Earnings Preview: Apple

Zacks

Apple Inc. (AAPL) will release its fiscal fourth quarter 2012 results on October 25, 2012. Apple has an average earnings surprise of 11.72% over the past four quarters. We don’t expect a major change in the earnings trend pattern for the current quarter.

Prior Quarter Highlights

In the third quarter, Apple’s top line expanded 22.6% year over year to $35.02 billion and beat the company’s forecast of $34.00 billion primarily driven by strong iPad sales in the quarter. However, revenue fell shy of the Zacks Consensus Estimate of $37.49 billion.

Though the company’s bottom line of $9.32 per share increased 19.6% from $7.79 per share in the year-ago quarter, it missed the Zacks Consensus Estimate by 10%. However, reported earnings were ahead of management’s conservative guidance of $8.68.

For the fourth quarter of fiscal 2012, Apple expects revenues of approximately $34.0 billion, lower than the Zacks Consensus Estimate of $36.3 billion. Earnings are projected at approximately $7.65 per share. Apple expects gross margin to be 38.5%, reflecting stock-based compensation expense of approximately $70.0 million.

For further details please read: Apple Shares Fall on 3Q Miss

Estimate Revision Trend

In the last 30 days, eight out of the 36 analysts covering the stock revised their estimates upward, while six downward revisions were noticed for the fourth quarter. The Zacks Consensus Estimate for the quarter remained at $8.93 per share for the same period of time.

Analysts expect iPhones to be the major catalyst for the company this quarter. The recent unveiling of iPhone 5 and the price cuts of the earlier version of the iPhones would help expand its top line. However, supply related constrains are the near-term headwinds for the company. Moreover, weak PC shipment is expected to impact the top line.

Recommendation

We believe that Apple remains the biggest growth story over the long term based on its superior product pipeline, Apps, iCloud and loyal customer base. Apple is also well positioned to gain from international expansion going forward. Additionally, the recent shareholder friendly moves such as dividend payment and share buyback are expected to drive the stock going forward.

Nevertheless, we believe that Apple’s ability to spur the popularity of its products in developing nations such as China, where pricing is often an important consideration, will go a long way in deciding the company’s future growth.

However, Apple continues to face increasing competition from Google Inc’s (GOOG) Android based products manufactured by Asian handset and tablet makers like Samsung and HTC. Although Apple has been trying to block the sales of products from these companies all over the world, its efforts have not been entirely successful.

We have a Neutral recommendation over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the near term.

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