Apple Computer (AAPL)

Summary:
Apple had an awesome FY 05 that saw an almost 5-fold increase in net income from FY 04. Net income was over double their best year in the last 10 years (2000). iPods have taken the world by storm, and Macs are slowly making a comeback. They've also managed to bust out one innovative product after another year over year, and don't seem to be slowing down.
The key question is can they keep this up? And will Christmas 05 be as good or better than Christmas 04? I believe that as long as Jobs is CEO, innovation won't slow down, and with the iPod nano and video iPods out, this will be another bumper shopping season for Apple.

FY05:
- Revenue: $13.9B (up 68% YoY)
- Net income: $1.3B (up 384% YoY)
- Net margin: 9.6% (up from 3.3% in FY04)
- EPS: $1.44
- Current P/E: 36.3 (FY05 P/E range was 23 - 63.1)
- Current ratio: 3.0 (Q3 FY05)

FY06 projections:
- FY Revenue growth of 35% (S&P)
- EPS: $1.77 (Yahoo) (23% growth)
- Q1 FY06 revenue guidance: $4.7B (34% YoY growth) (http://www.macobserver.com/article/2005/10/11.15.shtml)

Valuation:
- Current P/E of 36.3 represents an expectation that AAPL can grow earnings by another 80% (over a nominal P/E of 20).
+ 80% growth means revenues of $25.2B and earnings of $2.4B
- At a constant 23% annual growth, they will be able to do this in less than 3 years.

SWOT:
- Strengths:
+ Awesome brand
+ Awesome product line
+ Awesome engineering and product execution engine
+ Great distribution network for iPods (pretty much any electronics store)
+ Mp3 player market is red-hot, and Apple still has room to grow.
+ They've locked in a leading position with the Samsung deal (for 40% of Samsung's flash memory production at a 40% discount)

- Weaknesses:
+ Narrow product line (iPods and Macs)
+ Declining margins as iPods go downmarket

- Opportunities:
+ Video downloads
+ The "real" iPhone
+ Resurgence of the Mac
+ Making the Mac platform a consumer entertainment hub
+ Further leveraging online assets

- Threats:
+ Declining consumer confidence can hit iPod sales
+ Windows Vista launch
+ Performance is highly dependent on Steve Jobs (age 50)

Notes:
Macs switching from PowerPC to Intel chips in mid-2006
124 retail stored at the end of FY 05 (from 86 in FY 04)
Mac OS has 3% market share (by units sold)
iTunes has 85% of the legal music download market
IDC projects mp3 player sales to reach $145B (945.5M units) in '09 up from $47B (225M units) in '04.
iPods account for over 30% of revenue, Macs account for 44%
6.45M iPods sold in Q4 FY05
iPods have est. 50% gross margin (vs. 44% for Mac)

Bottom line:
I believe this will be a strong holiday season for Apple. They have great long term potential, with the proven ability to design, develop, and ship innovative products ahead of the curve. It doesn't look like they will be slowing down anytime soon.

Buy price: $55 (P/E of 31 with $1.77 est. FY06 EPS)
High Sell price: $106 (P/E of 60 with $1.77 est. FY06 EPS)

Sirius Satellite Radio (SIRI)

Notes:
- Negative surprises last two quarters resulted in price slumps after the results following a surge before
- 400K as of May 11 2004. Was 260K subscribers as of Dec 31 2003. Much, much less than XMSR
- Over 110 Channels, including a deal with NFL
- Distribution deals with Daimler Chrysler, Ford, BMW, Nissan, VW, and Hertz
- Daimler Chrysler and Ford have special stock purchase deals after X cars with radios are made (see 10-K). Warrants to purchase 4M shares each at $3.00 a share
- Similar stock deal to Penske (trucking co. and auto dealership) to exclusively order Sirius radios in purchased vehicles. Warrant to purchase 38M shares at $2.39 a share!
- They have 3 satellites in orbit and 1 spare, each has a useful life of 15 years
- Studio based in NY
- XMSR and Sirius have agreed to use the same radio standards (all radios can be used for both)
- Current deficit of $1.2B since start of operations
- They estimate they need 2M subscribers to achieve cashflow breakeven. Looks like they need 6-10M subscribers to turn a profit
- Class action lawsuit filed against them about inflated expectations (their stock tanked in 2001)

SWOT analysis:
- Strengths:
+ Looks like a good set of deals with automakers
+ Income statement seems to show a leaner company than XMSR (with 1/6 the subscribers, they are losing about the same amount of money)

- Weaknesses:
+ Really falling behind XMSR in terms of subscribers
+ Subscriber Acquisition cost (SAC) is $293 (vs. $75 for XMSR)

- Opportunities:
+ They could be snapped up by a media company (e.g. Time Warner)
+ Could go the other way too (e.g. recent deal with Dish networks)
+ No reason why they couldn't catch up and surpass XMSR, they are doing very similar things

- Threats:
+ May just get steamrolled by XMSR
+ Technology may pass them by (e.g. Internet radio)

Questions:
- How long will it take for 10M Americans to buy Satellite radio (if ever)?
- Does SIRI have enough cash to last that long?
- Why has SIRI fallen so far behind XMSR in terms of subscribers- Can they
catch up?

Recommendation: Stay away.

XM Satellite Radio (XMSR)

Notes:
- 1.5 M subscribers as of Feb 2004, from 1.3M in Dec 31 2003, and 350K in Dec 31 2002
- Estimated 2.8 M subscribers by the end of 2004
- What's the vehicle vs. non-vehicle subscription base-
- GM is an 8% owner, and XMSR has an exclusive (until 2013) factory installation deal with them
- Installed in 20,000 Avis rental cars
- How much does installation cost- XM-Roady by Delphi is $120 online (http://www.xm-radio-satellite.com/index.asp-PageAction=VIEWCATS&Category=289)
- How much is subscription- $9.99 a month (Playboy radio is $2.99 extra a month). Multiyear discounts are available.
- Have 2 satellites in orbit now. Launching a third in late 2004 and a forth in 2007. How much does each launch cost-
- 10-K claims to have enough money to cover operations without further financing
- Deal with Jetblue and AirTrans offering inflight service starting Fall 2004. How much will XMSR get- No money apparently, just free advertising

SWOT Analysis:
- Strengths
+ Growth is impressive. Will be at least 96% YOY in 2004
+ Sirius holds the only other US Satellite Radio license.
+ Economies of Scale. Only cost is of acquiring subscriber

- Weaknesses
+ They need to grow their subscriber base to at least 8.5 M before they become profitable (given fixed costs)
+ Is it really that compelling a service- Would you pay $10 / mo. for radio-

- Opportunities
+ They can get creative about services (e.g. weather service, traffic, etc.)

- Threats
+ Outstanding claim to their insurers that solar arrays on satellites are degrading faster than expected. Insurers are rejecting those claims.

Bottom line:
There is significant downside to this industry and to this company. It is a tough fight to get to even a breakeven point. They are a long way away, and don't have too much time to get there.

Recommend: Stay away.

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