Sunday, April 10, 2011

FY 2012 Analyst Estimates: Why AAPL Is Set To Pop

On September 11, 2010 I published a post titled FY2011 Analyst Estimates: Why AAPL Is Set To Pop. At the time the post was published AAPL had ended the week's trading at $263.41. Seven months later and with AAPL closing on Friday at $335.06, the share price is poised to again move higher and more than surpass the all-time trading high of $364.90 set on February 16, 2011.
Analyst FY 2011 Estimates
At Friday's closing price of $335.06 and a price-earnings multiple of 18.69 times trailing 12-month earnings per share, AAPL is trading at a deep discount to the company's 67% rate of eps growth in FY 2010 and the December quarter's eps growth rate of 75.2%. The current Wall Street consensus for the March quarter is revenue of $23.18 billion and eps of $5.33 per share or an eps growth rate of 60%. For FY 2011, ending in September, analysts are expecting revenue of $100.43 billion or about 54% revenue growth and eps of $22.97 or  eps growth of about 51.2%. Both estimates are well below current rates of growth. In the December quarter revenue rose 70.5% and eps 75.2%. But the disconnect between the analyst consensus and the company's current rates of growth become even more dramatic for fiscal year 2012 that begins in late September. 
FY 2012 Analyst Estimates
Expanding on a comment I made on a recent Apple 2.0 column titled AAPL: What Could Go Wrong?, the Street FY 2012 estimates for AAPL deny reality. The current Wall Street analyst consensus for FY 2012 is revenue of $117.95 billion and eps of $26.51. It's possible (and increasingly probable) Apple will meet or exceed those average estimates this fiscal year. In other words, the Street is forecasting zero revenue and earnings growth for next fiscal year. If Apple's December quarter rates of revenue and eps growth remain consistent, the company will report revenue of $111.20 billion and eps of $26.54 this fiscal year. For the March quarter I estimate revenue growth of  87% and eps growth of just under 90%. For the fiscal year I expect earnings per share of no less than $27. 
To reach the Street's current FY 2012 revenue consensus in FY 2011 revenue would need to rise this fiscal year by about 81%. To reach the FY 2012 eps consensus in FY 2011, eps would need to rise this fiscal year about 75% or about the same rate of eps growth reported in the December quarter.
Apple's Dynamic Revenue Mix
To sustain strong revenue and eps growth over the next eighteen months and through FY 2012, Apple does not need to release additional new products. In the recent December quarter (and according to my estimates again in the March quarter), iPhone revenue growth exceeded total revenue from iPad sales activity. The company's existing product lines (now including the Apple iPad) already provide a strong foundation for revenue and earnings growth for at least the next eighteen months. 
iPad revenue will surpass the revenue generated from Macintosh unit sales in the current June quarter, positioning the iPad as Apple's second highest revenue generator behind only the iPhone. The expanded domestic iPhone distribution that now includes Verizon network subscribers and the expected expansion of iPhone distribution in China sometime prior to the start of FY 2012 will sustain high rates of iPhone unit sales growth through the next fiscal year. The global market for the Apple iPad is in its early stages of development and iPad unit sales growth will also support strong revenue growth for the next several quarters. These factors alone suggest FY 2012 revenue of at least $165 billion and eps of at least $40, well above current Wall Street analyst estimates.


iTunes Revenue and Other Income
There are other sources of revenue and revenue growth for Apple that are commonly overlooked. As the number of iOS-based devices in the market continues to rise each quarter, revenue from the various iTunes stores is also on the rise and revenue growth from apps sales, ads and digital content will grow dramatically over the next few years. Further, the Mac app store has only recently opened. The return on Apple's cash and marketable securities (now totaling well over $60 billion) will rise as interest rates rise and add to the eps growth provided by growing device sales.
There is a definite halo effect among Apple products and at the epicenter of product sales are the Apple retail stores. In the December quarter retail store revenue rose 95% and new stores are opening each quarter. The Apple iPad appears to be a retail store magnet for customers. Since the release of the Apple iPad the rate of retail store revenue growth has surpassed the rate of revenue growth for the company as a whole. 
Price-Earnings Multiple as a Forecasting Tool
Although price-earnings multiples are a popular measure for evaluating share prices, I consider it useful only for comparisons of companies in the same or similar industries. For example, Apple's price-earnings multiple shouldn't be compared to the price-earnings multiple of Amazon (AMZN) or Google (GOOG). These are two popular but misguided comparisons. However, I do use this measure to evaluate historical market valuations of Apple and to forecast share price movements based on a price-earnings multiple range.  
On February 16, 2011 when Apple reached its current all-time high of $364.90 the shares were trading at a multiple 20.36 times earnings versus the price-earnings multiple of 18.69 at Friday's closing price. On February 1, 2011 I published a post titled Apple's P/E Multiple With And Without Cash In The Valuation. I expect AAPL to be valued within its current range of between 18 and 20 times trailing 12-months earnings. I don't expect the share price to trade below 18 times earnings or above 20 times earnings for extended periods of time. I do expect the share price to rise in concert with quarterly earnings and within the aforementioned price-earnings multiple range. 
Why AAPL is Set to Pop
Analyst price targets are determined by anticipated earnings growth and market conditions. My current target price and share price forecasts reflect anticipated earnings growth at a pace similar to the December quarter's growth rate of 75% for the balance of FY 2011 and continued strong growth through Apple's FY 2012 beginning in late September. My current target price is $590 per share.
Current Street estimates forecast eps growth of about 52% in the current fiscal year and eps growth of about 16% in FY 2012. These estimates lead to a mean target price of $424.80 as of this writing and a price-earnings multiple of 18.50 times Street consensus of $22.97 eps for the current fiscal year. These eps estimates and target prices will be revised following the release of Apple's March quarter results later this month. On average the current Street eps estimates for FY 2012 fall below my expectations for Apple's performance in the current fiscal year and the upward revisions in Street estimates following release of the company's March quarter results will be dramatic.   
I reiterate my current price target of $590 per share and expect the upward revisions in Street eps estimates and price targets to add fuel to the strong share price gains to be realized through the remainder of the current fiscal year.

Robert Paul Leitao

23 comments:

  1. This stock is sick and on the verge of collapse. It has high target prices and individual investors won't touch it. Apple belongs to the hedge funds as a manipulators playtoy. I'm willing to bet that Apple has another blowout quarter and the stock drops about $10-$15. Hardly what you would call a wonder stock. There's far too much hype around this stock. Stocks like Amazon, Netflix and Intuitive Surgical are far better. They've got higher P/Es, not much cash and nobody questions their nonstop share price rise. Meanwhile, analysts hype up Apple and it goes, well, nowhere except down. If I were to photograph Steve Jobs coughing and send it to a tabloid newspaper, I could take Apple's stock down $20 in five minutes.

    This is the type of company that Apple is. Consumers may love their products, but individual investors hate the stock. That's one good reason Warren Buffet won't touch Apple. He doesn't understand it. Him along with all the rest of the analysts. Apple is going to miss some number for earnings and the share price is going to plummet. Look out below. Just like the blowout quarter before it, this quarter is another wasted quarter for investors.

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  2. Thank you for this great analysis. (a minor observation - I presume you meant "above current Wall Street analyst estimates" at the end of the Apple's Dynamic Revenue Mix section?)

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  3. Apple’s going to make more $ this past quarter from smart covers than Google does from Android.

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  4. @GeneralMotors Gravytrain

    What's so hard to understand about Apple?
    1. People like quality and ease of use in computer-related electronic equipment.
    2. People are willing to pay extra for quality and ease of use
    3. Windows is insecure crap that only corporations are now willing to spend billions on IT staff to fix in the mistaken belief that PCs save money.
    4. Android is about-to-be insecure crap that only computer nerds, Apple-haters, and Adobe programmers are now willing to spend hours of their own time to fix in the mistaken belief that Android is a free and open source operating system.
    5. As people in other parts of the world get richer, they will increase their demand for Apple products.

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  5. Anonymous:

    Thanks for catching my mistake. I've fixed the error.

    Robert

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  6. Anonymous:

    The revenue from the iPad 2 smart covers is reason alone to raise per unit iPad revenue estimates for the June quarter.

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  7. General motors Gravytrain:

    AAPL is not going to collapse. Quite the contrary. I reiterate my target price target of $590 per share and expect the share price to rise in concert with eps growth.

    Price-earnings multiples are invalid in comparing enterprises in different industries and as I stated I expect AAPL to continue trading between 18 times and 20 times trailing 12-month earnings. Price-earnings multiple expansion isn't needed to move AAPL to $590 per share by early November.

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  8. Dead on analysis. The key point I take from this is how incredibly low analyst's targets are for 2012. Given current growth rates and the addition of the iPad, this is actually hard to believe. If Apple can make any new iPhone deal in China, even your numbers will be low! Of course, if they do release another new product, it will be time to rewrite everything.

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  9. If Apple needs to spend more money to secure supply next quarter, as some have suggested, might they be able to do this without lowering margins? I ask because you're obviously not worried about a negative margin surprise for q3 guidance.

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  10. The Street seems to like to nick AAPL for just about *anything* (i.e., the 'missed' analyst expectations of 6 million Ipads in the October earnings report). So I have the same type of concern as joshdean: could they mention anything related to the Japan earthquake/rising component prices to suggest future lower margins? These AAPL bears like to pounce on anything, more often imagined than not, and make a bigger deal out of it than it actually is. Would their delusions about any kind of comments on margin serve to limit share price appreciation in the short term?

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  11. @Anonymous from 1:36 PM:

    I wouldn't put it past bears to hop all over negativity such as poor guidance on margin, etc. Perhaps there will be a temporary negative reaction. But I think that the author is correct: ultimately, cooler heads prevail and the share price will follow the earnings. So as long as the growth is torrid, so too will be the share price gains. Just don't expect a linear ride.

    Thompson

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  12. Seems like the info here is reasonable.

    My question is that even though at 18-20 p/e the stock is in the 550+ range, why when other companies with less quality earnings and or growth
    rates get multiples north or 40??

    Apple at p/e of 40= stock above $900. If any company deserves it, tell me why not Apple? Is there a better growth story. A better company with proiducts in such demand etc etc NAH there isnt, but still compressed P/E? GO FIGURE.

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  13. AAPL is a no brainer for the long run as long as the overall market continues to be healthy. I think we will consolidate for awhile though like we did last time before the big run up. I'd be long as soon as the weekly stochastics stalls and begins to turn up.

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  14. joshdean:

    Apple's ability to secure components if even at higher prices for a short time is also a competitive advantage. I'm really not concerned about short-term margin pressure considering the after-purchase revenue potential of each iOS-based device sold.

    While much attention is focused on gross margin, few have noticed the significant drop in operating expenses relative to revenue. As revenue growth has accelerated the percent of revenue consumed by operating expenses has fallen sharply and may mitigate any short-term pressure on margins due to higher component costs.

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  15. Anonymous:

    P/E is a measure that's valid only when comparing companies in the same or similar industries. I do use it as a guide to determine the price range the market will assign to Apple based on earnings. I don't expect the market to award a higher P/E to Apple based on accelerating earnings growth but for the P/E to remain relatively consistent as earnings continue to rise.

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  16. GM GV:

    That is the most deluded thing I have ever read in my life. Apple about to collapse? You have that backwards, it's Microsoft that is about to collapse, not Apple.

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  17. We will see whom is right or wrong in due course.
    What I think is this: is the most innovative company I have ever owned, and I'm hanging my hat on their nail...there is not a better tech company in the universe...IMHO.

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  18. At the end of the next 3 Qtrs, I will be sure to post the verbatim quote of GeneralMotors GravyTrain on(April, 10 2011) along with the 52 week low on AAPL stock price --just to see how much water (or reason)the forecast holds. :)

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  19. Everything great...but someone tell me what is wrong with $AAPL for last 2 weeks then? What is it?

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  20. Japan, technical consolidation, earnings coming up...it already ran up a lot these past 6 months, has to stop the sprint to breathe for a second...

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  21. GeneralMotors GravyTrain is being sarcastic.... don't anyone notice sarcasm anymore

    Quote:
    Stocks like Amazon, Netflix and Intuitive Surgical are far better. They've got higher P/Es, not much cash and nobody questions their nonstop share price rise.

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  22. I see, thought Gravy was just a doodoo

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  23. Enjoy the ride. $750 by June and a split.

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