Introduction
- What is a fund manager?
- What does their profession involve?
- What strategies do fund managers implement?
Fund managers are highly skilled and qualified individuals employed by large companies in order to manage their funds and reserves on behalf of their employers (Heracleous & Papachroni, 2016). This job involves analyzing the market for potential venues for investment, taking calculated risks, and investing into ventures in order to deliver short-term and long-term profits. That way, the excess money is put to work instead of slowly losing its value due to inflation. Typically, fund managers find employment in banks, pension funds, hedge funds, and other similar structures that have to deal with large amounts of money (“Mathematical analysis of fund manager performance,” n.d.). Before investing money in stocks of particular companies, fund managers are required to perform a rigorous analysis of the organization, which includes financial analysis, business strategies, accounting analysis, and prospective analysis to help them determine the performance of the company in the future (Hossain, Saadi, & Treff, 2017). The purpose of this presentation is to solve a case study involving the investment of 25 million USD in a single stock.
Case Study Description
- 25 million USD to be spent on a single stock.
- The fund in question is a retirement fund.
- The company to be chosen has to have a good financial record (Ahmar, 2017).
- Apple Inc.
In this case study, the student is supposed to take the role of a Fund manager of a savings fund. These funds are typically the most secure due to a low interest rate and a long lifespan period. The manager decides to invest 25 million dollars in a single stock. The only question is what company deserves such a hefty investment. Investing in a single stock is associated with significant risk, when compared to investing smaller sums into different companies. At the same time, investing in a single stock can potentially generate more money through quarterly and annual dividends. Based on the analysis of the financial records of the most successful companies, Apple Inc. was chosen to be the safest bet for the investment.
Apple Incorporated: General Details
- Multinational corporation.
- Produces computers, telephones, smartphones, and other technological devices.
- One of the largest software developers.
Apple Incorporated started out as a computer company located in California. It has been at the head of a multitude of technological innovations, including the first personal computer as well as the first smartphone, both of which have shaped the electronics market. The company is now a multinational giant with over 500 specialized stores opened in nearly every country in the world. As it stands, the iPhone remains the company’s cash cow, providing over 70% of its total revenues (“Company valuation,” 2016). The company’s revenue as of 2018 exceeds 265 billion dollars, with 71 billion dollars in operating income. It is the leading company in the luxury smartphone segment. Apple has shown impressive rates of growth despite the crisis of 2008, and remains one of the best choices for stock investment (Ahmar, 2017).
Business Strategy Analysis: Intro
- Long-term action plans.
- Goals and objectives to enhance competitive advantage.
- Increasing market share.
- Help achieve the company’s ambitions in the modern competitive economy.
The following sections will consider themselves with the analysis of the business strategy implemented by Apple Inc. All companies, big or small, have an overarching plan to develop their products and increase their competitive advantage. Their purpose is to aid in achieving their goals, objectives, and enable them to enhance their competitive advantages in the global or national markets. It can also be defined as a framework that assist and guide the company that will be useful in the realization of great results amid the competitive market. The following analysis will explain why Apple is a good choice for long-term investment, based on the elements of their business strategy.
Business Strategy Analysis: Competitive Advantages
- Premium pricing.
- Innovation and brand name.
- Supply chain strengths.
The Company Valuation Journal (2015) lists the primary competitive advantages of Apple’s products. These are the positioning of their products in the premium segment, which enables the company to receive greater revenues from sales, a strong dedication to creating innovative products and investing in research and development, and a famous and popular brand name. In addition, the company cuts costs on production by placing their production and the entire supply chains in China, thus providing cheaper access to the country’s resources as well as the labor force, while shortening the supply lines, making them more manageable. The following sections will develop on Apple’s competitive advantages in more detail.
Business Strategy Analysis: Brand Strength
- Apple has a famous brand name.
- Associated with high quality.
- Associated with technological superiority.
- A status symbol.
Apple’s brand name is, perhaps, one of it’s strongest selling points. The company’s name is associated with high profits and dividends, stability, and innovation in the smartphone sector. Since 2017, the company has maintained its good performance despite being faced by myriad of market challenges. Apple Inc. has vastly invested a brand that is loved by the global community. Despite the fact that many of Apple’s competitors have managed to match its products in terms of functionality, Apple’s aura maintains a feel of uniqueness due to the highest quality of their products as well as a custom software, which is less prone to hacking attempts. The long-standing association with quality, price, and status makes Apple’s products a status symbol among the rich.
Business Strategy Analysis: Supply Chain
- Lean management techniques.
- A multitude of suppliers.
- China-based production.
- Low production costs.
Apple’s supply chain provides the company with a multitude of advantages compared to their competitors. First, the company maintains amicable relations with the Chinese government, ensuring profitable conditions for business. As Apple provides more than 50,000 workplaces from its largest factory alone, it plays a major role in the economic life of the country. Because China is also a major trading and resource hub, the company profits from a multitude of potential suppliers of electronic components as well as raw materials needed to produce its iPhones. As a result, Apple enjoys a strong bargaining power against the suppliers. Lastly, China has a population of over 2 billion people, which constitutes for plenty of experienced workers. These factors, together, form a strong basis for an efficient supply chain.
Accounting Analysis
- Apple’s revenue increase up to 20%.
- Earnings per stock up to 41%.
- Quarterly revenue of 62.9 billion dollars (“Contents: European Financial Management,” 2016).
Apple’s performance this year has been very impressive. According to the European Financial Management report of 2016, the company has seen a significant growth in its revenues as well as earning per stock, amounting to 20% and 41% increases respectively. These numbers show the increased profitability of the company in 2018, as it has been in several years before. Apple remains a solid choice for investment, due to higher chances of growth, guaranteeing higher dividend returns. The company’s quarterly revenue for 2016 stands at 62.9 billion dollars (“Contents: European Financial Management,” 2016).
Apple Inc.’s Company Accounting Conducts
- Quarterly and annual accounting.
- Company endorses economic excellence.
- Compliant with the Security Exchange Commission.
- Past issues no longer a problem.
According to the Contents: European Financial Management 2/2016 journal of 2016, Apple Inc. operates in full compliance with the Security Exchange Commission’s directives. It ensures complete transparency between the company and the stock market, allowing for the most accurate estimations of its performance. Apple is dedicated to economic excellence and seeks to earn the trust of its sponsors. The last time Apple was suspected of dubious coronation practices go back to 2006, when the company experienced financial troubles. Since then, the leadership has been changed, and now the company performs financial audits on a regular basis.
Market Challenges
- Slowdown in innovation.
- Competition increase.
- Political issues in China.
- Economic slowdown (“Financial statement and company risk analysis,” 2015).
Despite being a story of continuous success since 2007, Apple has several market challenges in front of it. Companies like Samsung, Sony, an Huawei are capable of matching Apple’s productive capabilities. Their products are not much different from Apple’s and are gaining more popularity. In addition, China could impose sanctions on Apple because of the economic warfare against the US. This could hurt the company’s production by affecting its bottom line. Lastly, the world’s economy has not completely recovered due to the ongoing oil crisis as well as the aftermath of the economic crisis of 2008-2009. This contributes to slower growth rates of the smartphone market (“Financial statement and company risk analysis,” 2015).
Financial Analysis
According to the numbers presented above, the company’s average in dividends to stakeholders amount to 23 billion dollars a year. Its operating cash flows are at 19.5 billion dollars. This is the cash used in day-to-day operations that insures short-term liquidity. It is used to purchase supplies, pay liabilities, and conduct operations. The less operating cash-flow the company has, the weaker are its positions and chances of paying back liabilities. Apple ensures complete transparency with its stakeholders by providing live information about cash flows on its site, which is accessible to all subscribers as well as the press (“Dividend Policy (Apple Inc.),” 2016).
Value and Market Share
- Positive growth since 2014.
- Investor base growth in 2015 (Kacperczyk, Nieuwerburgh, & Veldkamp, 2014).
- Net income increase compared to 2017 ratios.
- Steady profitability ratios are attractive to investors (Ian, 2018).
Apple Inc. is the most profitable company in the technology sector in terms of value and market share. The company has been experiencing a positive growth between 2014 and 2018, with a major spike happening in 2015. During that year, the company experienced a growth in net gains, raising its profits from 39.51 to 53.39 billion dollars. The investor’s base also grew from 111.55 billion to 119.36 billion and had the opportunity to grow even larger, had the company not pegged it at that level (Kacperczyk, Nieuwerburgh, & Veldkamp, 2014). As a result of this increase in performance, Apple became even more attractive to the investors, who seek steady and secure profitability rates. This resonates well with our case study.
Net Gains
- iPhone is the main workhorse for receiving net gains (Fischer, Staffieri, & O’Rourke, 2008).
- Gross revenue increase from 28.98% to 43.87%.
- Higher growth is expected in the future.
- 40% goal in stocks achieved (Ledenyov & Ledenyov, 2015).
The situation with Apple’s net gains can be considered positive as well. In the past 3 years, the gross revenues for the company have increased from 28.98% low to 43.87 percent high. With the situation on the smartphone marker remaining relatively stable and no companies looking to release any ground-breaking products in the luxury smartphone sector, it appears that Apple’s dominance will remain uncontested until the second quarter of 2019 at the very least. In addition, the company had achieved its 40% goal in stocks (Ledenyov & Ledenyov, 2015). This gives another reason for us to invest in Apple, as pension funds tend to favor companies with strong long-term performance.
Prospective Analysis
- Is used for identifying opportunities for the company.
- Levels of uncertainty in the industry.
- Financial forecasting.
- Potential expansion into the markets.
Prospective analysis is a tool used by fund managers and corporate executives in order to evaluate the potential for further development of the business and obtaining higher ratings of profitability. Understanding the level of uncertainty and unpredictability is important in making research or financial forecasts. Rigorous studies of the market, the customers’ demands, the requirements for performance, and product variety are important for Apple, as they earn money by producing high-tech gadgets. The analyst should consider the cost that should be used in future in the products’ sale; the expansion that should be embraced in the future for purposes of expanding the business and its prospective market. The following sections will expand on the prospective opportunities for the company.
Assumptions (I)
- The number of customers in the luxury segment will grow.
- Estimated growth of 25%.
- Target market growth = revenue growth (Barret, 2016).
The advances in the technological market make electronics more available to the population. In addition to the production becoming cheaper, the number of people in the world continues to grow. Parents buy devices to children, who are getting acquainted with the technology from an early age. Because of this, the total number of potential consumers of Apple products will grow. In addition, the growing importance in communication and information will bring additional value and importance to high-quality devices such as the iPhone, iWatch, Macbook, and many other devices that the company is currently producing (Barret, 2016). This bodes well for the future sales.
Assumptions (II)
- The number of customers in the target segment will increase.
- Portable computers will become more important.
- Smartphones and tablets for education.
The entire world is slowly moving from paperback to digital education. This goes in line with the environmental trends currently being developed among the younger generations. Instead of storing countless books in libraries, it would be much easier to digitize them. With the use of smartphones, every student will have a full access to books from anywhere. The rising requirements for convenience and connection will help Apple receive additional market share. It is also likely for the company to pioneer new ways of delivering information, making any potential investments in future technology very likely to pay off. This would make for an additional point to justify investing in Apple Inc.
Assumptions (III)
- Increased demand for smartphones among the youngest generation.
- High-output portable devices instead of large and cumbersome PCs.
- Client share shifting to Apple from Microsoft.
The electronic device industry is once more shifting towards minimization of the devices they produce, making them smaller and easier to carry. Computers and even laptops become impractical, as they are large, weight more, do not hold the charge as well, and do not fit into a pocket. Modern young people aged between 12 to 35 value mobility and not being held down by anything else. If Apple focuses its efforts on providing better capabilities at communication, portability, reliability, and battery time, the company would ensure continuous domination in the smartphone market. Apple Inc. has all the resources required to succeed in this endeavor, and investing into their stock will provide additional resources to ensure that success, securing larger dividends in the long-term perspective.
Conclusions
- Apple is a well-known company with a strong brand.
- Excellent positioning in the luxury setting.
- Large R&D base.
- Solid accounting practices.
- Stable growth since 2014.
- Good choice for investment.
In order to ensure that the 25 million dollar investment in a single stock would provide sufficient dividends in the short-term and long-term perspective, it is necessary to analyze the company from all sides. Its financial structure, reporting practices, strategic practices, and perspectives for development all need to undergo a rigorous inspection. The purpose of the fund manager is to analyze a multitude of companies and choose the one which is the most likely to provide a stable flow of dividends to make the investment worthwhile. Apple Inc. is a powerful company with a significant market share, large amounts of operating cash flows and yearly revenues, and a strong brand. It produces excellent smartphones that are considered status symbols in the luxury market. In addition, the company has a loyal customer base that kept it afloat during the hard times of 2006-2007. Apple experienced substantive growth ever since 2014 and does not plan on slowing down. Therefore, it represents a good target for single-stock investment. Although the company’s smooth operation maybe affected by unreliable global challenges, Apple Inc. has demonstrated ability to retain their financial structure over a short period of time, an additional advantage to a fund manager who is looking for directions to invest the $25 million.
References
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- Company valuation. (2015). The art of company valuation and financial statement analysis, 159-229.
- Contents: European financial management 2/2016. (2016). European Financial Management, 22(2), 169-169.
- Dividend policy (Apple Inc.). (2016). Lessons in Corporate Finance, 239-259.
- Financial statement and company risk analysis. (2015). Financial Valuation, 85-120.
- Fischer, L., Staffieri, A., & O’Rourke, J. S. (2008). Mendosa College of Business: Apple, Inc.: Pricing the iPhone (B).
- Heracleous, L., & Papachroni, A. (2016). Warwick Business School: Strategic Leadership and Innovation at Apple Inc.
- Hossain, A. T., Saadi, S., & Treff, M. (2017). Characteristics of Successful Hedge Fund Managers. Oxford Scholarship Online.
- Kacperczyk, M., Nieuwerburgh, S. V., & Veldkamp, L. (2014). Time-Varying Fund Manager Skill. The Journal of Finance, 69(4), 1455-1484.
- Ledenyov, D., & Ledenyov, V. (2015). Multivector Strategy vs Quantum Strategy by Apple Inc. SSRN Electronic Journal. Web.
- Mathematical analysis of fund manager performance. (n.d.). Fiduciary Finance.