Earnings Preview: Apple Inc.

Apple Inc. (AAPL) is expected to release its second quarter 2011 results after the market closes on April 20, 2011. We believe that Apple will continue to record above-market gains, exceeding the Zacks Consensus Estimate.

At its first quarter conference call, Apple forecasted second quarter earnings of $4.90 per share compared with $3.33 in the year-ago quarter. We should, however, take into account the company’s history of conservatism while looking at their current guidance.

The Zacks Consensus Estimate for the second quarter of 2011 is pegged at $5.34 per share, representing a year-over-year growth of 60.4%.

Apple posted an average earnings surprise of 21.27% in the trailing four quarters, implying that it has outpaced the Zacks Consensus Estimate by the same magnitude in the last four quarters.

Apple reported earnings per share of $6.43 per share in the first quarter of 2011, beating the Zacks Consensus Estimate of $5.38 as well as its own guidance of $4.80 per share.

Apple posted a positive earnings surprise of 19.5% in the reported quarter. Revenue increased 70.5% year over year to $26.74 billion, beating the Zacks Consensus Estimate of $24.30 billion and its own forecast of $23.00 billion. For further details please see Record 1Q for Apple.

We are positive on Apple’s earnings outlook and remain encouraged by the fact that second quarter estimates are clearly going up, implying that analysts see positive catalysts. The estimate revision trends and the magnitude of such revisions justify the strength of the stock.

Estimate Revision Trends

Specifically, 12 out of the 42 analysts raised their projections in the last 30 days, while only one analyst moved in the opposite direction. Over the last week, seven analysts upgraded their estimates, whereas none made downward revisions.

Overall, estimates for the second quarter have gone up 3 cents from $5.31 per share, in the last seven days, to $5.34 per share. There has been an increase of 6 cents over the past 30 days and 8 cents over the past 60 days.

We believe Apple will post strong results in the second quarter, based on solid sales of the iPad, iPhone and Macintosh.

Key Drivers

Strong Macintosh Sales – Resurgent demand for Macintosh has been a boon for Apple in the last few quarters. Apple shipped roughly 4.13 million Macintosh computers in the first quarter (ended December, 2010), reflecting a 23.0% year-over-year increase, attributable to strong demand for the product in each of its geographic segments. Both Asia-Pacific and Japan grew over 50%, which resulted in a double-digit growth in both desktop and portable platforms.

According to research group IDC, Macintosh sales increased 9.6% year over year in the quarter ended March 31, 2011. Apple grabbed an 8.5% share of the U.S. personal computer market, selling an estimated 1.375 million units in the first quarter.

However, Apple continues to face strong competition in the PC segment from Hewlett Packard Co. (HPQ), which leads the U.S market with 27.0% market share, followed by Dell Inc.’s (DELL) 12.8% and Toshiba’s 10.3%.

iPad 2 launch — In March 2011, Apple launched its much hyped tablet computer iPad2, and according to the analysts sales could have exceeded 500,000 units over its debut weekend. Although Apple will not be able to report iPad 2 sales for the full quarter, we believe that the launch of iPad 2 will significantly boost its top-line numbers.

IDC expects Apple to maintain 70%–80% market share through 2011, primarily due to the launch of iPad2. Based on IDC estimates, Apple will ship a minimum of 35 million tablets in 2011.

iPhone – Although Apple did not provide any specific details about the launch of iPhone 5 in the near term, we believe continued strong sales from iPhone 4 will drive top-line growth for the second quarter. We believe the availability of iPhone through Verizon Wireless will drive revenue growth in the upcoming quarter (before February, AT&T Inc. (T) was the sole iPhone carrier).

We believe the company is facing supply chain problems both for both its iPhone and iPad and the natural disaster in Japan has aggravated the situation.

Apple imports a number of manufacturing components from Japan for its iPad 2. Global supplies of NAND and DRAM, essential for smartphones such as iPhone, have also been affected by production shutdowns in Japan, which is a significant supplier of these memory chips. We believe the supply chain problem will hurt the company’s profitability in the near term.

Absence of Steve Jobs — Apple’s founder Steve Jobs took a medical leave in early January for an indefinite period of time. This is the third time that he has taken a medical leave since 2004.

Although his absence is not expected to have any significant impact in the near term, it will be interesting to see how the make-shift management responds to the growing demands of the industry. We believe it will be challenging for Apple to maintain its dominant position in the industry once its founder steps down.


We maintain our Outperform rating over the long term (6-12 months). We believe Apple is well positioned to achieve strong top-line growth over the long term based on product innovation, strong sales from iPad and iPhone and higher Macintosh sales.

Apple remains embroiled in legal battles over its mobile products. Besides Nokia Inc. (NOK), Samsung and Eastman Kodak (EK), Apple is engaged in legal battle with Taiwanese handset maker HTC, regarding the violation of numerous patents in March 2010. HTC manufactures several phones powered by Google Inc.’s (GOOG) Android mobile operating system.

Moreover, Apple’s share price has declined 2.6% since the release of first quarter 2011 results. We believe persistent supply chain problems led to such a scenario.

Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).

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