Breakout

Time for Apple to Answer Its Wake-Up Call

Jeff Macke
Breakout

When earnings expectations are as low as they are for Apple (AAPL), results don't get "released" as much as they escape captivity. Even if Apple sandbagged its guidance in order to make the actual numbers look good, the company is almost certain to report shrinking year-over-year profits for the first time in more than a decade.

According to Yahoo! Finance, Apple is expected to report earnings of $10.07 per share on $42.6 billion in revenues. In the same quarter last year Apple earned $12.30 a share. Negative earnings growth means Apple's much cited P/E of 9 isn't all that it would seem.

Hank Smith, CIO and VP of Haverford, is long Apple and says investors can win big tonight with just a little help from CEO Tim Cook. Smith says Cook can send shares higher one of two ways.

First, the company can come up with a more creative capital allocation strategy in the form of buybacks or a dividend hike. Smith reasons that Apple is better off buying shares with the stock at $400 than when it was $300 higher. Unfortunately Apple already started a $10 billion buyback program last October with the stock in the mid-$600 area. Suffice it to say, the program did little to support the shares.

Smith would much prefer a boost in the payout to shareholders. "Dividends are very real and the most tangible statement a company can make about the confidence in their current condition and future prospects," he states.

What would really get the Street's blood pumping would be some sort of new product. The iPad, iPhone and iPad all changed the world, but that was a long time ago. By tradition Apple releases products only during "events" that occur whenever the company pleases. This caginess has only fed the bear case and the growls are getting louder.

"It's one thing being coy and non-communicative when your stock price is rising every single month and every single quarter," notes Smith, "but when you drop from $700 a share to under $400 in a mere 4 or 5 months, I think that's a wake up call."

The stage is set for Apple to come up with an organic upside surprise tonight and it doesn't even involve selling more product. All the company has to do is come up with some sort of release date on almost anything new whether it be distributing cash to shareholders or proving it can innovate without Steve Jobs.

Tim Cook has gotten his wake-up call. Tonight Wall Street gets to see if he's asleep at the switch or out to lunch.

[Jeff Macke owns shares of Apple]

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