Earnings Preview: Apple (AAPL)

Apple Inc. (AAPL) is slated to release its fourth quarter 2010 results on October 18, 2010, after the market close. Since the beginning of the year, shares have risen 39.5%. The Zacks Consensus Estimate for the fourth quarter of 2010 is $4.02 per share, representing growth of 45.1% year over year. We believe that AAPL will continue to provide above-market gains and is expected to beat the Zacks Consensus Estimate.

Earnings Estimate Revisions – Overview

The earnings outlook for AAPL remains extremely strong ahead of its quarterly results. We expect AAPL to beat by a wide margin and remain encouraged by the fact that both the fourth quarter and full year 2010 estimates are clearly going up, implying that the 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 fourth quarter and fiscal 2010 earnings will exceed previous expectations based on a strong demand for the company’s iPad, iPhone and Mac in both the domestic and international markets.

Estimates are trending upward, as analysts’ opinion has turned increasingly bullish over the last thirty days. Out of the 42 analysts providing estimates, 12 have raised their estimates for the fourth quarter over the last 30 days, with 7 analysts making positive revisions over the last week. However, 2 analysts moved in the opposite direction in the last 30 days.

Estimate revisions for full year 2010 were even more encouraging, as 15 of the 49 analysts providing estimates lifted their estimates in the last 30 days, 11 of which were raised in the last 7 days. There was just 1 negative revision to the estimates. For the full year 2011, 16 of the 49 analysts providing estimates upped their estimates in the last 30 days, 9 of which were raised in the last 7 days, with no negative revision.

The analysts remain extremely bullish on the iPad sale, which was 3.3 million last quarter. In addition to Best Buy Co. Inc. (BBY) and Target Corp. (TGT), Wal-Mart Stores Inc. (WMT) recently announced plans to start selling iPad at its stores. The analysts’ projections for 2011 iPad unit sale vary widely between 20 million to 50 million units.

Although AT&T Inc. (T) remains the exclusive U.S. carrier for Apple, the company has been adding multiple carriers to sell its products in other countries. Apple is expected to come up with handsets at Verizon Wireless — a venture between Verizon Communications (VZ) and Vodafone Group Plc (VOD) — in January 2011, further driving iPhone sales. Several industry researchers estimate that Verizon’s release of the iPhone will drive Apple’s U.S. sales higher by at least 5 million units in 2011.

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

Magnitude of Estimate Revisions

Last quarter, management stated that fourth quarter earnings would be $3.44 per share compared with $2.77 in the year-ago quarter. We should, however, keep the company’s history of conservatism in mind while looking at their current guidance.

Overall, estimates for the fourth quarter have gone up from $3.78 per share, 90 days ago, to $4.02 per share (current), an increase of 24 cents. There has been an increase of 5 cents over the past 30 days and 3 cents in the last week.

The current Zacks Consensus Estimate for fiscal 2010 is $14.56, an increase of 60.5% over 2009 levels, reflecting the company’s strong earnings profile. For fiscal 2010, estimates have gone up significantly from $13.82 per share, 90 days ago, to $14.56 per share (current), which is an increase of 74 cents. There has been a 9 cents increase over the past 30 days and 5 cents in the last week.

Earnings Surprise

AAPL’s performance has been above expectation over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 39%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Third-Quarter Highlights

Apple’s third quarter earnings were a record at $3.51 per share, beating the Zacks Consensus Estimate of $3.08 by 43 cents per share and surpassing the company’s own guidance of $2.28 to $2.39 per share. Earnings shot up 74.6% from $2.01 per share reported in the year-ago quarter. Net income soared to $3.25 billion in the quarter, representing substantial growth of 78% from $1.83 billion in the year-ago quarter.

The upbeat quarter results were fueled by strong iPhone sales, record Mac sales, increased iPad sales and success of new product launches. Strong results are attributable to the thriving demand for the company’s iPhone and Mac, as unit shipments remain robust.

Strong earnings were attributable to record sales in the quarter, which leaped 61.3% year over year to $15.70 billion. The quarter generated highest quarterly revenues in the company’s history. The mammoth revenue growth was driven by an increased momentum in Mac shipments and strong iPhone sales, in addition to better-than-expected sales of iPad.

Our Take

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

We expect future growth to come from the success of iPhone 4 and iPad and increased Mac shipments, providing a boost to its revenues and earnings. With a loyal customer base, international expansion into new markets, competitive pricing strategy and new product launches, we remain positive on its long-term growth. We remain upbeat on Apple’s continuous efforts to revamp its product line.

The anticipated alliance with Verzion Wireless will also provide Apple a stronger position over its rivals Research In Motion Ltd. (RIMM) and Motorola Inc. (MOT), whose smartphones are currently promoted by Verzion Wireless. The availability of Apple’s iPhone through Verizon may drive down market share of Research In Motion, Motorola and Google Inc. (GOOG).

However, the European crisis, iPhone and iPad supply chain constraints and a cannibalization effect from iPad are areas of concern. Intense competition from Google’s Android-based phones and tablet PCs that could hurt margins and lower Apple’s market share.

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.

The estimate revision trends, magnitude of revising the estimates and higher number of upward estimate revisions indicate a significant upward pressure on the stock over the near term. Nevertheless, we expect AAPL to report strong results in the fourth quarter and fiscal 2010, supported by a Zacks #1 Rank, a short-term Strong Buy.

However, we have a long-term Neutral recommendation on the stock.

APPLE INC (AAPL): Free Stock Analysis Report

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