By Marek Fuchs
With Apple’s (AAPL) propensity for low-balling earnings estimates amid various media interpretations and a cottage industry of whisper numbers from gadflies, it’s hard to find a consensus for Apple’s first quarter, which will be reported after the bell on Wednesday.
As a result, the operative question of Apple’s earnings day will be as straightforward as it is uncommon: Precisely what expectations will the stock be reacting to when the numbers are released? Jacked-up ones that have them earning $15.50 or those pegging the quarter at a lean $11.97? That makes for a technical average (among the flotilla of nearly 50 Wall Street analysts who cover Apple) of $13.42, but this is not an “average” situation. Quite the contrary.
On Wall Street, it’s usually hard to find appreciable differences between analyst estimates. Here, you can drive an 18-wheeler through the range of numbers from analysts, while rhetoric from the media is only echoing the confusion. Reuters terms expectations “subdued,” while Motley Fool declares it “a safe assumption that Apple will beat its own guidance.”
The search for detail
In terms of detail, there’s even less consensus. Bloomberg says the stock reaction will be totally dependent upon iPhone5 numbers, while Motley Fool, seen above saying it’s a safe bet Apple would beat, also opines that “no one wants Apple’s iPad anymore” and that this will tear earnings asunder.
In a somewhat comic turn, The Wall Street Journal even ran the tantalizing headline: “Crystal Ball: What's ahead for Apple's stock price?” And what does the crystal ball say? Well, the WSJ hopes you have one. They are running a contest; the closest guess gets named in next Saturday’s paper.
With earnings expectations anyone’s wild guess (or, in the case of the Journal, a parlor game) you would probably do well – in this one case – to skip the earnings-expectations game. It’s simply impossible to determine what precise earnings number the market will be reacting to.
Cast your eyes to this
Cast your eyes, instead, to something a little less concrete but probably more relevant: the interplay between margins and revenue. Think of Apple, then, as a latter-day Amazon (AMZN). After all, it’s not Apple’s flush history that provides a guide, but its most recent quarter. In the fourth quarter of 2012, Apple earned $8.2 billion, or $8.67 per share. That (for what it’s worth) missed consensus by about 20 cents. Revenues, though, at $36 billion, were robust – and ahead of expectations. Higher production costs on the iPhone 5 were the culprit.
You got that? No matter how glitzy a company, all roads eventually lead to component costs. Get a quick read on Apple’s component costs this go round and you’ll probably know – better than a trader attempting to compare earnings to an impossible read consensus – how the stock will react over the next bit of time. If component costs are a problem again, revenues will have to come strong as the dickens (a la Amazon) to earn the market’s forgiveness. Bloated component costs and revenues that don’t raise eyebrows spell trouble.
Apple’s third quarter miss, caused by iPhone purchase delays in the prelude to the iPhone5 release and economic weakness in China, is probably a bit less relevant. Analysts won’t be looking at product delays or China as much as the general sense of whether component costs are in control or outstripping revenue growth by a decent length.
Is that as easy as assuming the stock will react directly to $13.42? Or $14.55? Or $11.92, for that matter? No, but in this case we can’t be bound by any traditional definition of consensus. Tune out all the strum und drang and, when the numbers hit, cast your eyes on the relationship between component costs and revenue.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.