sector in US, Europe and Asia Pacific. PEST analysis: Political analysis: US has a strong democratic setup which has been proved and effective rule of law with the elections are considered transparent and fair.
It also has massive political and economic impact on national and worldwide policymaking. However, US has to deal with the increase in the threat of terrorism due to the interventionist policies regarding the ‘War of Terror’. This leads to an increasing in number of terrorist attacks and the flow of illegal immigrants. Another problem of US is many of president Trump policies counter the legacy of Obama especially in healthcare and pharmaceutical industry.
President Trump might dismantle the structure of Obamacare, challenge the whole sector. Economic analysis: US has one of the most developed economic systems in the world with strong manufacturing and service sectors. US’s real GDP in 2017 was 16.81 trillion dollars, grew 3.2%, the fastest growth in the last 2 years. The economy is strengthened by its diversity and strong position in services and manufacturing sectors.
US is a forerunner in automotive, telecom, aerospace, electronics, chemicals and IT (information technology). In terms of budget deficit, from $1.