Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Apple will have to fend off increased competition fromAndroid-based competitors in the years ahead.
Brian Colello, CPA
Senior Analyst
brian.colello@morningstar.com+1 (312) 384-3742

Investment Thesis

28 Jan 2014

integrating hardware, software, services, and third-party
applications into differentiated devices that allow Apple to capture
a premium on hardware sales. Although Apple has a sterling brand,robust product pipeline, and ample opportunity to gain share in its
The primary analyst covering this company
does not own its stock.

various end markets, short product life cycles and intensecompetition will prevent the firm from resting on its laurels or
carving out a wide economic moat, in our opinion.

Research as of 10 Mar 2014
Estimates as of 31 Jan 2014
Pricing data through 01 Apr 2014
Rating updated as of 01 Apr 2014

We believe Apple has developed a narrow economic moat, thanks

Currency amounts expressed with "$" are in
U.S. dollars (USD) unless otherwise denoted.

Market Cap (USD Mil)483,146

52-Week High (USD)

575.1352-Week Low (USD)

385.1052-Week Total Return %to switching costs related to a variety of attributes around the iOS-2.9

Last Fiscal Year End

30 Sep 2013

5-Yr Forward Revenue CAGR %1.2

Price/Fair Value

0.95

Valuation Summary and Forecasts
Fiscal Year:

Price/Earnings
EV/EBITDA
EV/EBITFree Cash Flow Yield %Dividend Yield %SA
Mfrom the firm's moat, but from the achievement of building the first

truly revolutionary smartphone, the iPhone, that integrated

Investment Thesis

hardware and software, as well as a robust apps store andMorningstar Analysis

2012

2013

2014(E)

2015(E)

15.1
10.2
10.8
6.8
0.4

12.0
7.3
8.3
10.6
2.5

12.6
7.5
8.7
9.3
2.4

12.2
7.5
9.2
8.9
2.4

Financial Summary and Forecasts (USD Mil)
Fiscal Year:of Apple's exponential growth in recent years has stemmed not

1

3.2

5-Yr Forward EPS CAGR %platform that may make current iOS users more reluctant to strayoutside the Apple ecosystem for future purchases. However, muchContents

29.1

YTD Total Return %PLE

We believe Apple's strength lies in its experience and expertise in

Vital Statistics

ecosystem that attracted new users to platform. Apple's
first-mover advantage may be diminishing, and "easy growth"

Revenue

Revenue YoY %EBITEBIT YoY %Net Income, Adjusted

2012

2013

2014(E)

2015(E)

156,508

170,910183,252

190,648

44.6

9.2

7.2

4.0

55,241

48,99952,64050,112

63.5

-11.3

7.4

-4.8

41,73337,03738,872

37,193Net Income YoY %

61.0

-11.3

5.0

-4.3

coming from early smartphone adopters may be winding down as

Diluted EPS

44.15

39.75

43.12

44.45

Analyst Note-

Valuation, Growth and Profitability2

the smartphone market moves up the adoption curve andDiluted EPS YoY %

59.5

-10.0

8.5

3.1

Scenario Analysis

2competition ramps up from Samsung and others. Yet we still

Free Cash Flow

39,323

41,48339,44837,512

Economic Moat3

foresee iPhone growth, coming from both attracting new customers

Free Cash Flow YoY %

37.5

5.5

-4.9

-4.9

Moat Trend

4

to iOS (mostly in emerging markets, although we still see U.S.

Bulls Say/Bears Say

6growth as well) and retaining Apple's existing premium iPhone

Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
Analyst Note: EPS on a GAAP basis

Credit Analysis

customers, where we think the company's moat will play an

Financial Health7

increasingly important role. A partnership with China Mobile, theCapital Structure

7

world’s largest wireless carrier, should also give iPhone growth aEnterprise Risk

8

Management & Ownership

9

Analyst Note Archive

11

Additional Information-

Morningstar Analyst Forecasts

20

Comparable Company Analysis

24

Methodology for Valuing Companies

26

shot in the arm.

Ultimately, we think future smartphone and tablet competition willstem from software and services, as hardware is alreadyProfileApple designs consumer electronic devices, including PCs (Mac), tablets(iPad), phones (iPhone), and portable music players (iPod). Apple's products
run internally developed software, and this integration of hardware andsoftware often allows the firm to maintain premium pricing for its devices.
Apple's products are distributed online as well as through company-owned
stores and third-party retailers.

approaching commoditization. We view Apple as well positioned
to develop and expand enough services to enhance the user
experience, in order to build switching costs that will help the firm
retain customers and generate significant repeat purchases willbe critical for future iPhone growth in the years ahead.

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 1 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Morningstar Analysis
Valuation, Growth and Profitability 10 Mar 2014

SA
M

PL
E

Our fair value estimate for Apple is $570 per share, which
implies fiscal 2014 (ending September 2014) price/earningsof 13.5 times, and only 10 times after excluding $157 pershare of net cash on hand as of December 2013. We project
revenue growth of 6% in fiscal 2014, down from our priorprojection of 13%. Apple profited from successful launchesof new devices such as the iPhone 5s, but follow up sales
in the March 2014 quarter were below our expectations,which points to even lower revenue growth through the restof fiscal 2014 as these products age. Longer term, Appleshould still attract late smartphone adopters in developed
markets and new customers in emerging markets, especially
as Apple’s partnership with China Mobile, the world’s
largest wireless carrier, begins to pay dividends. As more
and more consumers are previous smartphone owners,
rather than first-time buyers, we think Apple has a goodchance to retain a sizable portion of its iOS user base today,and perhaps gain further share at the high end of the market.
However, although Apple has taken on the strategy ofmaintaining premium pricing, which may support grossmargins in the years ahead, such pricing may weigh on
future revenue growth. In turn, we model low single-digit
iPhone revenue growth in fiscal 2015 and beyond.

margin compression, albeit with relatively slower unit sales
growth. In turn, operating margins should fall to themid-20% range five years out. Our fair value uncertainty
rating for Apple is high.

We project solid iPad revenue growth in fiscal 2014 and2015, as this device both displaces PCs and is purchased asa third device alongside PCs and phones, but minimal growth
thereafter as Apple maintains premium pricing on thesedevices but fails to recognize exponential unit growth as inyears past. We assume Apple's line of Mac PCs will see
modest revenue growth, as Macs gain share in the declining
PC industry. We also do not make any profitability
assumptions for an Apple TV or iWatch but recognize that
future innovations may provide upside to our valuation.
We project 37.5% gross margins in fiscal 2014 and mid-30%
gross margins in the long term, as Apple maintains its focus
on premium pricing that helps to stave off meaningful gross

Scenario Analysis

Our base-case scenario for Apple projects average revenue
growth of 3% per year from fiscal 2014 to fiscal 2018, as
well as average operating margins of 25% over our five-year
forecast period. Our base scenario projects annual averagerevenue growth of 3% for the iPhone and 6% for the iPad,
while unit sales grow at average annual rates of 5% and
7%, respectively.
In our bullish scenario, we assume that Apple continues tobuild on its tremendous success with the iPhone, not only
benefiting from tailwinds surrounding smartphone growth,
but maintaining premium pricing for its devices. Similarly,
we project 3% higher unit growth for the iPad above ourbase-case assumptions. We also make more optimistic
assumptions about all other revenue streams. We maintainour base-case gross margin projections for each productline, but as iPhone becomes a greater portion of overall
revenue, we forecast that Apple's gross margins andoperating margins won't decline as quickly as in ourbase-case assumptions. Under these bullish assumptions,Apple would see average revenue growth of 8% per year
and average operating margins of 28%, and our fair value
estimate would be $730 per share.
In our bearish scenario, we assume Apple's iPhone revenue
essentially peaks in fiscal 2014 and falls modestly
thereafter. We project average iPhone unit sales declines
of 1% per year, as customers fails to capture new customers.
We also model average ASP declines of 3% per year as thefirm sells a higher proportion of older, cheaper models. We
also model only 3% average iPad unit growth, as Apple’s
premium pricing strategy backfires and customers choose
cheaper tablets from Android-based competitors. We also

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 2 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

PL
E

Apple were to stumble in any given product refresh cycle.
This prevents us from assigning the company a wide
economic moat.

SAM

make more pessimistic assumptions about all other revenue
streams, project modestly sharper gross margin declines
down to 32% by fiscal 2018, and higher operating expenses
that cause operating margins to dip to 15% by fiscal 2018.
Our fair value estimate under our bearish assumptions
would be $400 per share.

Inherently, we believe there are minimal switching costs
associated with smartphones, as all of these devices canperform most necessary functions--place calls, send texts,
browse the web, and so on. However, we believe Apple hasdone a much better job at trying to develop switching costs
than its handset predecessors (such as Motorola andBlackBerry) that failed to lock in customers when they wereon top. Apple's speedy initial development of a robust
third-party application ecosystem attracted earlysmartphone buyers and provided a difficult barrier to entry
for other smartphone OS platforms. Although Google’s
Android was able to develop a similar network andapplications developers focused on building products forboth of these operating systems, Microsoft has been unable
to build out a similarly robust developer network thus far,and we think Apple’s early advantage in third-party apps
will help fend off many other upstart competitors looking tobuild the next great mobile ecosystem.

Economic Moat

We believe Apple has a narrow economic moat based onmodest, but not insurmountable, customer switching costs.
We don't believe these switching costs are critical factors
in attracting new iOS customers, especially in emerging
markets, but that such switching costs will allow Apple tobuild a loyal iOS user base that may be less likely to flee toother operating systems for future device purchases in thelong term. As the smartphone market matures and a greater
proportion of purchases come from previous smartphoneowners, we foresee these switching costs as extremely
important differentiators in favor of Apple. That said, given
the short product life cycles of two to four years for most ofits devices, we still think competing products will haveplenty of chances to lure iOS customers away from Apple's
platform and overcome these switching costs, especially if

In our opinion, Apple's switching costs stem from its iOS
operating system and appear to be increasing, thanks to its
iCloud offering. Apple iOS users who purchase movies, TVshows, and applications from the iTunes store are unable
to port these media to Android or other portable devices(music is transferrable). iCloud adds another layer ofswitching costs by synchronizing media, photos, notes, andother items across all Apple devices. We believe an ownerof an iOS device (say, an iPad) is less likely to switch froman iPhone to an Android phone if it means that he or she
will be unable to sync or access a portion of their content.
Additional Apple devices, such as the Mac and potentiallyan iWatch, could raise these switching costs even further.
By comparison, no other former handset leader (Nokia,
Motorola, BlackBerry) offered secondary devices thatpartnered with their phones, giving Apple a unique edge

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 3 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Apple is trying to improve the network effects of its devices
with functions like iMessage and FaceTime. However,BlackBerry's demise proves that even highly popularsmartphone-centric networks like BlackBerry Messenger
can be broken if other smartphone features (or lack thereof)
drive customers to flee. Network effects may be forming
around Apple’s apps developers, as a more robust apps store
is likely helping Apple attract new customers. However,these same developers likely build for Android as well, so
we think that developers will flock to the ecosystem thatoffers the most attractive return on investment. Finally,
Apple may have some cost advantages associated with its
supply chain, such as squeezing suppliers or making massive
purchases of flash memory and other key components.
However, we believe these advantages are predicated on
the enormous forecast volume of Apple's products, and wesuspect these advantages would evaporate if Apple's
device production were to shrink.

PL
E

that handset makers such as Samsung are only now starting
to emulate. Along these lines, the iPad Mini, sold at lower
price points and, presumably, lower margins, may modestly
eat into Apple's tablet profitability but could be the rightmove if it gains further lock-in from price-conscious
consumers who would otherwise buy Amazon's andGoogle's cheaper tablets. Another encouraging but perhaps
fleeting factor is that customers have willingly accepted
iCloud and the coinciding switching costs because it offers
users a better product experience, rather than otherinstances of high switching costs where customers
begrudgingly accept these lock-in costs because of existing
infrastructure, a lack of suitable alternatives, or because
their businesses dictate such moves.

SA
M

Looking at other sources of economic moat, Apple holds
intangible assets associated with patents for its hardware
and software designs. However, both the value of such
assets and the sustainable competitive advantage
stemming from these assets remain cloudy. Regarding
Apple’s sterling brand equity, we view brands withintechnology differently than, say, consumer luxury goods. We
doubt that Apple can charge double the price for a productthat has the exact same hardware and software
specifications as an unbranded product. However, we thinkthat Apple benefits from intangible assets, or a brand, in
terms of the (mostly) positive user experiences that
customers capture from the firm’s integrated hardware,
software and services. Similarly, Apple might be the world's
most trusted consumer technology firm in terms ofdelivering flawlessly working products in existing, and evennew, product categories. However, we still think tech brands
are relatively fleeting, as technological inferiority cansupersede years of brand equity at any given time. As an
example, Nokia was long considered a top-10 brand, but its
failure to stay on the technological forefront overtook its
brand recognition.

Moat Trend

We believe Apple has a positive moat trend. The company's
iCloud offering should raise switching costs associated withiOS devices as more and more customers buy and own
multiple iOS devices (iPhones plus iPads, for example), as
well as acquire Apple-only media and applications on their
iOS devices and choose to upload this content, along withphotos and other items, to iCloud. We believe theseswitching costs are increasing based on Apple's strong iPad
growth in recent years, as more and more iPhone users now
own a second device that runs the iOS system and syncs
between the two devices. Apple has disclosed that it has
300 million iCloud subscribers as of June, which represents
rapid growth as compared to 250 million just five months
earlier. In our view, ownership of multiple devices not only
decreases the likelihood that customers would look foralternative devices that would be incompatible with theseproducts, but perhaps improves the probability that
customers buy even more iOS devices including Macs and© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 4 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Morningstar Analysis
Apple TVs.

SA
M

PL
E

To a lesser extent, we also believe Apple's switching costs
are increasing in regard to iPad sales into the enterprise.
Gartner estimates that only 13 million iPad business
subscribers (defined as devices either acquired by abusiness or expensed to it) existed in 2013, but this baseshould rise to 41 million users by 2017. We believe that not
only are a growing number of corporations purchasing iPads
today, but that these companies are writing native
applications for its employees that work solely on iOS
products, rather than browser-based apps that would run
on multiple tablet platforms. We think it would be
increasingly unlikely that such businesses would migrate to
Android- or Windows-based tablets based purely on costsavings. Although enterprise iPad sales don't move theneedle on our valuation today, we believe Apple's growing
presence in the enterprise is leading to stronger switchingcosts. Switching costs may also arise from the education
market, to the extent that schools and universities build iOS
apps that work with iPads used by students. In the
September quarter, Apple earned $1 billion of revenue fromeducational sales, and further adoption from schools may
allow Apple to have a steadier stream of customers andfuture iOS device buyers in the long term.

rather than strengthening. Neither of these factors indicate
weakening switching costs, in our view, and we have notyet seen much evidence that iOS users are abandoning theplatform. For example, data from Kantar World Panelsuggest that only a single-digit percentage of Samsung's
smartphone sales in the U.S. in 2012 came from platforms
other than the iPhone, and more recently, data from
Comscore indicates that Apple is gaining, rather than losing,smartphone subscribers in the U.S.
Nonetheless, we continue to believe that the short productlife cycles associated with Apple's products will prevent thefirm from gaining a wide economic moat. iOS and iCloud
provide some switching costs, but we don't think these costs
are overwhelming. If Apple were to ever launch a complete
flop of a product or lose a significant aspect of functionality
in its devices (say, if Facebook were no longer included or
if much-maligned Apple Maps was the only mapping
solution allowed on iOS), customers may be annoyed by iOS
switching costs, but less so than the frustration associatedwith buying premium Apple products that provide an inferioruser experience. Another risk to Apple's moat trend, in ourview, is that a variety of platform-agnostic web-based
services, such as Dropbox, Evernote, Spotify, and Netflix
may make media ownership, switching costs, and iCloud
less important differentiators for Apple in the future.

In our view, much of Apple's outsized growth in recent years
has stemmed not from the firm's moat, but rather from afirst-mover advantage as a result of building the first truly
revolutionary smartphone with a robust apps store andecosystem that attracted new users to platform--all while
facing little direct competition. Apple's ability to attract new
iPhone users to the platform may wane in the years ahead,partially due to greater competition from Samsung, but
mostly because Apple's premium pricing strategy may
prevent new customers in emerging markets from switching
to iPhones. However, we don't necessarily see either ofthese factors as a sign that the company's moat is eroding© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 5 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Bulls Say/Bears Say
Bears Say

3 Gartner expects the smartphone market to more thandouble from 2012 to 2015, providing Apple withavenues for iPhone growth.

3 Apple’s recent decisions to maintain a premium
pricing strategy may help fend off gross margincompression but may also limit unit sales and market
share as the low end of the smartphone space will
likely grow faster than the premium market.

PLE

Bulls Say

3 Apple appears poised to generate strong revenue
growth from the iPad in the years ahead as tabletscannibalize PCs.

3 Apple may have lost much of its vision and creativity
with the passing of cofounder Steve Jobs in October
2011.

SA
M

3 For each iOS device purchased, customers may be lesslikely to switch to another provider and more likely to
buy repeat Apple products, which we view as a goodsign for long-term iPhone, iPad, and Mac sales, as wellas an ability to drive revenue from new devices like arevised Apple TV or iWatch.

3 Whereas Apple focuses on a handful of key products,
Samsung has emerged as a strong rival by offering
highly competitive devices of all sizes and prices at
all times of the year.

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 6 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Credit Analysis
Five Year Adjusted Cash Flow Forecast (USD Mil)

Financial Health & Capital Structure2014(E)

Principal Payments
Interest Payments
Other Cash Obligations and Commitments
Total Cash Obligations and Commitments

Cumulative Annual Cash Flow Cushion

2017(E)

2018(E)

146,761 166,469 193,256 215,508 238,152
32,140 30,239 28,112 26,009 24,380
178,901 196,709 221,367 241,517 262,532
—
-308
-610
-918

—
-308
-613
-921

-2,500-304-587-3,391

—
-298
-557
-855

SA
M

Cash Flow Cushion
Possible Liquidity Need

2016(E)-6,000-273-505-6,778Adjusted Cash Flow Summary% of
USD Millions Commitments

Beginning Cash Balance
Sum of 5-Year Adjusted Free Cash Flow
Sum of Cash and 5-Year Cash Generation

146,761
140,880
287,641

1,140.9
1,095.2
2,236.2

Revolver Availability
Asset Adjusted Borrowings (Repayment)

—
—

—
—

287,641-12,863

2,236.2—

Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments
Sum of 5-Year Cash Commitments

Credit Rating Pillars Peer Group Comparison

Business Risk
Cash Flow Cushion
Solvency Score
Distance to Default
Credit Rating

Source: Morningstar Estimates

Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst

Apple has consistently exhibited a conservative capital
structure and maintains one of the largest cash cushions
that any corporation has ever seen. The firm held a whopping$159 billion in gross cash as of December 2013. The
company holds $34 billion of cash and investments in the
U.S. that can be used for dividend payments, stock
repurchases, and domestic acquisitions. The remaining$124 billion is held overseas, and Apple cannot repatriate
to the U.S. without paying additional taxes, most likely atclose to 35%. In order to tap into this massive cash balance,
Apple took on $17 billion of debt at extremely low rates thatwas well received and oversubscribed by bond investors.
We suspect that Apple would pay off this debt almost
instantly if the U.S. government ever changed its tax policyor allowed a repatriation holiday. Going forward, we believethat Apple’s U.S.-based cash is more than adequate to fundfuture dividend payments, as well as regular business
expenses in the U.S., such as most of the firm’s R&D efforts
and iCloud capital expenditures. However, Apple’s domestic
ongoing cash flow is likely inadequate to fund massive stockbuybacks, and we anticipate that any large round of futurebuybacks will be met with additional debt offerings. We
suspect that Apple will continue to use a portion of its
overseas cash to make shrewd purchases with overseas
partners pertaining to its supply chain, such as Apple's bulk
purchases of flash memory chips, and perhaps investments
in foreign supply chain partners. However, we project thatmost of this overseas cash will continue to sit on Apple’sbalance sheet and serve as collateral on any future bondofferings, at least until the day when U.S. tax policy allows
for repatriation at more favorable tax rates.

PL
E

Cash and Equivalents (beginning of period)
Adjusted Available Cash Flow
Total Cash Available before Debt Service

2015(E)AAPL

SectorUniverse

4
2
1
1
AA-

4.7
4.1
3.3
2.5
A

5.0
6.1
4.9
3.9
BBB+

Apple has announced that it plans to distribute $100 billion
to investors by the end of calendar 2015, $40 billion via aregular quarterly dividend (which is currently $3.05 pershare) and $60 billion from stock buybacks. We think thefirm made a wise move by instantly putting its $17 billion© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 7 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Credit Analysis
solution (and subsequent apology) may have diminishedApple's reputation and its customers' user experience, andother similar missteps may cause customers to leave theiOS ecosystem altogether. If Apple were to falter and its
exceptional brand be diminished as customers departed iOSin droves, we’re not even sure that Apple’s mighty cash
cushion could help the firm buy its way out of any problem.Asa premium phone supplier, Apple also runs the risk thatwireless carriers could reduce or eliminate the subsidies
that they provide their customers on the iPhone, in turnraising customers' up-front costs and perhaps making othersmartphones appear to be better alternatives. Finally, Apple
lost cofounder and visionary Steve Jobs in October 2011,
and while we believe CEO Tim Cook is a more-than-capable
leader, Apple runs the risk that its unique culture and senseof innovation may diminish over time.

SA
M

PL
E

of debt proceeds to work by buying back $16 billion of stockin the June 2013 quarter at, in our opinion, attractive prices.
Despite calls from some investors for a more aggressive
capital allocation policy, we would be surprised if Applesignificantly expanded its buyback program in the next
couple of years beyond its $60 billion authorization today.
Apple has notoriously been stingy with capital distribution
to investors, especially under the Steve Jobs regime, andwe highly doubt that the firm will ever take on a net debt
position, or even more debt than what it could instantly pay
off with its overseas cash hoard. We continue to projectthat Apple will make tiny, bolt-on acquisitions of intriguing
startups, in order to capture engineering and development
talent that can help improve the firm’s product offerings
while fitting in seamlessly with Apple’s corporate culture.
We see little risk that Apple will make a splashy, high-priced
acquisition that could destroy value for shareholders.
Enterprise Risk

We believe a large, well-diversified company like Apple
faces several risks. Smartphone and tablet competition isrising, as Samsung, in particular, has developed compelling
iPhone alternatives in the premium smartphone space.
Meanwhile, we anticipate that a greater portion ofsmartphone sales come from low-end devices in emerging
markets where Apple does not participate. If these devices
turn out to offer only a slightly worse user experience thaniOS products, Apple may be unable to capture an adequatepremium on future hardware sales. Apple also has to square
off against several competitors with much different
strategies than traditional hardware makers. Apple’s
devices compete against firms like Amazon (with its Kindle
Fire tablet) and Xiaomi, which appear willing to sellhardware at cost, in order to drive other revenue
streams.Despite its intentions to control as much of the user
experience as possible for its products, Apple still relies ona robust app developer base and strong partnerships withthird parties. Its decision to use an in-house mapping© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 8 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Management & OwnershipManagement
Management Activity

Position

MR. ARTHUR D.
LEVINSON, PHD
MR. TIMOTHY D. COOK
MR. ALBERT A. GORE,JRCRAIG FEDERIGHI
MR. ROBERT A. IGER
PETER OPPENHEIMERDANIEL J. RICCIO
MR. WILLIAM V.
CAMPBELL

Director
CEO/Director,Director
Director
Senior VP, Divisional
Director
CFO/Senior VP
Senior VP, Divisional
Director

Shares Held

Report Date*

162,698

01 Feb 2014

InsiderActivity—

87,371
62,523
41,170
5,541
4,889
3,064
2,523

31 Jan 2014
01 Feb 2014
15 Mar 2014
01 Feb 201431 Jan 2014
25 Feb 2014
01 Feb 2014

—
—
—
—
—
9,192
—

*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.

Fund Ownership% of Shares
Held% of Fund
AssetsChange(k)SAM

Top Owners

Vanguard Total Stock Mkt Idx
PowerShares QQQ Trust, Series 1
Vanguard Institutional Index Fund
Vanguard Five Hundred Index Fund
SPDR S&P 500

Portfolio Date

1.54
1.09
1.00
0.98
0.97

2.28
11.88
2.84
2.83
2.88

105
-39
19
47
-93

28 Feb 2014
31 Mar 2014
28 Feb 2014
28 Feb 2014
28 Mar 2014

0.03
—
—
—
0.02

20.56
19.71
18.89
17.05
16.93

-6
0
—
1
13

28 Feb 201431 Dec 201331 Dec 201331 Dec 201331 Dec 2013

% of Shares
Held% of Fund
AssetsSharesBought/Sold (k)Portfolio Date

0.42
0.21
0.36
0.22
0.17

42.87
0.76
2.18
1.81
8.28

2,066
1,880
1,650
1,079
1,066

31 Dec 201330 Jun 201031 Dec 201331 Dec 201331 Dec 2013

0.35
0.16
0.10
0.30
0.54

0.96
3.77
1.04
1.37
2.26

-4,140-2,430-1,653-1,278-1,09331 Dec 201331 Dec 201331 Dec 201331 Dec 201331 Dec 2013

Concentrated Holders

Fidelity® Select Computers Portfolio
Newmark Risk-Managed Opportunistic
Putnam Global Technology Fund
ProFunds VP Technology
JNL/Mellon Cptl Technology Sector Fund

Institutional Transactions
Top 5 Buyers

Heights Capital Management Inc
New Jersey Division of Pensions and Benefits
Deutsche Bank AG
Morgan Stanley & Co Inc
Coatue Management LLC
Top 5 Sellers

Susquehanna Financial Group, LLLP
Commerzbank AG
J.P.Morgan Securities Inc.
Citigroup Inc
Bank of New York Mellon Corp

We view Apple as a good steward of shareholder capital.
Arthur Levinson, former chairman and CEO of Genentech, ischairman of Apple's board of directors. Tim Cook became
CEO in August 2011 after cofounder, longtime CEO, andvisionary Steve Jobs stepped down from the CEO role before
passing away in October 2011. Cook was considered to be
Jobs' right-hand man and served in various operations roles
with Apple before becoming COO in 2005. We believe Jobs'
passing was a blow to the firm, as he was a one-of-a-kindleader and creative mind.

PL
E

Name

10 Mar 2014

Although Apple maintains sterling brand recognition andhas hundreds of millions of loyal followers, the company
has made a couple of missteps under Cook that, some would
argue, would have never happened under Steve Jobs. Apple
executed poorly when it decided to part ways with Google
Maps in iOS 6 and launch Apple Maps with a variety of bugs
and errors, leading to a formal apology and the ouster of VP
Scott Forstall. Also, Apple hinted that it believes that a 4" screen is an adequate screen size for a smartphone, yet
Samsung has done quite well in the near term with its muchlarger Galaxy smartphones and Galaxy Note phablets(phone/tablets). We fear that Apple may miss out on partof the premium smartphone market if it fails to build alarger-screen iPhone in the near-future, although rumors
continue to swirl that an iPhone 6 launch in 2014 may include
a larger screen version.
On the other hand, while many may have questioned Apple’s
management team about its decision to price the iPhone 5c
at $549, rather than at lower prices that more directly
addresses emerging market demand, we tend to approve ofApple’s decisions to maintain its premium pricing position.
We also applaud Cook’s decision to initiate a dividend andstock buyback plan in early 2012, as well as take on debt inorder to fund a $60 billion stock buyback program in 2013.
We recognize that many high-profile investors have called
for an even larger buyback program, but we think that

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 9 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

PL
E

Apple’s current plan is satisfactory as long as buybacks (andthe debt issuances needed to fund these buybacks) are madein a prudent manner. In retrospect, the misstep may havecome from not front loading the buyback program in 2013
when both Apple’s share price and interest rates were lower
than today.

SA
M

Perhaps more importantly, we think Apple’s frugality is quite
admirable in terms of acquisitions. Apple's strategy offocusing on smaller tuck-in deals and developing products
in-house, rather than splashy but questionable deals like
Microsoft's purchase of Skype or Google's foray into
hardware by acquiring Motorola Mobility and Nest, appears
to have served investors quite well in recent years. Apple
has also done a good job of attracting top-notch talent tothe company in recent months, such as former Burberry CEO
Angela Ahrendts to run Apple’s retail and online stores, andPaul Deneve, the former CEO of Yves Saint Laurent. We are
comfortable that these hires have strengthened Apple’s
bench in the unlikely event that Cook were to depart thecompany. Both hires not only have experience managing
luxury brands that sell aspirational goods, but also fuelspeculation that an iWatch is on the horizon. All the while,
Apple’s ongoing operations continue to generate operating
margins and cash flow well above its peers in various
hardware industries, which bodes well for future free cash
flow for investors.

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 10 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
We Expect a Seamless CFO Transition at Apple as
Oppenheimer Retires; Maintaining our FVE 04 Mar 2014

PLE

We will maintain our $570 fair value estimate and narrow
moat rating for Apple after the firm announced that CFOPeter Oppenheimer will retire at the end of September. All
in all, we anticipate a seamless transition of the role, andwe don’t foresee any radical changes in capital allocation
at Apple as a result of the change. We should note that CEO
Tim Cook hinted that an update to the firm’s capital
allocation policy, which will presumably include a dividend
hike and possibly an expanded stock buyback program, will
be announced in the next 60 days.

CarPlay will allow drivers to access Siri, directions via Applemaps, phone calls, text messages, music, and podcasts ina hands-free manner in the automobile, either via theinfotainment display panel in the car or with push-and-holdvoice control buttons on the steering wheel. CarPlay will
also support third-party apps like Spotify, and we suspectthat Apple's robust network of iOS app developers will build
new and modified apps to work with the platform and makeit a stronger car entertainment solution in the future.
Perhaps the biggest question is whether Google will support
CarPlay with Google Maps and perhaps search and otherapps down the line. The software solution was introduced
this week in Geneva in partnerships with Ferrari, MercedesBenz, and Volvo, but many other original-equipment
manufacturers are lined up to incorporate CarPlay in future
vehicles. From a geographical perspective, CarPlay is
supported in North America and many Western European
countries, but mainland China is absent thus far (Hong Kongis supported).

SA
M

Luca Maestri, Apple’s current VP of Finance and corporate
controller, will take over the CFO position in June, while
Oppenheimer will stay on through September to assist withthe transition. Maestri joined Apple in March 2013 and wasformerly CFO of Nokia Siemens Networks and Xerox andalso has 20 years of finance and operations management
experience at General Motors. Tim Cook was even quoted
in the company’s press release that Maestri was considered
to be Oppenheimer’s heir apparent, and we have no reason
to believe that Maestri won’t be up to the challenge ofrunning all of Apple’s financial operations.

Apple's CarPlay May Help Drive Future iOS Device
Sales; Maintaining Our $570 Fair Value Estimate 03 Mar2014

We will maintain our $570 fair value estimate and narrow
moat rating for Apple as the firm launches CarPlay, its
automotive software solution that allows for easy iOS usage
in the car. We view CarPlay as yet another native application
developed by Apple that probably won't drive much revenue
but creates another layer of modest switching costs thatwill ultimately allow the firm to maintain premium pricing
and sell future high-margin iPhones to current iOS
customers in the long term.

Our initial take on CarPlay is that the platform appears
similar to what the company hinted at in June during its
comments about "iOS in the car" at its Worldwide Developer
Conference. While CarPlay appears to be optimized tohandle entertainment, mapping, voice, and text functions in
the car, it does not appear to handle other automotivespecific diagnostics functions like tire pressure or fuelgauges. We suspect that Apple will leave this functionality
to current embedded software platforms like QNX, andalthough QNX will still probably offer entertainment apps
and features in its software, CarPlay may simply override
these functions.
Since Apple has consistently relied on vertical integrationand focuses on controlling all of the key technologies in its
products, we think it is limited in what it can do in theautomotive market and, similarly, the Internet of Things.

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 11 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
or Android become antiquated technologies. In this vein,
CarPlay will probably be accepted by car OEMs exactly
because it is incremental to, rather than replacing, existing
automotive infotainment operating systems, regardless ofwhether Android, QNX, or something else wins out in the
future.

PL
E

Since Apple won't develop automotive parts like tires orengines anytime soon, we doubt it will want to be
responsible for measuring the diagnostics of such products.
Rather, all of CarPlay's functions and features are those that
Apple fully controls as part of iOS 7, and CarPlay doesn't
appear to touch any other hardware or software functionsin the rest of the car.

SAM

We continue to believe that car OEMs will want to takeownership of the infotainment systems in their cars in order
to better compete with one another in the highly competitive
auto market. Similarly, we don't foresee carmakers simply
installing dumb touch screen panels into their cars andallowing smartphones or tablets to control the entire
infotainment experience in the same manner that Apple TV
or Google Chromecast allows users to project the content
on their smartphones and tablets onto a larger screen. This
is why we think CarPlay was launched as simply a softwareinterface, rather than an entire infotainment hardware andsoftware system installed in the car. This dynamic also
probably prevents Apple from capturing its normal pricing
premium and above-average gross margins on hardware
device sales if it were to build a full infotainment system.
Along these lines, many car OEMs like General Motors,
Honda, and Hyundai implicitly intend to be operating
system-agnostic in their vehicles, as each not only will
support CarPlay, but also are founding members of Google's
Android-based Open Automotive Alliance. We anticipate
that car OEMs won't want to be locked down to a single
operating system, as they may lose a potential sale because
the buyer has a different smartphone OS in his pocket.
Similarly, we doubt that each carmaker will want to build
an iOS and an Android version of their automobiles in orderto placate all potential customers. Additionally, given themuch longer lives of automobiles when compared with twoor three years for a smartphone, automakers should wantto protect themselves in the event (albeit unlikely) that iOS

In terms of Apple's narrow moat and positive trend rating,
we currently view CarPlay in the same manner as iWorks,
FaceTime, iMessage, and other native applications provided
by Apple. None of these native applications or software will
be major revenue drivers for the firm, but they will eachprobably create modest (but not insurmountable) switchingcosts that will allow Apple to maintain premium pricing andcontinue to sell high-margin iPhones to customers well into
the future. We think the strength of CarPlay's potential
switching costs will stem from how superior theentertainment system will be when compared with the car's
native infotainment system and, similar to smartphones,
how well Apple can cultivate a network of app developersthat can build CarPlay into the most robust and uniqueentertainment system on the market.
Today, if CarPlay is considered to be far superior to theinfotainment options offered by Android or QNX, then it may
in fact lead to solid switching costs for current iOS users.
Longer term, however, as Android and QNX improve, CarPlay
may not offer many switching costs or customer lock-in atall, as all infotainment options may be adequate. But
perhaps more important, CarPlay may negate switchingcosts for other operating systems as well, making the car
truly agnostic. Those who buy an automobile with an
Android operating system may not necessarily be locked in
to buying Android-based handsets for as long as they own
the car, as long as CarPlay is an available option within thesame device and is equal to, if not better than, theentertainment options provided within the Android car OS.
Similarly, we doubt BlackBerry can leverage any future© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 12 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
and iPad launches in China. Still, we would have expectedApple’s new partnership with China Mobile to more thanmask their impact. Apple’s gross margin forecast for Marchis a bright spot, but by maintaining a premium pricing
strategy on hardware, Apple may see less-than-stellar
revenue growth going forward.

PLE

improvements in QNX into a sustainable competitive
advantage that will allow it to sell more BlackBerryhandsets. Thus, we view CarPlay as no worse than neutral
but more likely a modest positive to Apple's narrow moatand sustainable competitive advantage.
Apple Serves Up a Disappointing Near-Term Revenue

Forecast; Trimming Our Fair Value Estimate to $570 27
Jan 2014

SA
M

Apple reported strong fiscal first-quarter earnings, but gave
investors a troubling second-quarter forecast that implies
little iPhone growth despite a new partnership with China
Mobile, the world’s largest wireless carrier. We will likely
trim our fair value estimate slightly, but will maintain our
narrow economic moat rating. None of the bad news inApple’s earnings report changes our long-term view of its
fundamentals, or its ability to retain customers in the future.
Revenue of $57.6 billion for the December quarter wasnear the high end of management's guidance, and within
our range of expectations. Unit sales of its iPhone--51
million--was slightly below our projection. However,average selling prices, or ASPs, of $637 held up well. The
iPad was the pleasant surprise, with 26 million units sold,although the iPad's ASPs remained flat despite priceincreases on new models, which suggests a negative
product mix. Mac units also grew nicely, up 19%
sequentially in a tough PC environment. Gross margins of
37.9% also exceeded the firm’s guidance, thanks to afavorable iPhone product mix toward the higher-priced 5s,
as well as component cost savings. Our greater concern,
however, comes from Apple’s March-quarter revenue
projection of $42 billion to $44 billion. This is well below
Street expectations of $46 billion. We think the forecast
implies iPhone unit sales in the high 30-million range, andonly modest growth from the 37 million iPhones sold during
the March 2013 quarter.
In the near term, headwinds persist. These include astronger U.S. dollar, and differences in the timing of iPhone

We're lowering our fair value estimate for Apple to $570
per share following the firm’s gloomy, March-quarter
forecast. As revenue typically dives each quarter from
December to March and then June (until Apple launches
new devices again in September, or unless new products
are announced before then), we think a soft March quarter
will lead to fiscal 2014 revenue growth of approximately
6%, a bit below our prior projection.
Revenue at the high end of Apple's projected range of $44
billion would represent a 24% sequential decline, and only
1% growth from the year-ago quarter. This would be despitepreviously widespread optimism around new carrier deals
with NTT DoCoMo, and China Mobile. We note that Apple
also has not meaningfully exceeded the high end of its
revenue forecast since it began giving a full revenue range
a year ago, so we’re hesitant to think that there’s much ofa chance of a meaningful upside surprise next quarter.
Apple cited four main factors for the soft sales forecast
which, if absent, would have led to another $2 billion ofrevenue next quarter: currency headwinds, a rapidly
declining iPod market, greater revenue deferrals on new
product sales (because Apple now gives more software
away for free), and channel inventory adjustments in China.
However, we would have anticipated that the China Mobile
launch alone would have been more than enough toovercome the impact of these collective headwinds.
Additionally, in our view, further growth at China’s othercarriers, China Unicom and China Telecom, would have

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 13 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
repeat product sales to these corporations and educational
institutions in the long term.

PLEmasked any dips in sales in China due to changes in thetiming of product launches there. Apple commented that
the China Mobile launch is off to an "incredible start," butwe believe that investor expectations for such a start would
have contributed to more than 1% annual revenue growth,regardless of these other negative factors. Even if sales at
China Mobile turn out to be strong, they may wind up simply
masking other iPhone problems, such as limited growth (atbest) in North America in the near-term, and market sharedeclines, as announced by Kantar World Panel, in Western
Europe.

SA
M

Despite the haircut to our fair value estimate, we still view
Apple as having a strong underlying base of loyal customers,
where switching costs and the firm’s narrow economic moat
will allow the company to generate repeat purchases overthe long term. We also foresee Apple attracting its fair shareof late smartphone adopters in developed markets, as wellas capturing greater wallet share among customers in bothdeveloped and emerging markets that look to trade up fromlower-priced smartphones to higher-priced iPhones. We
caution, however, that Apple’s premium pricing strategy will
make it harder for it to capture new customers in the futurethan a few years ago, during the early adoption phase.
By our estimates, if we ran a scenario where Apple achieved
no iPhone revenue growth beyond fiscal 2014, we’d value
the company at about $500 per share. Although Apple’s poor
forecast for the March quarter suggests that such a scenario
might be closer to reality than what we previously thought,
we’re not ready to count out long-term iPhone revenue
growth just yet.
We also anticipate strong iPad growth over the next coupleof years, as tablet adoption hasn’t come close to maturing.
Enterprise and educational iPad adoption still remain astickier underlying portion of total iPad growth. We remain
encouraged that Apple will be able to retain and make

Perhaps the brightest piece of news from Apple’s earnings
report was that CEO Tim Cook reiterated that Apple would
launch new products in multiple product categories during
the 2014 calendar year. We still view Apple’s innovation,and the potential for new products, as possible catalysts for
future increases to our fair value estimate. We have no
special insight into Apple’s product pipeline, but continue
to suspect that an iWatch may arrive before a TV, simply
because Apple could likely bring a wearable device tomarket quicker than a TV, which would require a much more
complex network of support from cable and content
providers. We also hope that Apple is not lumping its briefly
discussed "iOS in the car" software platform into this
discussion as a new device category. We’re not quite
convinced that it will become a revolutionary interface
capable of driving meaningful profitability.
For the December quarter, iPhone sales of 51 million units
reflects a 7% jump from the year-ago quarter. However,given the NTT DoCoMo launch, the initial sales into China
in the December quarter versus the March quarter a year
ago, and the bright data point of nine million units soldduring Apple’s initial weekend launch, this figure is still
modestly below our expectations. Apple noted that North
American sales contracted year over year, as some U.S.
carriers extended their upgrade terms to full 24 monthcontracts, rather than allowing customers to upgrade early.
Sales in Japan did well, thanks to the NTT DoCoMopartnership, although a soft Japanese yen provided somecurrency headwinds. Apple did cite tremendous growth insome emerging market regions like Latin America andEastern Europe, although we suspect such growth is off ofrelatively small bases. Given Kantar World Panel’s recent
market share data, market share losses in Western Europe
may have offset some of this growth.

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 14 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
Early China Mobile iPhone Demand Appears In Line With
Our Expectations; Maintain Our FVE 15 Jan 2014

We will maintain our $600 fair value estimate and narrow
moat rating for Apple. A couple of data points emerged frominterviews with Apple CEO Tim Cook and China Mobile
chairman Xi Guohua about Apple's official iPhone launchwith the carrier, beginning Friday. Various news reports havehinted that iPhone pre-orders at China Mobile (from Dec.
25, 2013 through today) have reached 1.2 million-1.4 million,
while Xi commented that pre-orders are in the "millions."
These estimates fall within the range of our expectations,as we continue to project that iPhone sales in calendar 2014
will double from 2013, mostly because of the China Mobile
deal as well as from ongoing growth with China's other two
carriers. We continue to project that Apple's December
revenue will exceed the firm's previously announced
guidance of $55 billion-$58 billion and that this China
Mobile partnership will enable the firm to recognize solid
year-over-year revenue growth in the upcoming March
quarter as well.

PL
E

The iPhone's ASPs of $637 were quite encouraging, but inline with our expectations, and not terribly surprising given
Apple’s premium pricing approach. The firm did concedethat its iPhone product mix skewed toward the moreadvanced iPhone 5s, which caught the firm a bit by surprisein terms of supply, but is a long-term positive for thecompany’s pricing power and, perhaps, the adoption andpopularity of new iPhone features like Touch ID.

SAM

The iPad's unit sales of 26 million were up 14% from theyear-ago quarter, although sales were up only 5% whenlooking at iPads sold through to end customers (rather thanto retailers). Flat ASPs of $440 per device were discouraging,
given a price increase for the new iPad Mini with Retina to$399. Apple noted that iPad sales in mainland China doubled
from the year-ago quarter, which we think led to a lessfavorable iPad mix toward older models like the original iPad
Mini and iPad 2, or perhaps a trade down to the smaller iPad
Mini with Retina versus the larger iPad Air.
Finally, looking at Apple’s financial results, the firm
generated net income of $13.1 billion, identical with theyear-ago period despite 6% revenue growth year-over-year.
Gross margin compression of 70 basis points and a 32%
spike in R&D expenses offset the revenue boost. We
continue to model relatively flattish EPS ($42 to $44 pershare in each of the next five years, adjusted for share
repurchases) in the long-term due to a similar dynamic,
where modest revenue growth is mostly offset by modest
gross margin compression and additional R&D spending.
EPS growth in the quarter to $14.50, versus $13.81 a year
ago, was driven entirely by stock buybacks, as Apple boughtback another $5 billion worth of its shares in the December
quarter, and $28 billion cumulatively in the past fivequarters. We'd like to see Apple continue with its $60 billion
stock repurchase plan as-is before considering any otheroutside requests to boost its authorization.

Cook also disclosed, ahead of the firm's earnings
announcement on Jan. 27, that the company saw record
iPhone unit sales in Greater China in the December quarter.
This comment is also in line with our expectations, given
Apple's ongoing momentum in the region and because thefirm launched new iPhones in China at the same time as therest of the world, as opposed to prior years when China
would receive Apple's latest phones on a three-month lag.
Finally, Xi hinted at "broad" collaboration between the twocompanies that extends beyond handsets, but at this point,
we dismiss these comments as we suspect that it hints atthe sale of iPads and other Apple products through China
Mobile's sales channels.

IPhone Will Finally Arrive at China Mobile on Jan. 17;
Maintaining Our Fair Value Estimate 23 Dec 2013

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 15 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes

Apple-China Mobile Partnership Appears Imminent;

PLE

We're maintaining our $600 fair value estimate and narroweconomic moat rating for Apple after it formally announced
its long-awaited partnership with China Mobile. The iPhone
will go on sale Jan. 17, 2014, with preorders beginning Dec.
25. Specific product pricing and availability has not beenannounced, but we don't anticipate a significant differencein Apple’s product lineup at China Mobile compared withother carriers.

SAM

We're encouraged, but not especially surprised, that thepartnership was announced before the critical Chinese New
Year holiday season, and we suspect that the deal could
provide some upside to Apple’s revenue forecast for the
March quarter, which should be discussed in late January.
We continue to view the greater China region, and a China
Mobile partnership, as the single most important catalyst
for iPhone unit sales growth in fiscal 2014. Between the
China Mobile partnership and growth at China Unicom andChina Telecom, we project that Apple’s iPhone unit sales infiscal 2014 in China will essentially double from fiscal 2013.

We believe that China Mobile represents the last significant
wireless carrier where a new iPhone launch will drivematerial iPhone revenue and unit sales growth. AssumingApple executes well, we believe that intermediate and longterm iPhone unit sales growth will come from further
worldwide smartphone penetration. Although the majorityof smartphone growth will likely come from low-end Android
devices, we still see room for further iPhone adoption at thehigh end, as well as low-end phone customers trading up
to more advanced devices. Market share gains from
Samsung and other high-end Android device makers could
provide further iPhone upside, but we're not counting onsuch gains in our fair value estimate. Finally, we still project
healthy iPad revenue growth over the next couple of years,
and foresee positive optionality associated with any new
product introductions.

Maintaining Our Fair Value Estimate 05 Dec 2013

We do not plan to change our fair value estimate or moat
rating for Apple after various news outlets reported
yesterday that a long-awaited partnership with China
Mobile, the world’s largest wireless carrier, has beenreached. Given these reports, as well as China Mobile’s priorannouncement that 4G TD-LTE licenses have been granted
to the carrier, it appears likely that a partnership will beannounced at China Mobile’s conference on Dec. 18 in
Guangzhou.
We have consistently believed that Apple would someday
strike a deal with China Mobile, which in turn drove our
projections for strong iPhone growth in China in fiscal 2014
and later years. Shifting the inevitable sales boost from an
iPhone launch with China Mobile up by a quarter or two
from our current estimated timeline won’t have a material
effect on our fair value estimate, and we will wait for further
details in terms of the timing of any iPhone launch, as wellas possible pricing tactics, before making any revisions to
our estimates. We should note that any China Mobile iPhone
shipments that occur soon after Dec. 18 could provide
further upside to Apple’s December quarterly results beyond
the firm’s prior revenue outlook. At this time, we’re notanticipating a radical shift in iPhone pricing at China Mobile
either, as we think Apple will continue with its premium
pricing strategy. Finally, since China Mobile just won 4G TDLTE licenses while its homegrown 3G TD-SCDMA standard
is incompatible with other 3G networks, we think the focusof the event will be on Apple’s newer 4G iPhone 5s and 5c.
We suspect that Qualcomm will continue to supply Apple
with the baseband chips needed to run the iPhone 5s and5c on a TD-LTE network, but perhaps another iPhone SKU
will be added so that the phone is backwards compatible
with 3G TD-SCDMA network as well. Due to these© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 16 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
company is unsure whether it can fulfill all iPad Mini demand
this holiday season. Gross margin of 37% is a nice forecast,in our view, once adjusted upward by about 150 basis points
for deferred revenue associated with free software
giveaways.

PLE

complexities, we don’t anticipate any revisions to Apple’solder 3G iPhone models like the 4s or 4.

Apple Dreams of a White, and Space Grey, iPad
Christmas; Maintaining Our $600 Fair Value Estimate 28
Oct 2013

Apple's strong, fiscal fourth-quarter results came in aheadof both the Street's, and our own, expectations. More
importantly, Apple's solid December-quarter outlook points
to healthy demand for the company’s new iPhones andiPads. We're maintaining our $600-per-share fair value
estimate, and our narrow economic moat rating.

SAM

For the September quarter, revenue of $37.5 billion and EPS
of $8.26 also exceeded the company’s prior forecast. We
suspect that the strong results were driven by a tremendous
iPhone launch during the quarter's closing days. Apple’s
iPhone unit sales held up well, at 33.8 million units, while
a 1% sequential decline in the average selling price, or ASP,
appears reasonable in light of Apple selling older iPhones
during most of the reporting period. Apple's iPad unit sales
and revenue declined modestly, but again pertains to thesale of older models, as customers likely pushed out new
iPad purchases until the new lineup of tablets rolls out inNovember.
Apple’s strong outlook for the December quarter still points
to robust ongoing iOS adoption, and we continue to view
Apple's shares as modestly undervalued. We calculate thatrevenue in the range of $55 billion to $58 billion likely implies
iPhone unit sales in the low-to-mid 50 million-unit range,ahead of unit sales of 47 million during last year's iPhone 5
launch. We attribute most of the projected unit growth to
new carrier deals with NTT DoCoMo and T-Mobile, as wellas launching iPhones in China a quarter earlier than usual.
The guidance also hints at strong, but not exponential, iPad
growth from new product launches, although even the

We're encouraged by Apple’s December-quarter revenue
forecast, as well as management's comments that itremains confident that iPhone 5s production can continue
to ramp up in order to satisfy tremendous demand. We
recognize concerns that Apple misjudged its iPhone 5s
versus 5c product split by building far too many devices ofthe latter, while possibly being unable to fulfill all demand
for the former. Production may shift heavily toward the 5s
in the near-term, but based on the company’s healthy
revenue guidance, we don’t believe that the firm will be
missing out on many iPhone sales to potential customers
this holiday season.
Our narrow economic moat thesis for Apple still revolves
around modest switching costs around the iOS platform,
assuming that the firm’s products are relatively equal to thecompetition. In this context, Apple’s iPhone 5s and 5c initial
weekend sales were the first sign that the company remains
at the head of the smartphone pack, but we view the firm's
guidance as another sign that iPhone demand and customer
satisfaction remain strong. In turn, we think that iOS
switching costs will continue to allow Apple to retain a good
portion of its user base over at least the next year and, most
likely, many more.
Perhaps the biggest negative data point from the quarter
pertains to the iPad. In addition to only flat year-over-year
iPad unit growth in the September quarter, we also believethat Apple's revenue forecast implies about 60% iPad unit
growth, sequentially, in the December quarter. If accurate,
such results would lead to only 8% iPad unit sales growthin calendar 2013, a less-than-stellar sign for what we© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 17 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Noteschanged its iPad Mini pricing, but again took the tactic ofmaintaining a premium position in the market rather thanstriving to gain massive market share at the low end. The
price increase of the new iPad Mini with retina display to$399 seems a bit high, but isn't shocking given the highcomponent cost of these displays. A $30 price cut in theoriginal iPad Mini to $299 was nice news, but probably notenough to stem market share losses or truly compete witholder Amazon Kindle Fires priced as low as $139.

PLE

perceived to be a high growth category. Apple's
management commented that it expects the December
quarter to be an "iPad Christmas," and CEO Tim Cook feels
confident that the iPad will achieve year-over-year revenue
growth, but we would have previously expected faster
growth out of these devices.

SA
M

While the iPad launch may represent the greatest potential
product for revenue upside in the period, supply constraints
around the new iPad Mini with Retina Display may
potentially limit Apple’s revenue in the upcoming months,
and replacement cycles for tablets--and particularly, iPads-among Apple’s loyal customers may be a bit longer thanpreviously anticipated. We're modestly less optimistic
about iPad unit sales in the long-term, as skyrocketing tablet
growth may be winding down. Still, we think that Apple will
be able to maintain premium pricing on these products,
which could help cushion any potential blow from sluggish
unit sales.
Apple Keeps High-End Focus with IPad and Mac Launch;With its moves to offer its iLife and iWorks software for free
(as well as the Mavericks operating system for Mac), Appleis continuing to give away software in order to improve thecustomer experience and enable it to capture premium
pricing and adequate margins on hardware sales. Lastly, wewere surprised by the lack of a Touch ID in the new iPads,
perhaps due to supply constraints as these parts are going
into the popular iPhone 5s. The lack of this feature may leave
the door open to the possibility of another iPad productrefresh in the spring of 2014.

Maintaining Our Fair Value Estimate 23 Oct 2013

We will maintain our $600 fair value estimate and narrow
moat rating for Apple after the company announced its
lineup of refreshed iPads and Macs. We were modestly
surprised by a couple of aspects of the launch but don't think
Apple made any groundbreaking announcements thatconflict with our long-term thesis for the firm. We view
Apple's Worldwide Developers Conference in June (which
previewed iOS 7) and iPhone launch in September as more
important events in terms of innovation.
Apple's new 9.7-inch iPad has been rebranded the iPad Air,
perhaps because it is lighter and thinner than prior versions.
However, when thinking about Apple's MacBook branding,we think the Air branding may hint at a future iPad Pro
someday, perhaps a 13-inch tablet, as Apple continues toimprove the functionality of its tablets beyond mere content
consumption and toward content creation. Apple also

Once again, we think the biggest headline from the event
will involve Apple's iPad pricing and another instance ofApple pricing its devices above expectations. The iPad Air
at $499 met our expectations, but we were surprised that
Apple didn't offer some sort of price cut on its relatively
ancient iPad 2 (originally launched in March 2011), which
will still be sold at $399 for another year. Regarding theoriginal iPad Mini, Apple matched Amazon's recent $30
price cut for its entry-level tablet, so at $299, the device
remains $130 more expensive than Amazon’s low-end 16
Gb offering. The bigger concern is that the old Mini is still$70 more than Amazon's newer 7-inch Kindle Fire HDX 7 (at$229), yet offers clearly inferior hardware specifications.
We don't expect Apple to adopt Amazon's strategy of selling
tablet hardware at close to cost in order to drive media
content sales, and we expect Apple's market share to erode
as a host of Android-based tablet rivals compete on price© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 18 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Analyst Notes
iPad unit sales estimates were roughly in this range as well,so we don't see this data point as shocking news.
PC Unit Shipments Continue Their Decline 10 Oct 2013PLE

as tablet hardware becomes commodified. However, Apple
will clearly have to flex its software and services muscle inorder to offer a superior customer experience (either inperception or reality) that it can capture such lofty pricing
premiums on older, entry-level iPad models, and/or
encourage customers to trade up to the more advanced iPad
Air or iPad Mini with retina display.

SAM

A portion of our narrow moat and positive moat trend thesis
for Apple stems from switching costs around the iOS
platform, some of which specifically come from iCloud ascustomers own multiple iOS devices in the home andwitness the benefits of syncing across hardware. We
suspect that Apple will ultimately concede share in thebooming tablet market as low-end competitors may growat a faster pace than the firm. Although we don't see thishappening, and certainly not based on Tuesday's news, ina worst-case scenario our switching cost thesis could be
dealt a blow if Apple's premium tablet strategy were to leadto such massive market share losses that the businessactually experienced long-term unit sales declines.
Looking at Apple's various iPad customers, we suspect thisrelatively higher pricing structure will have little effect onsales to enterprise customers, but it does seem prohibitive
to educational institutions looking to deploy tablets inschools. We wonder if price cuts or other incentives may
come in the spring, which is peak buying season by schools
as they flush their end-of-year school budgets, and perhaps
such cuts could be done in conjunction with another productrefresh.

Against the backdrop of the continued shift in the computing
environment from a client/server architecture to a cloud/device architecture, PC unit shipments declined 8.6% in thethird quarter versus 2012, according to Gartner, in line with
our full-year forecast of an 8.4% decline. We are notchanging our fair value estimates or moat ratings for relatedcompanies, including Apple, Google, Hewlett-Packard,Intel, Microsoft, Seagate, and Western Digital.
Altogether, we do not view the news as troubling for mostcompanies we cover, although those with a greater
concentration of cloud assets and a lesser concentration of
PC assets are affected the least. In our September
Technology Observer, "It's the End of the PC as We Know It,
but the Cloud Feels Fine," we highlighted that thisarchitectural change will divert investments toward otherform factors (for example, tablets and smartphones) as well
as software and services to support distributed applications,
including cloud infrastructure and cloud applications. We
believe Apple and Google have the most to gain, althoughApple is more attractively valued at this time, trading at a
19% discount to our fair value estimate. We caution thatinvestors betting on a rebound on the PC market are likely
to be disappointed, as we expect PC unit shipments to
decline in excess of 2% annually from 2014 to 2017.

Finally, Apple also provided a hint into iPad sales for the
September quarter, announcing that it sold its 170 millionth
iPad in early October. Based on 155.1 million units sold asof June, this statistic caps Apple's iPad unit sales at 14.9
million for the September quarter. However, we believe
Street estimates called for 14 million units and our quarterly© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 19 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Morningstar Analyst Forecasts
Financial Summary and Forecasts
Fiscal Year Ends in September

Forecast
2011

2012

2013

2014

2015

5-Year
Proj. CAGR

37.9
38.7
42.2
38.3
37.9
35.0
38.9

66.0
83.8
83.4
85.0
82.6
84.4
84.7

44.6
63.5
64.4
61.0
59.5
61.9
37.5

9.2
-11.3
-4.7
-11.3
-10.0
-17.5
5.5

7.2
7.4
10.5
5.0
8.5
9.7
-4.9

4.0
-4.8
-1.1
-4.3
3.1
-4.3
-4.9

3.2
-1.2
1.5
-1.1
1.2
-0.9
-4.1

3-YearHist. Avg

2011

2012

2013

2014

2015

5-Year
Proj. Avg

Operating Margin %EBITDA Margin %Net Margin %Free Cash Flow Margin %ROIC %
Adjusted ROIC %Return on Assets %Return on Equity %

31.7
34.3
24.1
25.3
33.8
138.6
25.0
38.4

31.2
32.9
24.0
26.4
36.5
146.8
27.1
41.7

35.3
37.4
26.7
25.1
38.4
152.9
28.5
42.8

28.7
32.6
21.7
24.3
26.5
116.2
19.3
30.6

28.7
33.6
21.2
21.5
25.7
118.3
17.7
32.1

26.3
32.0
19.5
19.7
21.1
107.7
14.9
28.8

25.5
31.5
19.0
18.8
19.1
100.6
13.6
24.6

Leverage

3-YearHist. Avg

2011

2012

2013

2014

2015

5-Year
Proj. Avg

0.04
0.10
—

—
—
—

—
—
—

0.12
0.30
434.240.25
0.65
199.970.24
0.74
197.830.21
0.68
203.94

USD Mil

Firm Value(%)

Per Share
Value

Present Value Stage I
Present Value Stage II
Present Value Stage III

139,538
143,840
84,266

38.0
39.1
22.9

166.76171.90100.71

Total Firm Value

367,643100.0

439.37

Cash and Equivalents
Debt
Preferred Stock
Other Adjustments

146,761-16,960—-32,029————

175.39-20.27—-38.28Equity Value

465,415—556.22PLE

3-YearHist. CAGR

Growth (% YoY)

Revenue
EBIT
EBITDANet Income
Diluted EPS
Earnings Before Interest, after Tax
Free Cash FlowSA
M

Profitability

Debt/Capital
Total Debt/EBITDA
EBITDA/Interest Expense

Valuation Summary and Forecasts
Price/Fair Value
Price/Earnings
EV/EBITDA
EV/EBITFree Cash Flow Yield %Dividend Yield %Discounted Cash Flow Valuation

2012

2013

2014(E)

2015(E)

1.00
15.1
10.2
10.8
6.8
0.4

0.79
12.0
7.3
8.3
10.6
2.5

—
12.6
7.5
8.7
9.3
2.4

—
12.2
7.5
9.2
8.9
2.4

Key Valuation Drivers

Cost of Equity %Pre-Tax Cost of Debt %Weighted Average Cost of Capital %Long-Run Tax Rate %Stage II EBI Growth Rate %Stage II Investment Rate %Perpetuity Year

10.0
—
9.7
26.0
-1.1
-5.3
15

Additional estimates and scenarios available for download at http://select.morningstar.com.

Projected Diluted Shares

837

Fair Value per Share (USD)—

The data in the table above represent base-case forecasts in the company’s reporting
currency as of the beginning of the current year. Our fair value estimate may differ from theequity value per share shown above due to our time value of money adjustment and in cases
where probability-weighted scenario analysis is performed.

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 20 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Morningstar Analyst Forecasts
Income Statement (USD Mil)
Fiscal Year Ends in September

Forecast
2013

2014

2015

108,249

156,508

170,910183,252

190,648

Cost of Goods Sold
Gross Profit

64,431
43,81887,846
68,662

106,606
64,304

114,131
69,121

122,360
68,288Selling, General & Administrative Expenses
Research & Development
Other Operating Expense (Income)Depreciation & Amortization (if reported separately)
Operating Income (ex charges)

7,599
2,429
—
—
33,79010,0403,381——
55,241

10,8304,475——
48,99911,846
5,685-1,050—52,64012,793
6,367-985—
50,112

Restructuring & Other Cash Charges
Impairment Charges (if reported separately)
Other Non-Cash (Income)/Charges
Operating Income (incl charges)———
33,790———55,241———
48,999——1,050
51,590——985
49,127

Interest Expense
Interest Income
Pre-Tax Income—
415
34,205—522
55,763

128
1,284
50,155308
1,292
52,574308
1,442
50,261

Income Tax Expense

8,283

14,03013,11813,702

13,068Other After-Tax Cash Gains (Losses)
Other After-Tax Non-Cash Gains (Losses)(Minority Interest)(Preferred Dividends)
Net Income————
25,922————
41,733————37,037————38,872————
37,193Weighted Average Diluted Shares Outstanding
Diluted Earnings Per Share

937
27.68

945
44.15

932
39.75

901
43.12

837
44.45

Adjusted Net Income
Diluted Earnings Per Share (Adjusted)

25,922
27.68

41,73344.15

37,03739.75

38,872
43.12

37,193
44.45

—

2.65

11.34

12.69

13.69

35,60435,60458,51858,51855,75655,756

60,57061,62059,97760,962

SA
M

Revenue

2012

PL
E

2011

Dividends Per Common Share
EBITDA
Adjusted EBITDA© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 21 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Morningstar Analyst Forecasts
Balance Sheet (USD Mil)
Fiscal Year Ends in September

Forecast
2012

2013

2014

2015

Cash and Equivalents
Investments
Accounts Receivable
Inventory
Deferred Tax Assets (Current)
Other Short Term Assets
Current Assets

81,570
—
5,369
776
2,014
10,877
100,606

121,251—
10,930791
2,583
14,220149,775

146,761—
13,102
1,764
3,453
14,421
179,501

166,469—
14,0481,889
3,702
15,462201,571

193,256—
14,615
2,025
3,852
16,086229,834

Net Property Plant, and Equipment
Goodwill
Other Intangibles
Deferred Tax Assets (Long-Term)
Other Long-Term Operating Assets
Long-Term Non-Operating Assets
Total Assets

7,777
896
3,536
—
3,556
—
116,371

15,452
1,135
4,224
—
5,478
—
176,064

16,597
1,577
4,179
—
5,146
—
207,000

19,667
2,877
3,629
—
5,518
—
233,261

21,802
4,177
3,144
—
5,740
—
264,697

Accounts Payable
Short-Term Debt
Deferred Tax Liabilities (Current)
Other Short-Term Liabilities
Current Liabilities

14,632——
13,33827,97021,175——
17,36738,542

22,367——
21,291
43,65823,946——24,32948,27425,6722,500—
25,31053,483Long-Term Debt
Deferred Tax Liabilities (Long-Term)
Other Long-Term Operating Liabilities
Long-Term Non-Operating Liabilities
Total Liabilities

—
8,159
1,686
1,941
39,756—
13,8472,648
2,817
57,854

16,960
16,4892,625
3,719
83,451

39,96018,4892,815
4,769
114,30742,46020,4892,928
5,754
125,114

Preferred Stock
Common Stock
Additional Paid-in Capital
Retained Earnings (Deficit)(Treasury Stock)
Other Equity
Shareholder's Equity—
13,331—
62,841—
443
76,615—
16,422—
101,289—499
118,210—
19,764—104,256—-471
123,549—
19,764—
131,690-32,029-471
118,954—
19,764—
157,430-37,140-471
139,583

Minority Interest
Total Equity—
76,615—
118,210—
123,549—
118,954—
139,583

SA
M

PL
E

2011

© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 22 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Morningstar Analyst Forecasts
Cash Flow (USD Mil)
Forecast

Fiscal Year Ends in September
2012

2013

2014

2015

Net Income

25,922

41,73337,03738,872

37,193

Depreciation
Amortization
Stock-Based Compensation
Impairment of Goodwill
Impairment of Other Intangibles
Deferred Taxes
Other Non-Cash Adjustments

1,622
192
1,168
—
—
2,868
—

2,600
677
1,740
—
—
4,405
—

5,800
957
2,253
—
—
1,141
—

7,930
1,050
2,724
—
—
1,751
1,050

9,865
985
2,660
—
—
1,851
985

(Increase) Decrease in Accounts Receivable(Increase) Decrease in Inventory
Change in Other Short-Term Assets
Increase (Decrease) in Accounts Payable
Change in Other Short-Term Liabilities
Cash From Operations

143
275-3,3252,515
6,149
37,529-5,551-15-4,5764,467
5,376
50,856-2,172
-973
1,303
2,340
5,980
53,666

-946
-125
-841
1,579
3,038
56,081

-567
-136
-424
1,726
982
55,121-4,260-3,192-32,967—-40,419-8,295-1,107-38,825—-48,227-8,165-911-24,698—-33,774-11,000-2,000—-182-13,182-12,000-2,000—-109-14,109

Common Stock Issuance (or Repurchase)
Common Stock (Dividends)
Short-Term Debt Issuance (or Retirement)
Long-Term Debt Issuance (or Retirement)
Other Financing Cash Flows
Cash From Financing

831
—
—
—
613
1,444

665
-2,488——125-1,698-22,860-10,564—
16,896
149-16,379-32,029-11,438—
23,000-2,724-23,191-5,111-11,4542,500
2,500-2,660-14,225

Exchange Rates, Discontinued Ops, etc. (net)
Net Change in Cash—
-1,446

—
931

—
3,513

—
19,708—26,786

SA
M

PL
E

2011

(Capital Expenditures)
Net (Acquisitions), Asset Sales, and Disposals
Net Sales (Purchases) of Investments
Other Investing Cash Flows
Cash From Investing© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 23 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Price/Earnings

EV/EBITDA

Price/Free Cash Flow

Price/Book

Price/Sales

2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

Google Inc GOOG USA

1.13

24.1

21.7

19.9

18.0

16.4

14.9

33.3

22.7

21.5

4.3

3.7

3.2

6.3

5.9

5.2

Microsoft Corporation MSFT USA

1.06

19.3

15.2

14.2

9.6

9.0

8.4

12.4

14.2

13.4

4.3

4.4

3.9

3.7

3.7

3.3

Hewlett-Packard Co HPQ USA

1.28

0.6

Company/Ticker

AverageApple Inc AAPL US

Returns Analysis

PL
E

Price/Fair
Value

0.95

2015(E)

9.3

8.6

8.8

5.6

5.9

6.1

7.8

9.7

10.7

2.3

2.0

1.8

0.6

0.6

17.6

15.2

14.3

11.1

10.4

9.8

17.8

15.5

15.2

3.6

3.4

3.0

3.5

3.4

3.0

12.0

12.6

12.2

7.3

7.5

7.5

9.4

10.7

11.2

3.5

4.1

3.5

2.5

2.6

2.5

ROIC %

Adjusted ROIC %Return on Equity %Return on Assets %Dividend Yield %Last Historical Year
Total Assets
(Mil)

2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

110,920 USD

13.8

13.5

12.7

25.0

22.4

21.5

16.3

15.4

14.4

12.6

12.3

11.8

—

—

—

Microsoft Corporation MSFT USA

— USD

28.1

28.8

26.4

32.5

32.8

29.9

24.5

31.8

29.4

13.2

17.8

16.9

2.2

2.3

2.5

Hewlett-Packard Co HPQ USA— USDCompany/Ticker

AverageApple Inc AAPL US

207,000 USD

2015(E)

12.7

11.6

11.0

23.0

22.2

21.9

20.5

19.0

15.8

4.7

5.1

5.0

1.6

1.6

1.6

18.2

18.0

16.7

26.8

25.8

24.4

20.4

22.1

19.9

10.2

11.7

11.2

1.9

2.0

2.1

26.5

25.7

21.1

116.2

118.3

107.7

30.6

32.1

28.8

19.3

17.7

14.9

2.5

2.4

2.4

SA
M

Google Inc GOOG USA

Growth Analysis

Revenue Growth %EBIT Growth %EPS Growth %Free Cash Flow Growth %Dividend/Share Growth %Last Historical Year
Revenue
(Mil)

2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)2013

2014(E)

2015(E)2013

2014(E)

Google Inc GOOG USA

59,825 USD

19.2

8.2

13.4

9.5

24.3

9.7

16.9

12.0

9.6 -1,017.5

40.1

4.0

—

—

—

Microsoft Corporation MSFT USA

77,849 USD

5.6

18.2

12.3

-4.3

5.1

7.2

-29.9

52.5

7.1

-62.2

150.6

5.6

23.8

22.0

11.1

Hewlett-Packard Co HPQ USA

112,298 USD

-6.7

-4.0

-2.8

-12.6

-2.0

-4.1

-12.6

8.8

-2.9

-44.2

-29.0

-30.6

1.1

—

—

6.0

7.5

7.6

-2.5

9.1

4.3

-8.5

24.4

4.6

-374.6

53.9

-7.0

12.5

22.0

11.1

9.2

7.2

4.0

-11.3

7.4

-4.8

-10.0

8.5

3.1

5.5

-4.9

-4.9

328.0

11.9

7.9

Company/Ticker

AverageApple Inc AAPL US

170,910 USD

2015(E)© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

2015(E)

Page 24 of 29

Morningstar Equity ResearchApple Inc AAPL (NAS) | QQQ
Last PriceFair Value

Consider Buy

Consider Sell

Uncertainty

Economic Moat™

Moat Trend™

Stewardship

Morningstar Credit Rating

Industry Group

541.65 USD

570.00 USD

342.00 USD

883.50 USD

HighNarrow

Positive

Standard

AA-

Computer Hardware

Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Gross Margin %EBITDA Margin %Operating Margin %Net Margin %Free Cash Flow Margin %2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

Google Inc GOOG USA

15,782 USD

56.8

59.2

58.5

29.9

30.8

29.9

23.3

26.8

25.9

26.4

27.6

26.6

18.9

25.9

24.2

Microsoft Corporation MSFT USA

15,146 USD

74.0

66.5

63.0

30.2

34.2

32.6

34.4

30.6

29.2

19.5

24.9

23.5

29.7

26.3

24.8

Hewlett-Packard Co HPQ USA

6,938 USD

Company/Ticker

AverageApple Inc AAPL US

Leverage Analysis

PL
E

Last Historical YearNet Income(Mil)

37,037 USD

2015(E)

23.1

24.4

25.1

11.4

11.3

11.1

7.2

7.4

7.3

6.2

6.7

6.7

7.2

6.0

5.6

51.3

50.0

48.9

23.8

25.4

24.5

21.6

21.6

20.8

17.4

19.7

18.9

18.6

19.4

18.2

37.6

37.7

35.8

32.6

33.6

32.0

28.7

28.7

26.3

21.7

21.2

19.5

26.6

24.6

22.6

Debt/Equity %Debt/Total Cap %EBITDA/Interest Exp.

Total Debt/EBITDA

Assets/Equity

Last Historical Year
Total Debt
(Mil)

2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

Google Inc GOOG USA

5,245 USD

6.0

5.2

4.5

5.7

4.9

4.3

—

—

—

0.3

0.3

0.2

1.3

1.2

1.2

Microsoft Corporation MSFT USA

11,944 USD

18.0

17.9

17.9

15.3

15.2

15.2

85.3

92.6

122.0

0.5

0.4

0.5

1.8

1.8

1.7

Hewlett-Packard Co HPQ USA

26,889 USD

AverageApple Inc AAPL US

16,960 USD

2015(E)

99.8

67.4

45.1

50.0

40.3

31.1

20.6

21.8

34.7

2.1

1.7

1.4

4.1

3.4

2.9

41.3

30.2

22.5

23.7

20.1

16.9

53.0

57.2

78.4

1.0

0.8

0.7

2.4

2.1

1.9

13.7

33.6

32.2

12.1

25.2

24.4

434.2

200.0

197.8

0.3

0.6

0.7

1.7

2.0

1.9

SA
M

Company/Ticker

Liquidity Analysis
Company/Ticker

Market Cap(Mil)Cash per Share2013

Google Inc GOOG USA

381,381 USD 173.30

Microsoft Corporation MSFT USA

343,816 USD

Hewlett-Packard Co HPQ USA

62,975 USD

AverageApple Inc AAPL US

0.82

2014(E)

Current Ratio

Quick Ratio

Cash/Short-Term Debt

Payout Ratio %2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

2015(E)2013

2014(E)

208.16 246.12

4.58

5.39

6.14

4.55

5.36

6.11

19.51

23.65

27.96

—

—

—

2.60

2.88

2.98

2.57

2.83

2.93

5.64

15.21

9.82

42.2

33.7

35.0

2.26

3.55

2015(E)

8.42

7.75

6.57

1.23

1.23

1.26

1.07

1.07

1.09

2.89

2.98

5.10

19.6

18.1

18.8

60.85

72.72

85.41

2.80

3.17

3.46

2.73

3.09

3.38

9.35

13.95

14.29

30.9

25.9

26.9

184.67 230.96

4.11

4.18

4.30

4.07

4.14

4.26

—

—

77.30

28.5

29.4

30.8

483,146 USD 157.53© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 25 of 29

Morningstar Equity Research

Research Methodology for Valuing Companies
3 Economic Moat™ Rating
3 Moat Trend™ Rating
3 Moat Valuation
3 Three-Stage Discounted
Cash Flow
3 Weighted Average Costof Capital
3 Fair Value Estimate
3 Scenario Analysis
3 Uncertainty Ratings
3 Margin of Safety
3 Consider Buying/Selling

The concept of the Morningstar Economic Moat™ Rating
plays a vital role not only in our qualitative assessment of afirm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—aswell as the Morningstar Moat Trend™ Rating—positive,
stable, or negative—to each company we cover. There are
two major requirements for firms to earn either a narrow orwide moat rating: (1) the prospect of earning above-average
returns on capital; and (2) some competitive edge that prevents these returns from quickly eroding. The assumptions
we make about a firm’s moat determine the length of “economic outperformance” that we assume in the latter stages

SA
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3 Stewardship Rating

The Morningstar Rating for stocks identifies companies trading at a discount or premium to our analysts’ assessment of
their fair value. A number of components drive this rating: (1)our assessment of the firm’s economic moat, (2) our estimateof the stock’s intrinsic value based on a discounted cash-flow
model, (3) the margin of safety bands we apply to our Fair
Value Estimate, and (4) the current stock price relative to ourfair value estimate.

of our valuation model. We also quantify the value of eachfirm’s moat, which represents the difference between a firm’s
enterprise value and the value of the firm if no future net investment were to occur. Said differently, moat value identifies the value generated by the firm as a result of any future
net new investment. Our Moat Trend Rating reflects our assessment of whether each firm’s competitive advantage iseither getting stronger or weaker, since we think of moats as
dynamic, rather than static.

PL
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Components of Our
Methodology

At the heart of our valuation system is a detailed projectionof a company’s future cash flows. The first stage of our threestage discounted cash flow model can last from 5 to 10 years
and contains numerous detailed assumptions about various
financial and operating items. The second stage of our model—where a firm’s return on new invested capital (RONIC)
and earnings growth rate implicitly fade until the perpetuity
year—can last anywhere from 0 years (for no-moat firms) to
20 years (for wide-moat companies). In our third stage, we
assume the firm’s RONIC equals its weighted average cost ofcapital, and we calculate a continuing value using a standard

Morningstar Research Methodology for Valuing Companies

Fundamental
AnalysisEconomic
Moat Rating

Company
Valuation

Fair Value
Estimate

Uncertainty
Assessment

Analyst conducts
company andindustry research:

Strength of competitive
advantage is rated:
None, Narrow, or Wide

3 Financial statement
analysis

Advantages that confer
an economic moat:

3 Channel checks

High Switching Costs(Microsoft)

Analyst considers
past financial results
and focuses oncompetitive position
and future prospects
to forecast future
cash flows.

Analyst uses a
discounted cash-flow
model to develop
a Fair Value Estimate,which serves as thefoundation for
the Morningstar
Rating for stocks.

The analyst then evaluates the range ofpotential intrinsic
values for the company
and assigns an
Uncertainty Rating: Low,
Medium, High,Very High, or Extreme.

3 Trade-show visits

3 Industry and company
reports and journals
3 Conference calls

3 Management andsite visits

TM

Cost advantage(Wal-Mart)

Intangible assets(Johnson & Johnson)
Network Effect(Mastercard)
Efficient Scale(Lockheed Martin)

Assumptions areentered into
Morningstar’s
proprietary discounted
cash-flow model.

The Uncertainty Rating
determines the marginof safety required
before we would recommend the stock.
The higher the uncertainty, the wider
the margin of safety.

QQQQQ
QQQQ
QQQ
QQ
Q
The current stock pricerelative to Morningstar’s
Fair Value Estimate,adjusted for uncertainty,
determines theMorningstar Rating
for stocks.
The Morningstar Rating
for stocks is updated
each evening after themarket closes.

@Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 26 of 29

Morningstar Equity Research

Research Methodology for Valuing Companies
Detailed Methodology
Documents and Materials*
3 Comprehensive
Equity Research Methodology
3 Uncertainty Methodology
3 Cost of Equity Methodology
3 Morningstar DCF
Valuation Model
3 Stewardship Rating

perpetuity formula. In deciding on the rate at which to discount future cash flows, we ignore stock-price volatility.
Instead, we rely on a system that measures the estimatedvolatility of a firm’s underlying future free cash flows, taking into account fundamental factors such as the diversity ofrevenue sources and the firm’s fixed cost structure.

Methodology

representative for more
information.

Our corporate Stewardship Rating represents our assessment of management's stewardship of shareholder capital,
with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy andvaluation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transactions, and accounting practices. Corporate governancepractices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of threeratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have madeexceptionally strong or poor capital allocation decisions.

PL
E* Please contact a sales

We also employ a number of other tools to augment our valuation process, including scenario analysis, where we assess
the likelihood and performance of a business under different
economic and firm-specific conditions. Our analysts typicallymodel three to five scenarios for each company we cover,stress-testing the model and examining the distribution of
resulting fair values.

to a fair value we apply in setting our consider buying/consider selling prices. Firms trading below our consider-buying
prices receive our highest rating of five stars, whereas firms
trading above our consider-selling prices receive our lowest
rating of one star.

SAM

The Morningstar Uncertainty Rating captures the range ofthese potential fair values, based on an assessment of acompany’s future sales range, the firm’s operating and financial leverage, and any other contingent events that may
impact the business. Our analysts use this range to assign
an appropriate margin of safety—or the discount/premium

New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value

2.75
2.50
2.25

• 1 Star

2.00
1.75
1.50

1.25 — 125%
1.00 — 95%— 175%— 155%• 2 Star— 135%

105% —
80% —

0.75

— 90%

125% —

115% —

110% —

— 85%

70% —

0.50

• 3 Star
— 80%

60% —

50% —

• 5 Star

0.25

Low

MediumHigh
Uncertainty Rating• 4 Star

Very High** Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.

@Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 27 of 29

Morningstar Corporate Credit Rating

Morningstar’s Approach to Rating Corporate Credit

3 Encapsulates our in-depth
modeling and quantitative
work in one letter grade.
3 Allows investors to rankcompanies by each of
the four underlying components of our credit
ratings, including bothanalyst-driven andquantitative measures.

Purpose

Methodology

The Morningstar Corporate Credit Rating measures theability of a firm to satisfy its debt and debt-like obligations.
The higher the rating, the less likely we think the company
is to default on these obligations.

We feel it’s important to perform credit analysis throughdifferent lenses—qualitative and quantitative, as well as
fundamental and market-driven. We therefore evaluateeach company in four broad categories.

The Morningstar Corporate Credit Rating builds on themodeling expertise of our securities research team. For
each company, we publish:

Business Risk
Business Risk captures the fundamental uncertainty arounda firm’s business operations and the cash flow generated
by those operations. Key components of the Business Risk
rating include the Morningstar Economic Moat™ Rating andthe Morningstar Uncertainty Rating.

PL
E

3 Offers a proprietarymeasure of the credit quality of companies on our
coverage list.

3 Five years of detailed pro-forma financial statements
3 Annual estimates of free cash flow

3 Provides access to all
the underlying forecaststhat go into the rating,available through our institutional service.

3 Annual forecasts of return on invested capital

3 Scenario analyses, including upside and downside cases
3 Forecasts of leverage, coverage, and liquidity ratios

for five years

3 Estimates of off balance sheet liabilities

SA
M

These forecasts are key inputs into the Morningstar
Corporate Credit Rating and are available to subscribers
at select.morningstar.com.

Cash Flow Cushion ™
Morningstar’s proprietary Cash Flow Cushion™ ratio is afundamental indicator of a firm’s future financial health
The measure reveals how many times a company’s internal
cash generation plus total excess liquid cash will coverits debt-like contractual commitments over the next
five years. The Cash Flow Cushion acts as a predictor of
financial distress, bringing to light potential refinancing,
operational, and liquidity risks inherent to the firm.

Morningstar Research Methodology for Determining Corporate Credit Ratings

Competitive
AnalysisAnalyst conducts
company andindustry research:• Management interviews• Conference calls• Trade show visits• Competitor, supplier,

distributor, andcustomer interviews• Assign Economic
Moat™ Rating

Cash-Flow
Forecasts

Analyst considers
company financial
statements
and competitive
dynamics toforecast future
free cash
flows to the firm.
Analyst derives
estimate of CashFlow Cushion™.

Scenario
AnalysisAnalysts run bulland bear cases
through the model
to derive alternate
estimates ofenterprise value.
Based on competitive analysis,
cash-flow forecasts, andscenario analysis,
the analyst
assigns
Business Risk.

Quantitative
ChecksWe gauge a firm’s
health using
quantitative tools
supported by ourown backtesting
and academic
research.

• Morningstar

Solvency Score™
• Distance to Default

BB

RatingCommittee

C

BBB

AAA
A
CC

Senior personnel
review eachcompany todetermine theappropriate final
credit rating.
• Review modelingassumptions

CCC

B

D

AA

AAA
AA
A
BBB

Extremely Low Default Risk
Very Low Default Risk
Low Default Risk
Moderate Default Risk

BB
B
CCC
CC

Above Average Default Risk
High Default Risk
Currently Very High Default Risk
Currently Extreme Default Risk

• Approvecompany-specificadjustments

C
D

Imminent Payment Default
Payment Default

UR
UR+
UR-

Under Review
Positive Credit Implication
Negative Credit Implication@Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 28 of 29

Morningstar Corporate Credit Rating

Morningstar’s Approach to Rating Corporate Credit
Overall Credit Rating

The four component ratings roll up into a single preliminary credit rating. To determine the final credit rating,a credit committee of at least five senior research personnel reviews each preliminary rating.
We review credit ratings on a regular basis and as events
warrant. Any change in rating must be approved by theCredit Rating Committee.

PL
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The advantage of the Cash Flow Cushion ratio relative toother fundamental indicators of credit health is that themeasure focuses on the future cash-generating
performance of the firm derived from Morningstar’s
proprietary discounted cash flow model. By making
standardized adjustments for certain expenses to reflect
their debt-like characteristics, we can compare future
projected free cash flows with debt-like cash commitments
coming due in any particular year. The forward-looking
nature of this metric allows us to anticipate changes in a
firm’s financial health and pinpoint periods where cash
shortfalls are likely to occur.

Morningstar Corporate Credit Ratings are available on
Morningstar.com. Our credit research, including detailed
cash-flow models that contain all of the components of theMorningstar Corporate Credit Rating, is available tosubscribers at select.morningstar.com.

SAM

Morningstar Solvency Score™
The Morningstar Solvency Score™ is a quantitative scorederived from both historical and forecasted financial ratios.
It includes ratios that focus on liquidity (a company’s
ability to meet short term cash outflows), profitability(a company’s ability to generate profit per unit of input),
capital structure (how does the company finance its
operations), and interest coverage (how much of profit isused up by interest payments).

Investor Access

Distance to Default
Morningstar’s quantitative Distance to Default measureranks companies on the likelihood that they will tumble
into financial distress. The measure is a linear model of thepercentile of a firm’s leverage (ratio of Enterprise Value toMarket Value), the percentile of a firm’s equity volatility
relative to the rest of the universe and the interaction ofthese two percentiles. This is a proxy methodology for thecommon definition of Distance to Default which relies on
option-based pricing models. The proxy has the benefit ofincreased breadth of coverage, greater simplicity ofcalculation, and more predictive power.
For each of these four categories, we assign a score, which
we then translate into a descriptive rating along the scaleof Very Good / Good / Fair / Poor / Very Poor.

@Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization(“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise
required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property ofMorningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Page 29 of 29