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Apple: A Lost Year Of Earnings Growth?

 January 30, 2013 02:13 PM

(By Mani) Apple, Inc. (NASDAQ: AAPL) has shifted to more realistic guidance and while it seems overdue it would result in substantial downward estimate revisions. Moreover, Apple's second-half profit will be about flat, resulting in a lost year of growth.

The March quarter guidance is for $41 billion to $43 billion in revenue, a gross margin of 37.5- 38.5 percent, and operating expenses between $3.8 billion and $3.9 billion. Analysts expect earnings of $10.33 a share on revenue of $43.08 billion, according to analysts polled by Thomson Reuters.

The lower-than-expected hints at various problems for Apple, including its supply chain challenges in Asia and intense rivalry from Samsung.

[Related -Apple Inc. (AAPL): How Q1 Earnings Will Fare?]

Although CEO Tim Cook cautioned investors not to pay much attention to supply chain noise from Asia, it seems to that the production cut chatter was fairly accurate.

Apple sold 47.8 million iPhones during the first quarter while Wall Street was expecting iPhone sales somewhere between 43 million and 53 million units.

"We estimate 37mn phones in March—Apple points out that shipments should be up from the sell-through a year ago of 32.5mn, a better indicator than the sell-in of 35mn as inventory was built for the China launch. The addition of 36 LTE carriers next week should help," UBS analyst Steven Milunovich wrote in a note to clients.

Apple also missed on sales of its iPad and Mac computers. The 22.9 million iPad sales were shy of analyst estimates between 23 million and 25 million units. On the Mac front, analyst estimates were mostly in the 5 million range while Apple sold 4.1 million units.

[Related -Apple Inc. (AAPL): iPhone Trending into Another Carl Icahn Disappointment?]

Despite the shortage of minis, iPad units should be down to perhaps 19.2 million though Macs should increase with greater availability.

Assuming revenue declines sequentially in the next three quarters, earnings could come in down a bit from $45 last year to $43 or so this year. The reason is the expected decline in gross margin from 44 percent to 39 percent. Apple's first quarter sales fell short of the consensus view of $54.73 billion despite rising 18 percent to $54.51 billion.

"Earnings momentum does improve in the second half, but now we're looking at flattish quarters year-over-year. Our estimate for F2014 is about $48 on 12% revenue growth," Milunovich said.

Although Apple is correct that, in isolation, these numbers are impressive, they are below at least sell-side expectations and catalysts are lacking. Given management's comments about new Apple users being inclined to buy other Apple products, it sounds like the company may offer a lower end phone and there were rumors the smartphone will have a 4" screen with cheaper casing.

Apple says it has not run out of ideas, and the stock discounts little innovation at these levels.

"Yes, long-term margins likely head south given increased competition, but we expect some good news between now and then to provide a trade in the stock," the analyst said.

Coming to cash position, Apple has more than $120 billion in its kitty and has $128 per share in cash and growing. Tim Cook said that making great products that customers love is the most important thing to Apple. That attitude has created a great company, but one wonders where investors rank.

"Apple proudly says it has never made an acquisition for revenue; if the company doesn't see large deals in its future (and perhaps even if it does), there is little excuse not to substantially increase the buyback at these price levels," Milunovich added.

Apple stock, which fell 16.5 percent year-to-date, lost $210 billion in market cap since the peak in September, when shares were trading at $700 levels. However, the good news is that Apple could become oversold in what may be capitulation. The stock needs a catalyst, which may come with new products in the June quarter. 



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