Apple Earnings: What to Expect (And Who Not to Believe)

by: Andy Zaky October 21, 2008 | about stocks: AAPL    

Andy Zaky

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Wall Street investors are holding their breath as Apple (AAPL) is set to report earnings after the close of regular trading this afternoon. This particular report will be one of the most crucial in the company's history as Wall Street and her analysts have completely written Apple off as a business that could thrive in a slower economic environment. In order for Apple's shares to recover from its recent 50% plunge in value, Apple will have to demonstrate its resilience in this slowing economy by both reporting strong earnings results and offering some compelling guidance.

In the past, Apple has consistently offered the Street ultra conservative guidance, basically rendering such guidance useless when it comes to how the company will actually perform. Yet, irrational investors on Wall Street continue to be completely preoccupied with Apple's meaningless guidance making it extremely difficult for Apple to rebound until management gets a clue that its conservative nonsense is not working in this particular environment. Apple should either take a page from Google's book and not offer guidance at all, or offer guidance that is more realistic in this skittish environment. Analysts polled by Thomson Financial expect Apple to post earnings of $1.11 in EPS on $8.05 billion in revenue fueled by sales of 2.7 million Macs, 10.5 million iPods and about 4 million iPhones. For Q1 2009, analysts are generally looking for Apple to report $1.66 in EPS on $10.6 billion in revenue.

I am looking for Apple to record approximately $1.25 in EPS on $8.343 billion in revenue. I expect Apple to sell 2.9 million Macs, 11 million iPods and about 7.25 million iPhones. I expect Apple to report that it reached its 10 millionth iPhone sales goal a full three months ahead of schedule. I expect gross margins to drop sequentially to 33.5%, operating expenses to rise to $1.310 billion, and OI&E to rise to $122 million. I expect Apple to post net income of about $1.33 billion after taxes of $474 million.

In terms of the revenue breakdown from Apple's primary operations, I am looking for Apple to produce $4.118 billion in revenue from Mac sales (2.9 million Macs at $1,420.00 ASP), $1.595 billion in iPod revenue (11 million iPods at $145 ASP), and a total of about $2.63 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below lists my estimates along with two other analysts whose opinions I highly respect.

Forecasted Income Statement (In Millions, except per share data)

Line Item

Apple's Forecast

Andy Zaky,

Bullish Cross

Deagol,

Stashbox

Turley Muller, Financial Alch.

Revenue

$7,800

$8,343

$8,333

$8,436

Cost of Goods Sold

$5,343

$5,548

$5,541

$5,736

Gross Margin

(31.5%) $2,457

(33.5%) $2,795

(33.5%) $2,792

(32.0%) $2,699

OpEx

$1,270

$1,310

$1,292

$1,270

Operating Income

$1,187

$1,485

$1,500

$1,429

OI&E

$118

$122

$122

$130

Net, before taxes

$1,305

$1,607

$1,622

$1,559

Taxes

(30.5%) $398

(29.5%) $474

(30.0%) $486

(29.0%) $452

Net Income

$907

$1,133

$1,136

$1,107

Earnings Per Share

$1.00

$1.25

$1.25

$1.22

Outstanding Shares

907,000,000

907,000,000

907,000,000

906,000,000


Segment Information & Product Summary (in Millions)

Line Item

Consensus Estimates

Andy Zaky,

Bullish Cross

Deagol,

Stashbox

Turley Muller, Financial Alch.

Macintosh Sales

2,700

2,900

2,880

2,961

Macintosh Revenue

-

$4,118

$4,072

$4,160

iPod Sales

10,500

11,000

11,000

11,200

iPod Revenue

-

$1,595

$1,540

$1,680

iPhone Sales

4,000

7,250

7,500

6,800

iPhone Rev. Recognized

-

$850

$894

$748

iTunes & Other Music

-

$800

$837

$811

Other Hardware

-

$460

$454

$467

Other Software

-

$520

$538

$559

Total Revenue

$8,050

$8,343

$8,333

$8,436

My Estimates Compared to Wall Street Analysts
The table below compares my estimates with Wall Street analysts. It should be noted that Kathryn Huberty from Morgan Stanley consistently provides earnings estimates which prove to be one of the worst on Wall Street. I fully expect the trend to continue when Apple reports earnings this afternoon.

Analyst

Revenue

EPS

G.M.

iPhones

iPods

Macs

Apple's Guidance

$7.8b

$1.00

31.5%

-

-

-

The Consensus Estimates

$8.05b

$1.11

30.5%

4.0m

10.5m

2.7m

Unpaid Analysts

            

Andy Zaky, Bullish Cross

$8.343b

$1.25

33.5%

7.25m

11.0m

2.9m

Deagol, Stashbox.org

$8.333b

$1.25

33.5%

7.5m

11.0m

2.880m

Turley Muller, Financial Alchemist

$8.436b

$1.22

32.0%

6.8m

11.2m

2.961m

Wall Street Analysts

            

Jeff Fidacaro, Merrill Lynch

$7.969b

$1.09

32.7%

3.88m

11.0m

2.7m

Gene Munster, Piper Jaffray

$8.370b

$1.17

32.0%

5.0m

11.0m

2.8m

Richard Gardner, Citigroup

$8.096b

$1.18

-

-

-

-

Ben Reitzes, Barclays

$8.00b

$1.11

32.9%

5.0m

  

2.761m

Mike Abramsky, RBC

$8.200b

$1.15

-

6.0m

10.8m

2.9m

Kathryn Huberty,
Morgan Stanley

$7.865b

$1.05

32.9%

-

-

2.8m

Toni Sacconaghi,
Sanford Bernstein

$8.151b

$1.14

32.0%

4.000

10.7m

2.783m

My Past Performance compared to Wall Street Analysts for Q2 2008
The table below compares my past performance with Wall Street analysts. The numbers highlighted in "blue" designate the closest estimate to Apple's actual report whereas the numbers highlighted in "red" designate the estimate which was furthest from Apple's actual report.

Analyst

Revenue

EPS

G.M.

iPhones

iPods

Macs

Apple, Inc.

$7.512b

$1.16

32.9%

1.703m

10.644m

2.289m

Andy Zaky, Bullish Cross

$7.449b

$1.31

36.0%

1.700m

10.5m

2.350m

Gene Munster, Piper Jaffray

$6.900b

$1.19

36.0%

1.6-2.0m

10.5m

2.100m

Shaw Wu, AmTech

$7.000b

$1.10

33.5%

1.5m

10.0m

2.150m

Richard Gardner, Citigroup

$7.000b

$1.23

36.5%

1.5m

9.5m

2.100m

Ben Reitzes, Barclays

$6.950

$1.05

33.2%

1.5m

10.3m

2.090m

Mike Abramsky, RBC

$7.200b

$1.11

34.0%

1.8m

10.5m

2.200m

Kathryn Huberty, Morgan Stanley

$6.634b

$1.10

35.8%

1.0m

8.5m

2.020m

Scott Craig, BofA

$6.900b

$1.07

n/a

1.22m

10.0m

2.021m


Notice how Kathryn Huberty of Morgan Stanley made the worst call in four out of the six major areas of prediction. She actually missed revenue by almost a cool billion ($815 million). How an analyst can miss that badly and continue to have any credibility in his or her coverage of a stock is beyond me. Credibility should be called into question when an analyst misses iPhone sales by 41%, iPods by a whole 2.1 million units and Macs by 269,000 units. I pointed out the obvious flaws in her analysis before and after earnings was released in Q2 2008. I also tried to point out that investors ought to ignore Kathryn Huberty's estimates and her meaningless downgrades of the stock. In September, she downgraded Apple two weeks in a row causing the stock to drop a cumulative 30 points or about 30% between the two downgrades. I still haven't figured out who is less intelligent: Kathryn Huberty or the irrational investors who continue to listen to anything she has to say.

Disclosure: Long Apple. 

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This article has 21 comments:

  •  
    Oct 21 10:43 AM
    Our (ChangeWave) surveys show Apple has reached a mature and increasingly positive place in the market - laptop and iPOD products now sell based on features and price and there is not buyer hesitation due to "newness." Apple is close to reaching this point with iPhones but as it reaches this level of customer maturity it will find more and more customers waiting until their current phone contract expires before buying an iPhone. This is all being said, Apple should beat estimates, especially in laptops.

    Apple's guidance is clearly driven by lawyers or a smart CFO - they have no obligation to anyone to change the way they do guidance. Why should they? Companies like Apple should worry about long term financial and stock performance, not making an analysts or trader happy on a given Wednesday in October.

    If and when you analyze Apple again, the key data point is money flows into tech or other mutual funds with a history of owning this sector. Apple's guidance will be much better than virtually any other tech company and money will flow out of other stocks into Apple as opposed to totally fresh money entering the market to play Apple. The stock does not have to fight Apple analysts - it has to fight continuing and massive withdrawals from mutual and hedge funds investing in tech.

    One thing Apple could so is spread it IR wings and start working consumer spending/retail analysts, something it does not realyl do at this time (or so I have been told).

    Bottom line: not a short (my specialty) and not a long based on investor concerns over the market. And we may not be at an appropriate entry point if the average multiple of an S+P stock continues to contract.
    Reply | Link to Comment
  •  
    Oct 21 10:50 AM
    To Michael Shulman,

    Apple trades at about 4 times its cash position. That's way better than GOOG, MSFT, INTC, CISCO, RIMM, AMZN, HPQ, IBM and other similarly situated tech companies. It will also produce about $3.00 per share in free cash flow per quarter over the next four quarters. That's $12.00 per share over the next year alone. Apple will have about $37.00 per share in cash by the time we hit October 2009 and you want to say that the stock is not valued correctly because of some nonsense P/E method? What if Apple had $200 per share in cash? Do you still think the P/E method would be appropriate? Jesus. People really need to look beyond P/Es man.
    Reply | Link to Comment
  •  
    Oct 21 10:50 AM
    To Michael Shulman,

    Apple trades at about 4 times its cash position. That's way better than GOOG, MSFT, INTC, CISCO, RIMM, AMZN, HPQ, IBM and other similarly situated tech companies. It will also produce about $3.00 per share in free cash flow per quarter over the next four quarters. That's $12.00 per share over the next year alone. Apple will have about $37.00 per share in cash by the time we hit October 2009 and you want to say that the stock is not valued correctly because of some nonsense P/E method? What if Apple had $200 per share in cash? Do you still think the P/E method would be appropriate? Jesus. People really need to look beyond P/Es man.
    Reply | Link to Comment
  •  
    Oct 21 11:07 AM
    APPL may be up or down in afterhours - what I'm looking at is the collapse of the Credit Market and how this will affect the average consumer from purchasing an expensive laptop or cell phone. I'd say that if it is getting difficult to buy groceries, pay the heating bill, or mortgage, these extras will be eliminated. I'd watch things like ATT subscription rates and decreasing Credit Card profits as a signal that Apple's stock wil continue to fall.
    Reply | Link to Comment
  •  
    Oct 21 11:07 AM
    Jesus!

    Why so insecure in what you've written that you need to attack detractors so aggressively?

    Read his post carefully. He's a market timer, he doesn't think the market's headed back up in his near-term, and Apple is a high-beta stock. Pretty straightforward. He didn't say ANYTHING about Apple's cash flow; he actually indicated no interest in fundamental analysis whatsoever, except at a macro level.

    Seriously - put your stuff out there (pretty ballsy, you are), and let people have at it. For one day, anyway.
    Reply | Link to Comment
  •  
    Oct 21 11:22 AM
    I have a lot of faith in Apple and its management. I am a long term investor and fully believe in it's model. --- However I have a hard time with Analyst such as Kathryn Huberty. This creature has no clue and I am surprised that Morgan Stanley still employs her. Freedom of speech is one thing but she has the smarts of a doorknob. Now I know why why Morgan Stanley is belly up. Instead of looking at Apple or any other company they need to clean house starting with Kathryn Dumb Huberty.
    Reply | Link to Comment
  •  
    Oct 21 11:31 AM
    Andy I hope you are ok on your prediccions,I have read so many articles related to apple, that when apple releases earnings people not over react
    for good or for bad giving this valuable American company the credit that deserves for his continuosly effort to give the world the best creations of desing and high tech gadgets