jpmorgan apple slideshow

US Equity Strategy FLASH

Too Early to Fade on AAPL. A Cyclical Sector unto Itself and Still Underowned

Portfolio Strategy Thomas J. Lee, CFA AC

(1-212) 622-6505

[email protected]

Bloomberg JPMA TLEE<GO>

J.P. Morgan Securities LLC

Daniel M. McElligott

(1-212) 622-5598

[email protected]


Katherine C. Khor

(1-212) 622-0934

[email protected]


See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may

have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their

investment decision.

North America Equity Research

February 24, 2012

IT Hardware Mark MoskowitzAC

(1-415) 315-6704

[email protected]


Anthony Luscri

(1-415) 315-6702

[email protected]


Mike Kim

(1-415) 315-6755

[email protected]


2

Overview: Given upturn in global growth, Cyclicals are leading

Apple Focus #1: A Sector unto itself

Apple Focus #2: Top 10 driver of earnings…

Apple Focus #3: Superior comparative fundamentals

Apple Focus #4: Still underowned

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain to YE

16 Technology Stock Ideas Highly Correlated with Apple

Fundamental case for Apple: Still Catalysts: Mark Moskowitz

Outline

3


Cyclicals and Near-Cyclicals have been the leaders in the market over the past five months, outperforming as the macro

environment has improved. Since early October, when the S&P 500 troughed at 1099, global growth prospects improved: (i)

the US labor and housing markets have improved; (ii) the risk of a tail event in Europe has diminished; and (iii) China is moving

to easing.

Note outperformance of Cyclicals below with 530bp since October’s low and 330bp YTD.

The best performing Sectors within this have been Financials and Technology.

Rank Sector

Absolute

Perf

Relative

Perf

S&P 500 23.9% —

Cyclicals 29.2% 5.3%

1 Materials 32.2% 8.3%

2 Industrials 31.4% 7.5%

3 Technology 26.6% 2.7%

4 Discretionary 26.5% 2.6%

Near-Cyclicals 30.8% 6.9%

1 Financials 30.9% 7.0%

2 Energy 30.7% 6.8%

Defensives 10.5% -13.4%

1 HealthCare 16.7% -7.2%

2 Staples 11.8% -12.2%

3 Telecom 7.6% -16.4%

4 Utilities 5.9% -18.0%

Rank Sector

Absolute

Perf

Relative

Perf

S&P 500 8.3% —

Cyclicals 11.6% 3.3%

1 Technology 14.1% 5.8%

2 Materials 12.2% 3.9%

3 Industrials 10.1% 1.8%

4 Discretionary 9.7% 1.4%

Near-Cyclicals 10.4% 2.1%

1 Financials 13.4% 5.1%

2 Energy 7.5% -0.9%

Defensives 0.0% -8.3%

1 HealthCare 3.4% -4.9%

2 Staples 0.7% -7.7%

3 Telecom -0.7% -9.1%

4 Utilities -3.4% -11.8%

Relative Price Performance of S&P 500 Sectors % chg

Source: J.P. Morgan and FactSet

Technology and

Financials have

been the clear

leaders YTD.

Cyclicals and

Near-Cyclicals

have been the

clear leaders

since the October

low, as macro

conditions have

strengthened

over the past five

months.

Since October low

2012 YTD

4

Overview: Given upturn in global growth, Cyclicals are leading Macro scenario for Europe, China, and US housing favor Cyclicals outperformance

Investors still need to re-allocate into equities, particularly Cyclicals and Financials. Consider the scenarios listed below. In

each case, US equities are the consistently most attractive, and within US equities, there is a Cyclical bias. But this was not

the positioning of investors at the end of 2011--then, risk aversion was so high, being Defensive was the consensus call.

European outlook has been stabilizing recently, with recent developments on Greece showing a more coordinated and

effective effort in the region to resolve the sovereign debt crisis.

China’s monetary policy has shifted from containing inflation to selective easing in order to promote economic growth.

The US Housing market likely bottomed in mid-2011, as evidenced by sharp improvement in housing starts and

homebuilder sentiment.

What asset class to own? What sector to own?

European outlook stabilizes US Treasuries High-y ield Cyclicals

Gold US equities Near-Cyclicals (Energy/ Financials)

Corp bonds Euro equities Defensives

Other fixed inc EM equities

China eases US Treasuries High-y ield Cyclicals




US housing bottomed in mid-2011 US Treasuries High-y ield Cyclicals




Investors need to

be positioned in

Cyclicals and

Near-Cyclicals in

order to

outperform under

likely macro

scenarios.

US equities likely to outperform

under all three projected macro

scenarios.

Macro Scenario Suggests Outperformance for Cyclicals J.P. Morgan Strategy view on asset class and sectors to own under certain macro conditions

Source: J.P. Morgan

5


Data show Cyclicals are Underowned… Active Managers should buy Cyclicals on dips

Below we have summarized the sector weightings of Russell 1000 funds, with an “underweight” or “overweight” defined as

being 100bp difference compared to the comparable weighting in the Russell 1000. There are some notable conclusions.

50% of funds with data available are UW Cyclicals. Of these funds that are UW Cyclicals, 15% are missing their benchmark

by 250bp YTD, much worse than the 9% of overall Russell 1000 funds that are missing by 250bp YTD. Clearly, being UW

Cyclicals is not an effective strategy so far in 2012.

Those funds OW Cyclicals (which is only 35% of funds based on AUM), have outperformed their benchmark by 60bp YTD,

which is 110bp better than the average performance of those funds UW Cyclicals.

The key takeaway is that 50% of funds are UW Cyclicals, and it is these Funds that we believe should make the

rotation into Cyclicals, given the improving macro momentum.

Fund Sample Size YTD Perf % of Funds Beating & Missing

Category

Total

AUM of

Funds

% of

Total

Funds

AUM

Avg YTD

Relative

Total

Return

% Funds

missing

by 250bp

% Funds

beating by

250bp

Diffusion (%

beating

minus %

missing)

All Funds $417,548 100% 0.0% 9% 8% -1%

Funds OW Cyclicals $146,130 35% 0.6% 4% 14% 10%

Funds UW Cyclicals $207,344 50% -0.5% 15% 5% -10%

Funds OW Near-Cyclicals $67,896 16% 0.2% 9% 12% 3%

Funds UW Near-Cyclicals $194,559 47% -0.1% 11% 10% -1%

Funds OW Defensives $54,459 13% -0.9% 27% 2% -25%

Funds UW Defensives $210,785 50% 0.5% 4% 13% 9%

50% of funds are UW Cyclicals.

Funds that are OW

Cyclicals are

outperforming by 110bp

relative to funds that are

UW Cyclicals.

50% of Russell 1000 Funds Are Underweight Cyclicals Shaded rows indicate a Cyclical Tilt Strategy; OW (UW) defined as fund having weighting of sector that is 100bp greater (less) than weighting in Russell 1000

Source: J.P. Morgan and Bloomberg. Based on funds which reported holdings as of Nov, Dec, or Jan.

6


As for Sector weightings: 61% of Large-Cap Funds are UW Technology

We also zoomed in more closely on the four Cyclical sectors to determine what is driving the UW positions by active managers.

Technology has the least amount of funds OW the sector of all of the Cyclicals, with only 16% of funds OW Technology.

The differential in performance between OW Technology and UW Technology is the greatest, with funds OW Technology

outperforming funds UW Technology by 70bp YTD.

61% of fund managers are UW Technology, a strikingly high level given the strong performance of YTD.

Fund Sample Size YTD Perf % of Funds Beating & Missing

Category

Total

AUM of

Funds

% of

Total

Funds

AUM

Avg YTD

Relative

Total

Return

% Funds

missing

by 250bp

% Funds

beating by

250bp

Diffusion (%

beating

minus %

missing)

All Funds $417,548 100% 0.0% 9% 8% -1%

Funds OW Industrials $220,100 53% 0.2% 9% 13% 4%

Funds UW Industrials $64,016 15% 0.1% 14% 8% -5%

Funds OW Discretionary $163,445 39% 0.1% 8% 10% 2%

Funds UW Discretionary $71,401 17% 0.2% 13% 13% 0%

Funds OW Materials $126,286 30% 0.3% 13% 17% 4%

Funds UW Materials $66,340 16% 0.0% 11% 8% -2%

Funds OW Technology $64,839 16% 0.5% 5% 8% 3%

Funds UW Technology $253,054 61% -0.2% 13% 10% -3%

3) 61% of funds are UW Technology, an

extremely high level given the

outperformance of Technology YTD.

2) The differential in performance

between OW and UW Tech is

greatest for Technology at 70bp. 1) Of all Cyclicals, fund

managers are least OW

Technology at only 16% of

funds.

61% of Funds are Underweight Technology Shaded rows indicate a Cyclical Tilt Strategy; OW (UW) defined as fund having weighting of sector that is 100bp greater (less) than weighting in Russell 1000

Source: J.P. Morgan and Bloomberg. Based on funds

which reported holdings as of Nov, Dec, or Jan.

7









Outline

8


In understanding the mechanics of continuing Cyclical outperformance, we looked at the key players that will likely be driving

the rally further. We ranked the top 10 Cyclical stocks in terms of weighting in the S&P 500. AAPL, with 3.7%, is the largest

single stock by weighting, and its influence on the markets has been generating significant buzz.

To put the sheer magnitude of AAPL’s weighting in the S&P 500 in perspective, we have compared AAPL’s weighting

against the 65 GICs Level 3 Industries and the 10 Sectors. When ranked as an Industry, AAPL is the 6th largest “Industry”

by weighting.

As a “Sector”, AAPL is larger than Materials, Utilities, and Telecom.

Rank Cyclical Stocks Weighting

1 Apple Inc. 3.7%

2 Microsoft Corp. 2.1%

3 International Business Machines Corp.1.8%

4 General Electric Co. 1.6%

5 Google Inc. Cl A 1.3%

6 Oracle Corp. 1.2%

7 Intel Corp. 1.1%

8 Cisco Systems Inc. 0.9%

9 QUALCOMM Inc. 0.8%

10 McDonald's Corp. 0.8%

Top 10 Cycl Stocks 15.3%

All Cyclical Stocks 45.2%

Rank Industry Weighting

1 Oil Gas & Consumable Fuels 9.8%

2 Pharmaceuticals 5.7%

3 Computers & Peripherals 5.2%

4 Software 4.2%

5 IT Serv ices 3.8%

6 Apple Inc. 3.7%

7 Insurance 3.4%

8 Food & Staples Retailing 3.1%

9 Diversified Financial Serv ices 3.0%

10 Media 2.8%

Top 10 44.9%

Rank Weighting

1 Technology 20.2%

2 Financials 14.2%

3 Energy 11.9%

4 Staples 11.5%

5 Health Care 11.2%

6 Discretionary 10.8%

7 Inustrials 10.6%

8 Apple Inc. 3.7%

9 Materials 3.6%

10 Utilities 3.4%

11 Telecom 2.6%

Weighting of AAPL in S&P 500 vs. Cyclical stocks, Sectors, and Industries % of S&P 500 market cap

If AAPL were…


…a Cyclical Stock

…an Industry

…a Sector

AAPL is

basically an

industry by

itself.

AAPL is basically

a sector by itself,

and is larger than

3 of the 10

Sectors.

AAPL is the

largest single

stock in the S&P

500.

9


…AAPL has been a top contributor to the S&P 500 point gain since Oct low and YTD,

even when compared to overall sectors and industries

At the stock level, AAPL has been the #1 driver (out of 500 stocks) of the S&P 500's rally both since the October low and

YTD, contributing 14 points to the rally since October (37% rise for AAPL) and 11 points to the YTD rally (27% rise for

AAPL). This large contribution is widely known at this point, however…

…AAPL’s contribution to the rally is also significant even when compared to aggregated industries. Out of the 65 GICS

Level 3 industries, AAPL would be the 2nd-ranked industry since October and 1st-ranked industry YTD based on point

contribution to the S&P 500's rally. Think about that, AAPL has contributed more to the S&P 500 rally YTD than any

of the 65 industries.

…If we view AAPL as its own sector, it is still a meaningful contributor. AAPL has contributed more points to S&P 500 rally

since October than three sectors (Materials, Utilities, and Telecom). YTD, AAPL’s contribution is even greater, with AAPL’s

point-gain contribution ranking higher than six sectors (Energy, Materials, HealthCare, Staples, Telecom, and Utilities).

Change since October low

Price at

October

low

Price

Now Delta % chg

Contribution to

S&P 500

Point Delta

Rank out

of 500

Stocks

Rank out

of 66

Industries

Rank out

of 11

Sectors

Apple Inc. $375 $515 $140 37% 14 1 2 8

S&P 500 1,099 1,362 263 24% 263

Rank of Contribution to S&P

500 Point DeltaYTD Change

Price at

Start of

2012

Price

Now Delta % chg

Contribution to

S&P 500

Point Delta

Rank out

of 500

Stocks

Rank out

of 66

Industries

Rank out

of 11

Sectors

Apple Inc. $405 $515 $110 27% 11 1 1 5

S&P 500 1,258 1,362 105 8% 105

Rank of Contribution to S&P

500 Point Delta

AAPL has contributed more points

to the S&P 500’s rally YTD than

any other industry.

Contribution to S&P 500 point gain S&P 500 points

Source: J.P. Morgan and FactSet. Note: Ranking excludes AAPL from the Computer & Peripherals industry and from the Technology sector in order to avoid double-counting the impact of AAPL.

2012 YTD Since October low

10









Outline

11


AAPL and other outliers have meaningful effect on 4Q11

As we discussed two weeks ago, there has been frequent discussion about the outsized role Apple’s (AAPL-OW) results have

had on S&P 500 earnings overall.

AAPL’s earnings growth in 4Q11 of 121% contributed 3.5% of the 8.0% YoY earnings for the S&P 500. In other words, 44%

of the S&P 500's earnings growth in 4Q11 came from AAPL.

Apple is not the only stock having a disproportionate impact on the S&P 500 results, however. In 4Q11, the Top 10 stocks

accounted for 7.3% of the S&P 500’s 8.0% EPS growth (or $1.65 of the $1.80 YoY increase in 4Q11 EPS), or 92% of

earnings growth.

Contribution to S&P 500 EPS Revenue

Rank Ticker Name 4Q10 4Q11 Delta % chg

Contr to S&P

500 EPS

Growth

Contr to

S&P 500

Rev Growth

1 AAPL Apple Inc. $0.65 $1.45 $0.79 121% 3.5% 0.9%

2 AIG American International Group Inc.-$0.24 $0.12 $0.36 — 1.6% -0.4%

3 BAC Bank of America Corp. $0.08 $0.18 $0.09 113% 0.4% 0.1%

4 COP ConocoPhillips $0.21 $0.30 $0.08 40% 0.4% 0.4%

5 WFC Wells Fargo & Co. $0.35 $0.43 $0.08 22% 0.3% 0.0%

6 CAT Caterpillar Inc. $0.11 $0.17 $0.07 62% 0.3% 0.2%

7 ALL Allstate Corp. $0.03 $0.08 $0.05 181% 0.2% 0.0%

8 OXY Occidental Petroleum Corp. $0.14 $0.18 $0.04 29% 0.2% 0.0%

9 IBM International Business Machines Corp.$0.57 $0.62 $0.05 8% 0.2% 0.0%

10 SLB Schlumberger Ltd. $0.13 $0.17 $0.04 30% 0.2% 0.1%

Sub-Total $2.03 $3.69 $1.65 81% 7.3% 1.3%

S&P 500 $22.55 $24.35 $1.80 8% 8.0% 7.8%

AAPL contributed 3.5% of the S&P

500’s 8.0% YoY earnings growth in

4Q11, or 44% of the index’s total

earnings growth.

Top 10 Positive Contributors to YoY Delta in 4Q11 EPS Revenue and Net Income $ in mm


12


Contribution of outliers to earnings growth in 2011 is not extraordinary in a historical

context

To put the contribution to earnings growth of “outliers” in 2011 in perspective, we looked at the historical contribution to

earnings growth from the top 10 stocks relative to overall S&P 500 earnings growth.

The top 10 outliers have contributed 16% to earnings growth on average over the past 20 years.

Given that overall S&P 500 earnings growth has been only 7-10% on average over the past 20 years, the implication is that

earnings growth overall would actually be flat or negative without the boost provided by the top 10 stocks. This subset of

490 stocks from the S&P 500 has actually seen NEGATIVE 3.3% earnings growth on average over the past 20 years.

9.7%

5.6%

13.0

%

13.8

%

17.0

%

6.1%

7.4%

5.4%

11.8

%

10.8

%

10.1

%

6.9%

41.1

%

46.2

%

10.0

%

8.3%

6.7%

4.3% 8.

9%

75.7

%

17.4

%

6.5%

LT Avg16.0%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Top 10 Stocks LT Avg

Top 10 stocks have historically contributed

16% of S&P 500 earnings growth…

…but in 2011, top 10 stocks contributed

6.5% to S&P 500 earnings growth, implying

that outliers were less of a driver.

Contribution to S&P 500 Earnings Growth from Top 10 Stocks %; Top 10 stocks based on contribution to YoY delta in S&P 500 net income


-13.

8%

-27.

1%

2.9%

-1.9

%

22.9

%

5.8% 9.0%

1.9%

-6.2

%

14.6

%

4.2%

-62.

8%

-17.

9%

22.5

%

13.9

%

13.8

%

8.4%

-14.

9%

-69.

1%

-3.7

%

29.2

%

7.5%

LT Avg-3.3%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

S&P 500 excl Top 10 LT Avg

S&P 500 earnings growth is

negative on avg without the

boost from the top 10 stocks…

…but in 2011,

EPS was still

positive at 7.5%

even without the

top 10 stocks..

S&P 500 Earnings Growth Excluding Top 10 Stocks Since 1990; Top 10 and Bottom 10 stocks based on contribution to YoY delta in S&P 500 net income


13









Outline

14


There is a strong fundamental case supporting AAPL, with sales growth, EPS growth, ROE, and P/E all currently attractive for

AAPL. The stock also ranks extremely well on these metrics compared to all S&P 500 stocks, industries, and sectors.

AAPL has the 6th strongest 2012 Sales Growth (out of 500 stocks) with 45% growth. Ranked as both an “Industry" and as

a “Sector”, AAPL's 2012 Sales Growth outpaces all 65 GICS Level 3 Industries and all 10 Sectors.

At 56%, AAPL’s 2012 EPS Growth outpaces 471 other stocks in the S&P 500, and when measured against the 65

Industries, it is ranked 5th strongest. On a Sector level, AAPL has the second strongest 2012 EPS Growth, behind Telecom.

In terms of ROE, AAPL is ranked 28th among the 500 constituents of the S&P 500, and 3rd among the 65 Industries.

Ranked among Sectors, AAPL has the strongest ROE.

APPL’s 2012 P/E of 12.0x makes it the 130th cheapest stock in the S&P 500, roughly within the top quartile of cheapest

stocks. Compared to the 65 GICS Level 3 Industries, it is the 16th cheapest, which would again put it in the top quartile.

On the Sector level, AAPL is more expensive than only 2 Sectors: Financials (10.8x) and Energy (11.3x).

The main takeaway is that AAPL has a strong fundamental case supporting it from several perspectives, which is likely to

help support a continued rally in the stock and thus a continued rally for Cyclicals.

If AAPL was a…

Stock Industry Sector

Current

Value

Rank

among 500

(Quartile)

Rank

among 66

Rank

among 11

2012 Sales Growth 45% 6, (1) 1 1

2012 EPS Growth 56% 29, (1) 5 2

ROE 42% 28, (1) 3 1

P/E (2012) (rank 1 = cheapest) 12.0x 130, (2) 16 3

AAPL is top ranked relative to the

10 sectors on sales growth, EPS

growth, ROE, and P/E.

Sales growth at 45%,

EPS growth at 56%,

ROE at 42%, and P/E at

12.0x are all extremely

attractive for AAPL

currently.

The Attractiveness of AAPL across 4 Metrics


15









Outline

16


We compiled a similar analysis to the earlier analysis looking at large-cap mutual fund sector weightings, but instead zoomed in

further on the weighting of AAPL within large-cap mutual funds.

40% of large-cap funds do not have AAPL as a top position. Surprisingly, 40% of large-cap funds do not have AAPL as

one of their top 10 positions, despite the stock being the largest stock in the Russell 1000. These 112 funds without a large

position in AAPL are also underperforming their benchmark by 60bp YTD. On the other hand, the 60% of funds that do

have AAPL as a top 10 holding are underperforming their benchmark by a much smaller margin of only 10bp. Thus, funds

that have a large position in AAPL have outperformed those funds without a large position in AAPL by 50bp YTD.

For the funds that have a significant OW position in AAPL (at least 75bp greater weighting within the fund than AAPL's

weighting within the Russell 1000), these funds are actually outperforming by 30bp on average YTD. Thus, being OW

AAPL has been a driver of outperformance for mutual funds YTD.

The key takeaway from this analysis is that funds that hold a position in AAPL have seen better performance YTD, and

funds that hold a significant position in AAPL have seen even better performance. Given that we expect further

outperformance for Cyclicals such as AAPL over the next several months, this trend of outperformance for funds holding

AAPL is likely to continue.

Fund Sample Size YTD Perf % Funds Beating & Missing

Category

# of

Funds

% of All

Funds

Total

AUM of

Funds

% of Total

AUM

Median YTD

Total Return

Median YTD

Relative

Total Return

% Funds

missing

by 250bp

% Funds

beating by

250bp

All Funds 282 100% $498,085 100% 7.9% -0.2% 8% 8%

Funds OW AAPL by at least 75bp 78 28% $132,755 27% 8.5% 0.3% 9% 9%

Fund OW AAPL by 25bp-75bp 45 16% $102,508 21% 7.6% -0.6% 0% 2%

Funds OW AAPL by 0bp-25bp 15 5% $17,863 4% 7.8% -0.4% 0% 7%

Funds OW AAPL 138 49% $253,126 51% 8.0% -0.2% 5% 7%

AAPL in Top 10 Holdings 170 60% $393,832 79% 8.1% -0.1% 4% 6%

AAPL not in Top 10 Holdings 112 40% $104,253 21% 7.6% -0.6% 14% 10%

Mutual funds that are OW

AAPL (vs. weighting in

Russell 1000) are

outperforming their

benchmark so far YTD.

40% of funds do not have AAPL as a top

10 position, despite AAPL being the

largest stock in the Russell 1000.

Having a large position in AAPL has led to 50bp of

relative performance YTD (-10bp minus -60bp).

AAPL contribution to Russell 1000 Mutual Funds AUM in $mm

Source: J.P. Morgan and Bloomberg. Note: Data above on weighting of AAPL focuses on funds that had AAPL in the top 10 holdings within the fund, as these funds disclosed this data more easily.

17


Institutional Ownership of AAPL low, leaving room for increased ownership

Currently, only 72% of AAPL’s shares are held by institutional investors.

This is 415bp below the 77% institutional ownership of the S&P 500, meaning Institutional Investors are more UW

AAPL than they are the S&P 500 in general. To compound the UW AAPL effect here, Institutional Ownership of AAPL is

actually 500bp below that of the Technology sector, suggesting room for institutional investors to increase their position in

AAPL over the coming months.

694bp527bp 440bp

113bp 59bp 47bp

-385bp -415bp -465bp

-1019bp

-1782bp

Dis

cret

iona

ry

Hea

lthC

are

Mat

eria

ls

Fin

anci

als

Indu

stria

ls

Tec

hnol

ogy

Sta

ples

AA

PL

Ene

rgy

Util

ities

Tel

ecom

83% 82% 81%

78% 77% 77% 77%

73% 72% 72%

66%

59%

Dis

cret

iona

ry

Hea

lthC

are

Mat

eria

ls

Fin

anci

als

Indu

stria

ls

Tec

h

S&

P 5

00

Sta

ples

AA

PL

Ene

rgy

Util

ities

Tel

ecom

AAPL is UW by

500bp relative to

the Technology

sector.

As a ―Sector‖: % of Market Cap Held by Institutional Investors Relative to the S&P 500 % of company market cap, relative to S&P 500 % institutional ownership


AAPL is under-owned by

institutional investors

compared to the S&P 500.

Relative % Institutional Ownership Absolute % Institutional Ownership

18






Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500 upside, or half of points gain

to YE



Outline

19

Apple Focus #5: Reaching "fair value" implies 30pts of S&P 500

upside, or half of the points gain into YE

Apple is potentially one of the larger drivers of points gains into YE (to reach 1430, or 70 points from here). The other being

Financials.

For starters, every $100 increase in AAPL’s price adds 10 points to the S&P 500.

On a valuation basis, if AAPL’s relative P/E shifts to 164% of the S&P 500 P/E (which is the historical avg relative P/E for

AAPL since 2005), this would represent 74% upside for AAPL, and add 38 points to the S&P 500, or a 2.8% rise for the

overall index.

Using analyst target prices as another scenario, if AAPL were to rise to the price target of $625 from Mark Moskowitz, J.P.

Morgan’s IT Hardware analyst, this would represent 21% upside for AAPL, which would add 11 points to the S&P 500, or

0.8% upside for the overall index.

Driver Calculation AAPL Price S&P 500 Price

Methodology Description Value Description Current

Implied

Value Delta Current

Implied

Value Delta

%

Chg Current

Implied

Value Delta

%

Chg

Price

1 Each $100 change in AAPL $100 Delta in AAPL price $100 AAPL trades $10 higher than the current price $513 $523 $100 $513 $613 $100 19% 1,358 1,368 10 1%

Valuation

2 Trade to Historical Relative P/E of

164%

Historical AAPL P/E relativ e

to SPX P/E (since 2005)

164% AAPL's P/E rises to 20.9x to reach 164% Rel P/E to the

S&P's P/E of 12.7x

94% 164% 6951bp $513 $893 $380 74% 1,358 1,396 38 3%

3 Trades to Historical Relative PEG of

39%

Historical AAPL PEG relativ e

to SPX PEG (since 2005)

39% 24% 39% 1476bp $513 $829 $316 62% 1,358 1,389 32 2%

24%=

0.4/1.65

39% *

0.4=0.6

Analyst Target

4 Moskowitz's Price Target Target Price Set by JPM

Analy st

$625 AAPL's Price rises to Moskow tiz's $625 price target $513 $625 $112 $513 $625 $112 22% 1,358 1,369 11 1%

AAPL's PEG ratio rises to 0.6 from 0.4 to reach the

Historical Av erage Relativ e PEG ratio of 39% (S&P 500

currently has a 1.65 PEG ratio)Moving to historical average adds 32-39

points to the S&P 500, or half of the

projected gains of the S&P 500 into YE.

Theoretical Impact on AAPL and S&P 500 under different scenarios Market Cap in $mm; Drivers are shaded


A $100 increase in AAPL

price adds 10 points to the

S&P 500

20



AAPL is currently undervalued on both absolute and relative P/E

AAPL at its current valuation is undervalued on both an absolute P/E (12.0x vs. 12.7x S&P 500) and a relative P/E (94% vs.

historical average of 164%). We plotted the NTM P/E of both the S&P 500 and AAPL below and looked at the discount or

premium of AAPL relative to the market:

While AAPL has historically traded at a premium to the S&P 500, this relationship has become dislocated recently with

AAPL now trading at similar multiples despite its strong growth rate.

On a relative P/E basis, at 94%, AAPL is now trading at a 7000bp discount to its historical long term average of 164%.

2/24/1212.7x

2/24/1212.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

45.0x

50.0x

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

SPX NTM P/E AAPL NTM P/E

AAPL used to trade

at a big premium…

…but now trading at

similar multiples

despite its still

strong growth rate.

Absolute NTM P/E for S&P 500 and AAPL NTM, since 2005

Source: J.P. Morgan, FactSet, Bloomberg

2/24/1294%

Long Term Avg164%

0%

50%

100%

150%

200%

250%

300%

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

Rel AAPL NTM P/E Long Term Avg

7000bps

cheaper

than

historical

avg

Relative NTM P/E for AAPL NTM, since 2005


21



And similarly, PEG ratios also indicate that AAPL is trading at a discount

To further advance the point that AAPL is currently undervalued, consider its absolute PEG and relative PEG ratios:

Historically, AAPL’s PEG ratio has been at similar multiples or at a premium to the S&P 500. However, at current

valuations, AAPL is undervalued relative to the S&P 500 on a PEG ratio basis.

When we consider AAPL’s relative PEG ratio, (PEG of AAPL relative to PEG of S&P 500), AAPL is currently trading

1500bps below its historical average.

Any move from this point to return to “fair value” can potentially lead to 30 points of upside for the S&P500, which is half the

points needed to drive us closer towards out 1430 YE Target.

2/24/121.65

2/24/120.40

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

SPX PEG AAPL PEG

AAPL is

undervalued on

PEG ratio

Absolute NTM PEG Ratio for S&P 500 and AAPL NTM, since 2005


2/24/1224%

Long Term Average

39%

(150%)

(100%)

(50%)

0%

50%

100%

150%

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12

Rel PEG Long Term Average

AAPL is

undervalued

on a Rel PEG

basis by

1500bps

Relative PEG for AAPL NTM, since 2005


22









Outline

23


We compiled a list of 16 stocks, based on names highly correlated to Apple. We thought about compiling a list of companies in

the Apple value chain, made up of component suppliers and beneficiaries of the end markets, but this ended up identifying a lot

of foreign corporations. Instead, we asked our derivatives team to identify stocks highly correlated to Apple and we further

narrowed this using the following criteria:

(i) Stocks in the Technology sector; (ii) 1-year historical correlation to Apple stock > 55%; (iii) 2012 P/E ratio <15.0x;

(iv) Rated Overweight or Neutral by J.P. Morgan; and (v) Market Value >$1bn.

These 16 stocks have an average 60% 1yr historical correlation to Apple stock, an implied upside to J.P. Morgan analysts’

target prices of 8%, and a 2012 average P/E of 11.7x.

J.P. Morgan Derivatives & Delta One Strategy has also created a basket for investors who would like to leverage this

theme. The basket can be found on Bloomberg under ticker JPUSAAPL Index.

JPM Coverage ValuationAAPL Correlation

Name Sub-Industry Ticker

Current

Price

Market

Cap

JPM

Rtg JPM Analyst

Target

Price

Implied

Upside 2012 P/E 1yr 5yr

1 NCR Corp. Computer Hardware NCR $21.58 $3,401 OW Paul Coster, CFA $27.00 25% 9.0x 67% 49%

2 Vishay Intertechnology Inc. Electronic Components VSH $12.57 $1,807 OW Steven J. O'Brien $15.50 23% 12.8x 59% 54%

3 Dell Inc. Computer Hardware DELL $17.15 $30,810 OW Mark Moskowitz $21.00 22% 8.2x 62% 54%

4 CA Inc. Systems Software CA $26.93 $13,078 OW John DiFucci $32.00 19% 10.8x 55% 48%

5 Itron Inc. Electronic Equipment & Instruments ITRI $46.52 $1,853 OW Paul Coster, CFA $52.50 13% 12.1x 58% 43%

6 Google Inc. Cl A Internet Software & Serv ices GOOG $607.94 $156,825 OW Doug Anmuth $686.00 13% 14.3x 64% 65%

7 ON Semiconductor Corp. Semiconductors ONNN $9.04 $4,066 OW Christopher Danely $10.00 11% 14.1x 65% 55%

8 Applied Materials Inc. Semiconductor Equipment AMAT $12.90 $16,696 N Christopher Blansett $14.00 9% 13.5x 57% 51%

9 International Business Machines Corp.IT Consulting & Other Serv ices IBM $193.87 $224,889 OW Mark Moskowitz $210.00 8% 13.0x 61% 57%

10 LSI Corp. Semiconductors LSI $8.33 $4,694 N Harlan Sur $9.00 8% 14.4x 62% 42%

11 Amdocs Ltd. IT Consulting & Other Serv ices DOX $30.77 $5,266 N Sterling Auty, CFA $33.00 7% 11.7x 68% 37%

12 Wright Express Corp. Data Processing & Outsourced Serv icesWXS $61.32 $2,377 N Tien-tsin Huang, CFA $61.00 -1% 14.4x 59% 33%

13 Western Digital Corp. Computer Storage & Peripherals WDC $39.56 $9,294 N Mark Moskowitz $39.00 -1% 6.9x 58% 52%

14 Jabil Circuit Inc. Electronic Manufacturing Serv ices JBL $25.69 $5,383 OW Steven J. O'Brien $25.00 -3% 10.0x 56% 50%

15 Intel Corp. Semiconductors INTC $26.73 $136,109 N Christopher Danely $25.00 -6% 11.1x 60% 53%

16 Advanced Micro Devices Inc. Semiconductors AMD $7.14 $4,976 N Christopher Danely $6.00 -16% 11.0x 57% 46%

Average 8% 11.7x 60% 49%

Source: J.P. Morgan estimates and FactSet.

16 Technology Stocks Highly Correlated with AAPL Priced as of 02/22/2012

24









Outline

25

Fundamental case for Apple: Still Catalysts

In Its Own Orbit: Low Penetration Rates and Social Networking Enablement to Sustain

High-Growth

With Apple (AAPL, $516.39), we reiterate our Overweight rating and Dec-12 price target of $625. The stock remains on the J.P.

Morgan Analyst Focus List. Although the stock is trading north of $500, we think that there is substantial appreciation potential

from current levels. In our view, the best part of Apple’s risk-reward profile is that plenty more upside potential exists, likely

elevating Apple's revenue and earnings growth to a completely new orbit. In other words, Apple is in a league of its own.

Apple continues to disrupt the tech playing field. With its optimized smartphone, tablet, and notebook PC form factors,

complemented by its iTunes/App Store ecosystem, the company single-handily has disrupted the technology playing field.

The supply chain has been impacted, and there also has been a splintering of the Wintel and Android-based camps. As a

result, we expect many industry participants to be left scrambling to restore relevance in the next few years.

Low penetration rates to sustain high-growth stature. Apple’s penetration rates in its end markets and customer

verticals have plenty of upside, in our view. For example, in smartphones, Apple’s global market share is 19%, versus 30%

in the U.S. In PCs, Apple’s global market share is 5%, versus 11% in the U.S. As Apple begins to drive another halo-effect

with the iPhone and iPad in China and later in Latin America, we believe Apple device sales stand to exhibit a series of

growth spurts. Plus, there is still the relatively untapped opportunity of the enterprise.

Social media/networking enablement is a long-term tailwind. We believe that Apple’s portfolio of feature rich devices

should be a lead beneficiary of the social media/networking adoption curve. In our view, Apple's devices enable users to

easily access and participate in social media/networking experiences. While other device vendors stand to benefit as well,

we believe that Apple's devices should lead the charge, given ease-of-use, reliability, and Apple’s common user interface.

Dividend could create a scarcity issue. We believe that the initiation of a dividend program could create a scarcity issue

with respect to Apple shares. Reason being, Apple is under-owned institutionally. Apple is the largest stock in the Russell

1000, but 40% of mutual funds indexed to the Russell 1000 do not have Apple as a top 10 holding. Plus, in the event of a

dividend initiation, many income-based funds would be forced to scramble to build positions, likely creating a scarcity issue.

26


Investment Thesis

With Apple, we reiterate our Overweight rating and Dec-12 price target of $625. The stock remains on the J.P. Morgan Analyst

Focus List. Although the stock is trading north of $500, we think that there is substantial appreciation potential from current

levels. In our view, the best part of Apple’s risk-reward profile is that plenty more upside potential exists, likely elevating Apple's

revenue and earnings growth to a completely new orbit. In other words, Apple is in a league of its own.

Key growth drivers include 1) Apple’s low market penetration rates in tablets, PCs, China, and the enterprise, 2) the relative

growth prospects of its key end markets versus other tech segments, and 3) Apple’s role in enabling the social

media/networking adoption curve. In total, we believe that these drivers can sustain the relative outperformance of Apple's

operating model and stock, as illustrated in the below figure.

Apple Stock Price Performance versus Large Cap Tech and Broader Market Indices January 3, 2007 to February 22, 2012

0

100

200

300

400

500

600

700

Jan-07 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 May-11 Feb-12

Apple Large Cap NASDAQ S&P 500

Note: Large Cap index includes: AAPL, EMC, DELL, HPQ, IBM, LXK, NTAP, and XRX.

Source: Bloomberg.

27


Apple continues to disrupt the technology playing field

In our view, Apple has become the leader of the mobility age from a device and content perspective. With its optimized

smartphone, tablet, and notebook PC form factors, complemented by its iTunes/App Store ecosystem, the company single-

handily has disrupted the technology playing field. The supply chain has been impacted, and there also has been a splintering

of the Wintel and Android-based camps. As a result, we expect many industry participants to be left scrambling to restore

relevance in the next few years.

It is no secret that a tenacious focus on both innovation and design has helped Apple cement its leadership in offering user-

friendly, content-driven device experiences. A critical driver to Apple’s success has been the company's focus on owning the

hardware and software platforms. Plus, the company steadily has become tightly integrated with the supply chain, due to 1) its

above-market growth attributes and 2) strategic investments in the capital equipment footprints of key suppliers. All of these

factors have combined to propel Apple’s growth trajectory relative to its end markets. As the below table illustrates (Table 1),

the company has delivered above-peer growth in smartphones, tablets, and Mac.

Table 1: Apple Segment Unit Growth Rates vs. Broader Tech Segments Annual percentage growth based on calendar year units

Source: Company reports and J.P. Morgan estimates.

2007 2008 2009 2010 2011 2012E 2013E

iPhone -- 269.2% 83.6% 89.2% 96.1% 38.3% 17.6% Smartphone mkt growth % 53.6% 26.1% 11.5% 73.4% 53.5% 43.2% 32.2% iPad 173.8% 44.8% 27.1% Tablet market growth % 228.1% 55.2% 33.5% Mac 37.3% 27.8% 13.2% 28.5% 23.3% 16.3% 16.0% PC market growth % 14.3% 10.7% 5.5% 13.8% 0.5% -1.4% NA

28



Plus, as the two tables below illustrate, Apple’s overall revenue and earnings growth trajectories and how they have outpaced

the large cap technology peers by a wide margin. We expect these trend-lines to continue in Apple’s favor.

Table 2: Revenue Growth YoY - Apple versus Technology Peer Group Annual revenue growth percentage

Table 3: Non-GAAP EPS Growth YoY - Apple versus Technology Peer Group Annual non-GAAP EPS growth percentage

Source: Company reports, J.P. Morgan estimates and Bloomberg.

2007 2008 2009 2010 2011 2012E 2013E CAGR

Apple 35% 40% 20% 63% 68% 27% 15% 37% Amazon 39% 29% 28% 40% 41% 29% 27% 33% Cisco 18% 5% -10% 19% 6% 7% 7% 7% Dell 6% 0% -13% 16% 1% 1% 4% 2% EMC 19% 12% -6% 21% 18% 10% 9% 12% Google 9% 24% 29% 18% 17% 19% HP 13% 0% -10% 9% -2% -2% 2% 1% IBM 8% 5% -8% 4% 7% 1% 4% 3% Microsoft 26% 7% -5% 14% 8% 7% 8% 9% Oracle 24% 17% -2% 39% 14% 4% 8% 14% RIM 90% 88% 51% 29% 8% -12% -1% 31% Samsung 14% -9% 22% 18% 3% 18% 7% 10%

Peer Group Avg. (Ex. Apple) -1% 16% 7% 7% 8% 7%

2007 2008 2009 2010 2011 2012E 2013E CAGR

Apple 67% 62% 37% 75% 96% 27% 11% 51% Amazon 134% 30% 47% 20% -20% -4% 44% 29% Cisco 23% 2% -13% 19% 6% 15% 15% 9% Dell 15% 10% -28% 52% 34% 1% 10% 11% EMC 32% 3% -17% 51% 21% 16% 17% 16% Google 19% 28% 22% 15% 18% 20% HP 34% 10% 4% 22% -9% -7% 5% 8% IBM 18% 25% 13% 16% 15% 11% 11% 15% Microsoft 50% 1% -4% 31% 17% 2% 15% 15% Oracle 32% 22% 7% 27% 21% 3% 12% 17% RIM 88% 73% 24% 45% -11% -45% 5% 17% Samsung -7% -48% 69% 89% -12% 35% 11% 11%

Peer Group Avg. (Ex. Apple) 35% 56% -1% 21% 13% 23%

29



Below, we also present the trend-line of Apple’s margin expansion during the company's major revenue growth phase. The key

message is that with Apple, revenue growth does not come at the expense of profit growth, and we do not expect this approach

to change.

Source: Company reports, J.P. Morgan estimates and Bloomberg.

Table 4: Apple Operating Metrics – The Trends Tell the Story of Profitable Growth %, based on calendar year

2007 2008 2009 2010 2011 2012E 2013E

Revenue growth % 34.8% 39.6% 19.9% 63.3% 67.6% 27.2% 14.8% Gross margin % 33.5% 36.7% 40.9% 38.8% 42.4% 43.1% 42.5% Operating margin % 18.9% 23.7% 28.6% 28.2% 33.9% 34.4% 33.8% EPS growth % 66.6% 61.9% 37.3% 74.8% 96.0% 26.6% 11.4%

30

Fundamental case for Apple: Still Catalysts Low penetration rates to sustain high-growth stature

We believe that Apple can continue to outgrow its technology peers beyond the near term. The company’s penetration rates in

its end markets and customer verticals have plenty of upside, in our view. For example, in smartphones, Apple’s global market

share is 19%, versus 30% in the U.S (Table 5). In PCs, Apple’s global market share is 5%, versus 11% in the U.S. As Apple

begins to drive another halo-effect with the iPhone and iPad in China and later in Latin America, we believe Apple device sales

stand to exhibit a series of growth spurts.

In China and other parts of Asia, it is important to note that the company is just getting started. China alone represents 20% of

global tech spending. There is also India, and after that, we expect Latin America to be a focal point in coming years due to the

economic expansion of that region, as affirmed by the future Olympics and World Cup selections. Plus, there is still the

relatively untapped opportunity of the enterprise for all geographies. Recently, General Electric and Halliburton announced

ongoing initiatives or plans to use more Apple devices, which we think could set the stage for greater sales of Macs in addition

to iPhones and iPads.

In smartphones, Apple has enjoyed a meaningful rise in global market share based on units. While we do not have explicit

market share for revenue, we estimate that the $200-plus premium in subsidy rates attached to the iPhone versus competitive

smartphones has enabled Apple to possess revenue share more than 2 times that of its unit market share.

Table 5: Apple Worldwide Smartphone Market Share Percentage based on total units

Source: Gartner.

Table 6: Apple PC Market Share Summary Percentage based on total units

Source: Gartner.

2008 2009 2010 2011

Global smartphone market share 8.2% 14.4% 15.6% 18.9% U.S. smartphone market share 19.0% 24.4% 22.9% 30.1% Asia-Pacific smartphone market share 2.8% 7.6% 12.9% 14.6%

2007 2008 2009 2010 2011

Global PC market share 2.9% 3.4% 3.6% 4.1% 5.0% U.S. PC market share 6.8% 8.4% 8.2% 9.1% 11.2% Asia-Pacific PC market share 0.8% 0.9% 1.0% 1.6% 2.5%

31

Fundamental case for Apple: Still Catalysts Valuation

Our price target is derived from a weighted blend of EV/EBITDA and P/E scenarios utilizing historical peak/trough multiples. With

Apple, we think it is time for the “value stock” valuation multiples to be re-rated higher. Our revenue and EPS growth estimates

position Apple as the lone star in large cap tech. Currently, Apple trades at 11.6x our C2012 EPS estimate, versus the peer group

average of 12.1x. In our view, Apple is trading like a distressed value stock and not as the high-growth story in large cap tech. We

expect Apple to continue outperforming on both top- and bottom-line growth metrics relative to the peers as the company’s rapid

growth phenomena of the iPhone and iPad intensify. Plus, do not forget about the Mac business, we think that the company’s

incremental market penetration opportunities can help the Mac become a major contributor to overall company growth in the

coming years.

Worst Case Base Case Best Case

Sales $147,017 $162,579 $171,946 Y/Y growth % 15.0% 27.2% 34.5% Operating profit $42,635 $55,941 $65,340 % of sales 29.0% 34.4% 38.0% Interest/other inc. (exp.) 500 500 500 Pre-tax income $43,135 $56,441 $65,840 Income taxes $10,875 $14,229 $16,599 Tax rate 25.2% 25.2% 25.2%

EPS $33.97 $44.45 $51.86

Y/Y growth % -3.2% 26.6% 47.7% Diluted shares 950 950 950 D&A $3,250 $3,250 $3,250 EBITDA $45,885 $59,191 $68,590 % of sales 31.2% 36.4% 39.9%

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.


EV/EBITDA multiple 8.5x 7.5x 6.5x Implied enterprise value $390,026 $443,934 $445,834 Net debt ($133,762) ($133,762) ($133,762) Implied market cap $523,788 $577,696 $579,596

Implied stock price $551.62 $608.39 $610.40

Probability 20% 60% 20% Average stock price $597.44



P/E Multiple 16.5x 15.0x 13.5x

Implied stock price $560.58 $666.82 $700.08

Probability 20% 60% 20% Average stock price $652.23


Price Weight

EV/EBITDA $597.44 50%

P/E $652.23 50%

Average stock price $625.00

Source: J.P. Morgan estimates.

Table 7: Apple Inc. P&L Scenarios $ in millions, except per share data, C2012

Table 8: Apple Inc. EV/EBITDA $ in millions, except per share data, C2012

Table 9: Apple Inc. Forward P/E Table 10: Apple Inc. Blended Price Target

32


Risks to Rating and Price Target

Macroeconomic and secular conditions We assume that Apple possesses partial buffers to any shocks in the macroeconomic environment or the ASP challenges in

the PC or smartphones markets. Should incremental weakness blunt end market demand more than expected or slow Apple’s

International and retail store expansion, then our view and estimates could be at risk.

Competitive dynamics We assume that Apple will continue to outgrow the market in smartphones, tablets, and PCs. Should competitive responses in

these three segments disrupt Apple’s business, then our view could be at risk to the downside.

Gross margin Our view assumes that Apple’s gross margin profile hovers near the 39-40% threshold as component pricing eases and

manufacturing yields on newer products improve. Should these dynamics not manifest, then our view and estimates could have

risk to the downside.

Rate of new product cycles We expect Apple to sustain its rigid cycle of new product refreshes. Should the company begin to slow in its technology

improvements and frequency of refreshes, the company’s image as a provider for leading-edge solutions could take a hit. In

such a case, we fear that investors could begin to lose interest in the story.

33

Disclosures

Important Disclosures

• Market Maker: JPMS makes a market in the stock of Apple Inc..

• Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Apple Inc..

• Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the

following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Apple Inc..

• Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or

services other than investment banking from Apple Inc..

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all

J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or

emailing [email protected] with your request.

34

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are pr imarily responsible

for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the

research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject

securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirect ly related to the specific recommendations or

views expressed by the research analyst(s) in this report.

Important Disclosures

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by

visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the

stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the

average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock

will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-

cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage

universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research

website, www.morganmarkets.com.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most

recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email

[email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors,

including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business

units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not

registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE

Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Disclosures

35

Disclosures

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment

banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk

disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's

website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA,SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services

Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England &

Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is

regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures

Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited

(ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant

with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities

and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of

the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number

– INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of

Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock

Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and

Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa,

S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange

Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 032/01/2012 and Co. Reg. No.:

199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A.,

Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X)

which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan

Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd.

is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business

under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai:

JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level

7, PO Box 506551, Dubai, UAE.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries

(collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer

that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date

of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of

any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations

of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial

instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on

companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute

transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

36

DisclosuresCountry and Region Specific Disclosures

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment

research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of

investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to

persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being

referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to

which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued

to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to

"wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or

outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings

given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and

J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership

disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered

with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from

two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options

listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may

occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In

the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the

executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial

Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association,

The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report

may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates

may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important

Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and

distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their

business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the

Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada:

The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities

described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described

herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a

dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province

or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any

province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer

incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer

registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the

information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued

to persons regarded as professional clients as defined under the DFSA rules.

"Other Disclosures" last revised January 6, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written

consent of J.P. Morgan.

jpmorgan apple slideshow

Documents