Apple is reporting their first fiscal quarter ’13 tonight after the close, and there has not been this much anticipation around any event since Moses descended the mountain back in the Biblical day.
The stock price is down from its high of $702 in mid-September, trading just above $500 as this is being written. Apple appreciated over 30% in calendar, 2012, excluding the dividend.
Here is what we think are consensus estimates for Apple’s various product lines. The most bearish analyst on AAPL has been Collin Gillis, an excellent analyst out of BGC. We are using his research as a base, giving his pessimism on the stock.
iPhone – Collin expects 49 ml iPhones sold in the quarter. We’ve heard that any number above 50 ml is a positive and will be well received by the Street;
iPad – BGC expects 21.5 million, and it is with the iPad Mini and the iPad where we think Apple has unit and dollar upside in the quarter;
Mac – Collin expects 1.2 ml Mac’s and 3.9 ml laptops for a total of 5.1 ml units sold. (Don’t forget it is the Mac that is the higher-margin product for Apple. Mac’s market share has steadily grown from 3% in the early 2000’s to 14% (last number we heard) today. A strong Mac number will assuage a lot of margin worries on the part of Street analysts. No question, that Mac has benefitted from the APPL halo effect.)
iPod – 15 ml units at ASP of $165 per BGC. (Not really a material contributor to AAPL’s financials anymore.)
Here is where we fall on the positives and negatives around Apple currently:
1.) Stock is widely owned and a darling for every retail investor. This is very much a red-flag for me as a portfolio manager. Clients speak of Apple today as they did about Microsoft and Intel in the late 1990’s;
2.) The smartphone market is seeing intense competition and is one of the reasons margins are questioned by analysts. The iPhone is Apple’s biggest product line by unit sales. Samsung and the Android operating system are not going away;
3.) The market capitalization of AAPL makes it the single largest market cap in the S&P 500 and the QQQ. AAPL’s weighting in the QQQ is now 16% and in the SPY, now 3.5%. This is just a personal opinion, but with AAPL’s size, it is analagous to a tree that is placed into a cement potting device. Ultimately the roots of the tree and its growth are limited by the structure of the potting material. With relatively normal market returns, as soon as AAPL gets up to 5% – 6% of the SP 500, it get becomes limited in terms of further p/e expansions given the capitalization of the SP 500 and the Nasdaq.
4.) No question, analysts have been cutting fiscal ’13 and ’14 earnings estimates since September, or about the point of the stock’s peak:
Today: $47.97 and $56.44
Dec ’12 $48.80 and $57.35
Oct ’12: $50.22 and $58.70
Sep ’12: $53.30 and $61.13
Jul ’12: $52.55 and $60.62
Apr ’12: $53.93 and $60.80
Jan ’12: $46.89 and $50.84
Oct ’11: $38.55 and $42.50
Current eps consensus on AAPL of $13.47 tonight is actually a 3% decline in earnings per share (year-over-year) on $54.73 bl in revenues for expected growth of 18%.
5.) The margin worries have resulted in these downward revisions to AAPL’s estimates. Apple revenues have seen some downward revisions, but not near the degree earnings have been slashed;
6.) Just the sheer attention given to this stock by CNBC, the financial media, the blogs, etc. etc. is very concerning (one example – this blog – we do not usually post during the week).
7.) Apple started this miraculous run in the early 2000’s – the mega outperformance is getting on 10 years. It is very hard for a tech company to sustain that kind of dominance;
8.) There is a technical gap on AAPL at $425, left over from the January ’12 earnings report. These gaps tend to get filled. Sometimes they are not.
1.) The most compelling part of AAPL’s argument today is valuation: trading at 8(x) earnings today ex-cash, and 7(x) cash-flow it is very hard to expect another 15% drop in AAPL, which would bring us down to that $425 level;
2.) AAPL has $128 per share in cash just sitting on the balance sheet. Even though Tim Cook is an engineer, somehow, someway, at some point, that cash (you would think) would be returned to shareholders in the form of a better dividend and share repurchases, or even a 1-time special dividend;
3.) The attractive valuation limits AAPL’s downside in our opinion;
4.) The sentiment around AAPL has turned decidely negative in our opinion, shortly before this key earnings report. Rarely is this sentiment right. This happened in 2011 during the critical 4th quarter as well, although we didn’t see the degree of downard earnings revisions. Here is how expected 2013 and 2014 EPS estimates tracked in last year’s December quarter – note the January increase:
Jan ’12: $46.89 and $50.84
Dec ’11: $38.84 and $42.09
Nov ’11: $38.59 and $42.50
Oct ’11: $38.55 and $42.50
Again, note the change in earnings after the January ’12 earnings report, and how conservative the analyst estimates were in December ’11 quarter. Pessimism wasn’t this bad in January ’12 around AAPL as it is today.
Conclusion: with all the negativity around the stock, and the worries about margins, we still get back valuation. In the December quarter, 2011, AAPL grew revenues and EPS 73% and 116% respectively. For tonight, analysts are expecting year-over-year growth of 18% and -3%. Even though last year is a very tough compare, will it be that tough ?
We have sold very little AAPL for clients during the December ’12 quarter drop from $700 to $500. The stock could test $425, but we continue to hold the name, given its valuation, and the expectation that we will hear AAPL tell us what they plan to do with all that cash. We think the negative sentiment around the stock has gotten too extreme, and we can tolerate a 15% drop to $425, although we obviously would prefer it not happen.
According to AAPL’s weekly chart on our technical software, AAPL hasnt been this oversold as March, 2009 or the generational low in the SP 500.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA