Apple reported largely inline December quarter results. Revenues of
$54.5 billion were barely shy of consensus and EPS of $13.81 were barely
above consensus. Gross margins exceeded guidance and were close to the
most optimistic street estimates. Product sales were about as expected
except for Macs, which missed by lot.
Guidance was below the street as usual. There was hope that guidance
would be closer to the analyst estimates which would have eased concerns
about demand for iPhones and iPads, gross margins, and negative
datapoints from the supply chain.
The actual earnings and guidance were greeted by a quick 6% drop in
the shares. I'd call that fair as essentially the quarter and guidance
left the recent controversies intact and provided no relief for the
bulls. The way the street works that gets the stock back to the low end
of the recent range. Not great but not a disaster if you believe as I
do that underlying product demand is growing.
On the call, the company explained its new approach to guidance. Here is the exact quote:
"In recent years our guidance reflected a conservative point
estimate for results every quarter that we have reasonable confidence in
achieving. Going forward, we plan to provide a range of guidance that
reflect our belief of what we are likely to achieve. While we cannot
forecast with complete accuracy, we believe we are likely to report
within the range of guidance we provided.""
This comment dropped the stock another 6% to where it trades now as
the conference call concludes, $459, down 11% from today's close. The
issue here is that management seems to be saying that previously
guidance was "conservative" and now it is "what we are likely to
achieve." Management denied to expand on this quote when given a couple
of opportunities in Q&A to admit that the shift still leaves
guidance as "conservative." I do think the second attempt by an analyst
left open the possibility that guidance is conservative.
The reason this matters is that low-balling guidance meant that this
quarter's guidance disappointment probably wasn't that bad as the actual
report would be close to analyst estimates. If this quarter's guidance
is real, then analyst estimates are going to have come down sharply.
Current FY13 consensus is $48. That would imply $24 in second half
earnings if guidance is taken at face value, a 33% gain year over year.
However, with a just reported flat quarter, guidance for -20%
quarter, and ongoing worries about demand due to the supply chain
datapoints and production cuts, analysts and investors are never going
to believe a quick rebound to 33% growth.
If this year ends up with EPS in the low $40 range, down 5%, the
shares look pretty cheap as long as growth resumes. With $144 in cash,
call it $120 after-taxes, the stock is trading at $340 against $40 in
operating EPS. Very cheap if growth resumes. But we aren't going to
know whether growth resumes for a few months.
I believe growth will resume. I also believe that guidance is going
to prove conservative again. Underlying product demand looks a lot
better than the stock price to me. Until I am proven right, however,
the stock is in the penalty box with minimal upside. I think it is
worth holding on but expect the bumpy ride to continue and when growth
does resume think $500s not $700s.
Apple is widely held by clients of Northlake Capital Management,
LLC, including in Steve Birenberg's personal accounts. Steve is sole
proprietor of Northlake, a registered investment advisor. Regulatory
filings can be found at www.sec.gov. Apple is a net long position in
the Entermedia Funds. Steve is portfolio manager of Entermedia, owns a
controlling stake in the Funds' investment management company, and has
personal monies invested in the Funds.