Sunday, December 19, 2010

Apple: Testing Analyst EPS Estimates With Revenue Forecasts

Apple: Testing Analyst EPS Estimates With Revenue Forecasts
I'm frequently asked by members of the Apple Finance Board to review the revenue and resulting earnings per share estimates of Wall Street analysts for accuracy of their eps estimate outcomes. 
Late last week Philip Elmer-DeWitt posted an Apple 2.0 column titled $1 billion here, a million there in which he cited recent analyst revisions to December quarter estimates. In composing a comment in response to that column, I reviewed the net revenue to net income ratio for Apple over the past several quarters and came up with a ratio to apply to revenue estimates to determine a corresponding eps result. This is one of the tests I apply to my own estimates before publishing the results of my work.
It's a fairly easy and reasonable (though not intended to be precise) way to test the relationship between an analyst's revenue and eps estimates. In fiscal year 2010 about $.215 of each revenue dollar reached the net income line. Multiple an analyst's revenue estimate in billions by .215 and then divide that amount by .935 for the number of shares (about 935 million) that will be reported by Apple in the December quarter for use in the eps calculations.
Quarterly Revenue Data and Cost Component Ratios
On November 21st I published a blog post titled Apple's Profitability and the Influences of Gross Margins, Tax Rates and OpEx. This post details the impact of these components on Apple's quarterly results over the past two fiscal years. On November 28th I continued this review in a blog post titled Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue. For readers interested is reviewing the quarterly results for the past two fiscal years, I've posted the data in an entry titled Apple: A Comparison of Eight Quarters of Revenue and Earnings Per Share. The post is intended to be a conveniently accessed repository of the quarterly information for Apple Finance Board members and other readers if this blog. 
I will be updating my own published estimates for the December quarter before the end of the month and under no scenario do I see quarterly revenue below $26.5 billion and eps below $6.00 per share.

In the December quarter, due in large part to an anticipated 70% rise in revenue, I expect the net income ratio to revenue to be higher than the FY2010 average. In the December quarter operating expenses will scale at no more than two-thirds the pace of revenue growth and the company's tax rate will remain low. I also expect gross margin to rise sequentially, leading to an eps performance far higher than current analyst estimates.

Robert Paul Leitao

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