briefing.com Previewing Apple Computer (AAPL)
Updated: 12-Oct-04 15:00 ET
Regular readers of the Looking Ahead page will know that our "Playing Defense" series normally appears on Tuesday. However, in an attempt to preview what we believe will be some of the more closely-watched, and actively-traded, earnings reports, we are going to suspend that segment until after earnings season.
Today's preview piece focuses on Apple Computer, which reports its fiscal Q4 (Sep) results after the close on Wednesday. Before delving into what analysts are saying ahead of the report, let's first review the guidance provided by Apple when it reported fiscal Q3 earnings in July.
What Apple Said in July
* Looking ahead to the fourth quarter of fiscal 2004, we expect revenue of about $2.1 billion and earnings per diluted share of $0.16 to $0.17, including $.01 per diluted share in restructuring charges.
A Taste of What Analysts Are Saying Now
* Piper Jaffray (Oct. 11) - Based primarily on confidence related to iPod sales and greater supply/demand balance, we are slightly raising estimates for FY05 and FY06. Our price target is now $44, based on a multiple of 35x CY05E EPS (plus cash).
* Prudential (Oct. 11) - We believe that demand for the company’s new products remains strong. We would not be surprised to see the company post upside to both our $2.1B revenue estimate (up 4% sequentially and 22% year-over-year) and our $0.18 earnings estimate (in-line with Street consensus). At current levels, we believe that the shares are priced for perfection and vulnerable to anything short of a stellar performance. We would look for a much lower entry point before becoming more constructive on the shares.
* UBS (Oct. 8) - We expect a solid quarter from better notebook sales, strong debut of the new iMac and increased sales of iPod Minis. Our estimates are for sales of $2,186m and EPS of $0.19.
* Merrill Lynch (Oct. 7) - We recently increased our estimate to $0.19 on higher iPod sales. The iPod should beat our 1.1 million unit estimate though estimates above 1.5 might be pushing it. We look for positive guidance for the December quarter when all cylinders could be firing for Apple.
* Morgan Stanley (Oct. 6) - We raised our FQ4:04 revenue estimate by $90MM to $2.2B largely due to iPod and accessory strength and our EPS shifts to $0.20 from $0.18 on slightly lower gross margins (26.7% vs previous estimate of 27.0%). We increased our iPod unit estimate to 1.55MM from 1.2MM.
* First Albany (Oct. 6) - We expect 4Q:04 (Sept.) upside not only to our projections for 1.25B iPod units but expect EPS to beat our estimate of $0.18 by at least $0.01... we think further upside potential will become increasingly difficult to justify as competition (and comparisons) get tougher.
* Bear Stearns (Oct. 4) - we think Apple has the potential to exceed its guidance of $0.17-$0.18 in EPS on $2.1 billion in revenues... While a key swing factor to Apple’s performance is the supply of G5 chips from IBM for Apple’s new iMac and Power Mac lines, our sense is that availability was sufficient to meet what Apple had budgeted in its guidance. Though investors may be optimistic about Apple's near-term outlook and prospects as a play on seasonal trends, we think most of its catalysts are reflected in the valuation, are concerned about slowing momentum beyond the holiday period – particularly in the face of decelerating year-over-year EPS growth rates – and don’t see compelling valuation upside.
General Impressions
Preview notes are generally optimistic, with special attention to the growing success of the iPod and the company's new G-5 iMacs. Seems to be a sense, too, that Apple is an opportune seasonal play entering calendar Q4 when spending on consumer electronics revs up for the holidays. An underlying question is whether that consideration has already been discounted in Apple's stock, which is up 80% year-to-date and 18.1% since the start of calendar Q3.
In many cases, analysts have either revised EPS and/or revenue estimates upward or have acknowledged that there is good potential for Apple to surpass their estimates when the company reports its Q4 (Sep) results. In turn, iPod unit estimates have also been on the rise, but we would note that the range of estimates remains wide (roughly 1.0-1.9 mln).
Given the improved expectations, an in-line report is likely to be regarded as a disappointment, especially since Apple has made it a recent habit (see table below) to surpass both top- and bottom-line estimates. According to Reuters Estimates, the consensus EPS and revenue numbers are $0.18 and $2.149 bln, respectively; for fiscal Q1 (Dec), they are $0.28 and $2.516 bln.
Since hitting a new 52-wk high of $40.93 on Oct. 7, shares of AAPL are down 6.1%. Weakness ahead of what most believe will be a solid earnings report can be interpreted to mean that traders are either (a) fretting that AAPL will be unable to live up to such high expectations (b) taking profits now as they recognize material upside will be harder to come by or (c) are anticipating a sell-the-news response and getting out ahead of time.
To reverse the recent trend in meaningful fashion then, we suspect Apple will have to beat the consensus EPS estimate of $0.18 by at least $0.02, report better than expected top-line results, with unquestioned strength in iPod sales, and provide upbeat guidance for the pivotal December quarter. The table below offers a snapshot of how the stock has traded just before, and after, earnings reports in the past six quarters. The second table, meanwhile, offers a look at some of the company's related (and publicly-traded) competitors, suppliers, vendors, etc.
Period Consensus EPS Actual EPS Consensus Revenue Actual Revenue 1 Day before Report Day of Report 1 Day after Report 2 Days after Report
3Q04 $0.15 $0.17 $1.944 bln $2.014 bln +0.3% +1.2% +11.3% +8.9%
2Q04 $0.10 $0.14 $1.813 bln $1.909 bln -4.0% -1.1% +10.0% +9.5%
1Q04 $0.14 $0.16 $1.926 bln $2.006 bln +1.6% +0.3% -5.6% -6.1%
4Q03 $0.07 $0.08 $1.649 bln $1.715 bln +0.8% +1.1% -6.3% -8.3%
3Q03 $0.03 $0.05 $1.491 bln $1.545 bln -1.5% +1.3% +5.2% +5.0%
2Q03 $0.02 $0.04 $1.464 bln $1.475 bln -1.4% -1.1% -0.9% -0.8%
Computers
DELL, HPQ, GTW, IBM, SYNA
Processors
IBM, MOT, BRCM, HIT, NVDA, ATYT, AGR.a
iPod/iTunes
ROXI, RNWK, LOUD, YHOO, MSFT, DELL
