Earnings Preview: Apple Inc. (AAPL)

Apple Inc. (AAPL) is slated to release its third quarter 2010 results on July 20, after the market close. Since the beginning of the year shares have risen 19%. We believe that AAPL could continue to provide earnings above expectations despite its current premium valuation.

Earnings Estimate Revisions – Overview

The earnings outlook for AAPL remains extremely strong ahead of its quarterly results. We expect AAPL to post beat by a wide margin and are encouraged by the fact that both the third quarter and full year estimates are clearly going up, implying that analysts see positive catalysts. The estimate revision trends and the magnitude of such revisions justify the strength in the stock.

Agreement of Analysts

A majority of the analysts agree that Apple’s third quarter and fiscal 2010 earnings will exceed previous expectations.

Estimates are trending upward, as analyst opinion has turned increasingly bullish over the last 30 days. Out of the 38 analysts providing estimates, 18 have raised them for the upcoming quarter over the last 30 days, with 5 analysts making positive revisions over the last week. However, 2 analysts moved in the opposite direction in the last 30 days while 1 has lowered estimates in the last 7 days.

Estimate revisions for full-year 2010 were even more encouraging, as 24 of the 41 analysts providing estimates lifted their forecasts in the last 30 days, 8 of which were raised in the last 7 days. There were no negative revisions.

The positive revisions are attributable to the strong demand for the company’s iPhone and Mac, as unit shipments remain robust. Some analysts had previously expressed caution regarding Mac shipments, believing that the iPad would cannibalize Mac sales. But this has been limited so far. Instead, AAPL has been taking share in the PC market and analysts remain extremely positive about the company’s continued growth in desktops.

While the outlook for the Mac, iPad and iPhone 4 remain extremely strong — fueled by demand in both the domestic and international markets — analysts have expressed some caution regarding the European crisis and near-term supply chain constraints. However, judging from the fact that full-year estimates are up, the supply chain pressure could alleviate in the current quarter.

AAPL is also benefiting from a positive mix shift to the higher-margin Mac and iPhone business, helped by recent product upgrades. Additionally, customers continue to shift to the iPod Touch, another positive influence on margins.

Magnitude of Estimate Revisions

The magnitude of revisions is significant since AAPL reported its second quarter results.

Last quarter, management stated that third quarter earnings would be in the range of $2.28 to $2.39 per share compared with $2.01 in the year-ago quarter. We should, however, keep the company’s history of conservatism in mind while looking at their current guidance. Therefore, the current Zacks Consensus Estimate for the second-quarter is $3.07 per share, representing a 52.7% year-over-year growth and way above the company’s own guidance.

Overall, estimates for the third quarter have gone up from $2.65 per share 90 days ago to $3.07 per share (current), an increase of 42 cents. There has been an increase of 10 cents over the past 30 days and 1 cent in the last week.

The current Zacks Consensus Estimate for fiscal 2010 is $13.82, an increase of 52.47% over 2009 levels, reflecting the company’s strong earnings profile. For fiscal 2010, estimates have gone up significantly from $11.95 per share 90 days ago to $13.82 (current), which is an increase of $1.87. There has been a 33 cents increase over the past 30 days and 5 cents in the last week.

Second-Quarter Highlights

Apple’s second-quarter of 2010 results (both earnings and revenue) beat the bullish Zacks Consensus Estimates, fueled by strong iPhone sales (which more than doubled in the quarter due to strong international demand), increased Mac sales, success of the new product launch, increased consumer spending and a rebound in PC shipments.

Earnings in the quarter were a record at $3.33 per share, beating the Zacks Consensus Estimate of $2.43 by $0.90 per share and surpassing the company’s own guidance of $2.06 to $2.18 per share. The earnings increased 86.0% from $1.79 per share reported in the year-ago period. Net income soared to $3.07 billion in the quarter from $1.62 billion in the year-ago period.

Strong earnings were due to higher sales in the quarter, which increased 48.6% to $13.50 billion, beating the Zacks Consensus Estimate of $12.0 billion. The tremendous revenue growth was driven by increased momentum in Mac shipments and strong iPhone sales.

This enabled the company to produce a positive earnings surprise of 37%. The company has been producing positive earnings surprises in the preceding quarters as well, with the four-quarter average at 40%.

Outperform Recommendation

Overall, Apple’s earnings performance has been way above expectations, and we will not be surprised if the tech giant beats expectations in the current quarter.

Apple has experienced tremendous growth, driven by the success of its iPhones and increased Mac shipments. In our opinion, the new iPhone 4 will be another milestone achievement for AAPL, helping it continue on the growth path. Moreover, we are highly positive about AAPL’s iPad launch, which is expected to revolutionize mobile computing and will provide a boost to AAPL’s revenues and earnings in 2010.

Although AAPL faces tough competition in the smartphone market, we believe that its continuous effort to expand into international markets, competitive pricing strategy and new product launches will drive tremendous growth.

Nevertheless, we expect AAPL to report stronger results in the third quarter and fiscal 2010 and maintain our Outperform rating supported by a Zacks #1 Rank.

APPLE INC (AAPL): Free Stock Analysis Report
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