Why Apple Will Beat The Street

Apple ended November trading at $585.28 per share. At the closing price on November 30th, the shares traded at 13.28 times trailing12-month earnings and off 17% from the all-time high of $705.07 set on September 21, 2012. In the ten weeks since the all-time high, analysts have reduced their expectations for the company's December quarter and the fiscal year ending in late September. The changes in analyst expectations have contributed to the recent downward pressure on the share price. 

Apple will beat the Street's revenue and earnings consensus estimates for the December quarter and the Street's consensus estimates for the current fiscal year. In today's article I will explore the factors that will deliver an earnings surprise when Apple's quarterly results are released in late January. I expect the share price to retrace to the all-time high by the first trading day of February 2013 through a gradual recovery of lost ground over the next sixty days. Management's eps guidance and the Street's consensus eps estimate are not supported by the company's earnings to revenue ratios measured over the most recent eight fiscal quarters. 

Apple's Guidance and Analyst Expectations

For the December quarter, management offered revenue guidance of $52 billion and earnings per share guidance of $11.75. Management's guidance suggests revenue growth of 12.23% over the prior-year period and a decline in eps for the quarter of $2.12 or 15.28% from the $13.87 in earnings per share achieved last year. Management is quick to remind analysts the prior-year period contained 14 weeks versus Apple's usual 13-week fiscal quarters. In contrast to Apple's very low guidance numbers, Wall Street analysts are currently expecting revenue of $54.52 billion, representing expected revenue growth of 17.68% and earnings per share of $13.30, representing an expected decline in eps of 4.10%.

Net Income Per Revenue Dollar

Using an estimated 950 million fully diluted shares outstanding as a constant, management's December quarter guidance suggests about 21.5% of revenue will flow to net income. The Street consensus is a bit more positive, suggesting 23.17% of revenue will reach the bottom line. In an article published in early November, I illustrated the percentages of Apple's quarterly revenue that reached the net income line over the most recent twelve fiscal quarters. There's a direct correlation between the percentage of net income per revenue dollar on a quarterly basis and the iPhone product cycle. The graph below illustrates the percentage of revenue that flowed to net income over the most recent eight quarters as a reference for the performance comparisons in today's article. 

Net income per revenue dollar tends to fall during the quarters in which Apple's flagship iPhone handset reaches the end of its annual cycle. Net income per revenue dollar tends to rise during the first two quarters following the annual iPhone refresh. This is because the iPhone has the highest gross margin among Apple's device lines and the quarters in which the iPhone represents the highest percentage of revenue also yield the highest net income per revenue dollar.

Apple's Rates Of Revenue And Earnings Growth
The graph below illustrates Apple highest rates of revenue growth occur in quarters following the annual iPhone refresh and in these quarters Apple delivers the highest net income per revenue dollar.

The iPhone 4 introduced a new handset form factor while the iPhone 4S maintained the same form factor for a second model year. Although the iPhone 4S generated higher gross margin than its predecessor, it had an abbreviated period of peak demand. The iPhone 4 maintained strong global demand into the June quarter of FY2011. The iPhone 4S peaked as a product early in the March quarter of FY2012. The falloff in iPhone 4S demand through the June and September quarters of the fiscal year reduced the company's rates of year-over-year revenue growth and diminished the percentage of revenue that flowed to the net income line. 

Apple Price Target: $950 Per Share

Today I am updating my 12-month Apple price target to $950 per share. This price target represents an expected share price appreciation of 52.8% from Apple's closing price of $621.70 on August 10th, 2012. I expect share price appreciation, on average, to trail behind the rate of earnings per share growth over the next 12 months as Apple's massive market cap influences the share price performance and as the company's price-earnings multiple continues to contract.

Over the next twelve months I anticipate reported revenue growth of roughly 50%, corresponding earnings per share growth of about 60% and the aforementioned 52.8% rise in the share price value. I anticipate 12 months from today a price-earnings multiple of 14 times trailing 12-month earnings, suggesting a slight compression in the multiple from today's valuation of 14.61 times trailing 12-month earnings of $42.55 per share. For the four fiscal quarters ending June 29, 2013, I expect trailing 12-month earnings of about $68 per share. 

Apple's P/E Multiple and Cash Per Share

The graph below illustrates Apple's rising cash per share and falling price-earnings multiple over a 10-fiscal quarter period. The dates selected for all of the graphs in today's article are the first trading day of the month following the release of the company's quarterly results. The dates were selected to provide a uniform reference and to eliminate the impact of rising earnings multiples immediately preceding the release of quarterly results. 

No matter the rising cash per share, Apple's price-earnings multiple has been on a steady and indisputable decline over this 10-quarter period. I expect this trend to continue over the next 12 months. 

Apple will continue to trade at a modest multiple to earnings relative to the company's rates of revenue and earnings growth. All of the wishful thinking in the world and spirited comparisons of Apple's valuation to other large enterprises with more lofty earnings multiples will not change the outcome. 

As of Friday's closing price, Apple's market cap stands at nearly $583 billion. I expect over the next twelve months for the market cap to reach $900 billion. Already Apple's market cap is greater than the combined market caps of IBM, Microsoft, HPQ and Dell with about $40 billion in market cap to spare. Apple is among the most widely held equities on the planet and the company's massive market cap will influence the share price valuation no matter the modest price-earnings multiple relative to current rates of growth.

Apple: Focus On Earnings Growth, Not The Earnings Multiple

On February 11, 2012, I issued a revised 12-month price target for Apple of $790 per share. Since that date the share price has risen about 10% to Friday's closing price of $545.18. Over the next twelve months I expect the share price to rise at least 45% from Friday's closing price to reach above my published target.

Posts At Eventide Axiom #1: Focus on Earnings Growth, Not The Earnings Multiple

In FY2012, I forecast Apple's earnings per share to rise at least 100% from FY2011's $27.68 to over $56. Apple began this fiscal year with an eps gain of over 115% to $13.87 in the December quarter. The March and June quarters will deliver eps growth rates at or near 100% due to strong unit sales of the iPhone 4S and strong unit sales of the new iPad models that will be released later this month. This fiscal year will end with an extraordinary high eps growth rate in the September quarter due to the company's languid performance in the prior-year period. The release of the iPhone 4S in the December quarter creates a soft prior-year comparison in the quarter that closes the current fiscal year. 

Even at a modest multiple of 12.5 times trailing 12-month earnings, at $56 in FY2012 earnings per share, Apple's share price will reach $700 by early November. While it's not practical to forecast the earnings multiple the market will award Apple, it's also not necessary for the multiple to expand to reach my stated 12-month price target. At Friday's closing price the shares are currently trading at 15.52 times trailing 12-month earnings. Even if the multiple contracts, the share price advance will remain on track. 

Earnings growth will deliver strong share price appreciation for Apple whether or not the earnings multiple expands or contracts. 

Posts At Eventide Axiom #2: Applying The "Law of Large Numbers" to Apple is Bunk!

In the December quarter, nearly 75% of Apple's reported revenue was sourced from products that did not exist in the market as recently as five years ago today. With the forthcoming refresh of the Apple iPad product line, the percentage of reported revenue generated by the iPhone and iPad will continue to rise well into next fiscal year. At this time, the market for the Apple iPad can not be accurately determined nor defined and the product line remains in a nascent phase of global market development. 


The chart below illustrates the sources of Apple's $46.33 billion in revenue in FQ1 2012. 

Apple: March Quarter Expectations After Record FQ1 Results

On Tuesday Apple announced record quarterly revenue of $46.333 billion and record eps of $13.87 in the December quarter. The 73.2% rise in revenue and 115.7% rise in earnings per share were fueled by strong domestic demand for iPhones, iPads and Macintosh personal computers and by gross margin in the quarter of 44.7%.

In announcing the company's FQ1 results for the 14-week period, Apple offered revenue guidance of $32.5 billion for the 13-week quarter ending March 31, 2012 and earnings guidance of $8.50 per share. Management's guidance suggests revenue growth of 31.75% and eps growth of 32.8%. Once again, Apple's guidance will be proven decidedly conservative. 

December Quarter Revenue Growth Recap

Apple's 73.2% revenue growth in the December quarter was aided by a 14-week fiscal period encompassing the immediate post-Christmas shopping week and extraordinary revenue growth in Apple's Americas region, exclusive of the company's retail stores. The Americas delivered 92% revenue growth to $17.714 billion, representing 38.2% of total reported revenue on strong sales of the Apple iPhone 4S. 

Despite the well publicized economic problems in Europe, the region turned in a strong revenue growth rate of 55% for the quarter. Apple's Asia-Pacific region, absent the release of the iPhone 4S through an authorized carrier on China's mainland, turned in a respectable 54% revenue growth rate. The Asia-Pacific region will be the catalyst for robust revenue and earnings growth in the March quarter.

On To The March Quarter

In a recent article titled Where Apple Makes Its Money, I suggested the Asia-Pacific region will surpass Europe as Apple's second biggest revenue region this fiscal year. In FY2011, China was the only country outside the US to deliver more than 10% of Apple's reported revenue total. The release of the iPhone 4S on China's mainland in the March quarter will generate greater than 100% revenue growth in the Asia-Pacific region in this three-month period. 

The Apple iPhone

In the December quarter Apple defied skeptics who questioned the company's ability to ramp iPhone supply to meet demand. In the holiday quarter iPhone unit sales rose 128% to 37.044 million units and handset sales revenue, inclusive of accessories and related products, rose 133% to $24.417 billion or 52.7% of the company's total reported revenue. In the March quarter, the rate of iPhone unit sales growth may again reach triple digits due to the China iPhone 4S rollout and the company's proven ability to meet demand for product. At the end of the December quarter, the iPhone's global channel supply of about 6 million units represented less than three weeks of December quarter sales and was well below the targeted range of 4 to 6 weeks of supply. 

In addition to the expected strong iPhone sell-through in the March quarter, Apple can add millions of units to channel supply before the end of the period and in support of the continuing global roll out of the iPhone 4S handset. For the March quarter, I'm targeting iPhone unit sales of 36 million units. 

The Apple iPad

In FQ1, Apple sold 15.434 million iPad units and sell-through was slightly higher than reported sales. This represented 111% unit sales growth even as consumer expectations for a product line refresh to occur in the March quarter continue to grow. During the conference call with analysts following Tuesday's earnings release, management mentioned the iPad's fast adoption in the education market. With the prospect of the iPad 3's release in the March quarter and the chance the iPad 2 will remain a shipping product, Apple could deliver in the area of 200% iPad unit sales growth in this fiscal period. Education channel sales will be an iPad unit sales growth catalyst in the upcoming June quarter.

The Macintosh

The Mac's unit sales performance exemplifies the "Apple product mutual halo effect." Record Apple retail store traffic following the release of the iPhone 4S in October assisted in boosting December quarter Mac unit sales 26% to 5.198 million units. In the Asia-Pacific region Mac unit sales rose 58%. I expect March quarter Mac unit sales of about 4.7 million. Both the Asia-Pacific region and the Apple retail segment will be unit sales growth leaders in this three-month period. 

For The March Quarter

My preliminary March quarter revenue estimate stands at $41 billion, representing anticipated revenue growth of 66% and an earnings per share growth rate of about 80% to $11.50. Apple's guidance for the quarter of $32.5 billion in revenue and eps of $8.50 is consistently conservative. I currently expect Apple to beat guidance by $3 per share.

On The Fiscal Year

For the fiscal year ending in late September, I now expect revenue exceeding $175 billion and earnings per exceeding $50. FY2013 is on track to be a more than one-quarter trillion dollar revenue year. Over the next two weeks I will be updating my current 12-month price target of $640. I expect the updated price target to land in the vicinity of $700 per share. 

Apple's Earnings Quality

Apple's gross margin in the December quarter reached 44.7% and net income reached nearly 28.2% of revenue.  I expect gross margin and the percentage of revenue that flows to the net income line to remain high through the March and June fiscal quarters due to the continuing global roll out of the iPhone 4S handset. For as long as revenue growth rates remain greater than 50%, the percentage of revenue consumed by operating expenses will continue to decline. In the December quarter operating expenses came in at $3.363 billion or just above 7.25% of reported revenue. The declining percentage of revenue consumed by operating expenses contributed to the very strong net income growth in the quarter and will contribute to extraordinarily high net income growth rates this fiscal year. 

Robert Paul Leitao

Disclosure: The author is long Apple shares

Apple's Monster Quarter And The Pending Share Price Advance

Apple is unique among America's mega caps due to the company's ongoing rates of revenue and earnings growth. From $108.25 billion in revenue reported in the fiscal year ended in September, Apple will surpass $170 billion in revenue this fiscal year and reach over one-quarter trillion dollars in revenue in FY2013. At a current market cap of $375 billion, the shares trade at about 14.5 times trailing twelve month earnings of $27.68 per share and at about 8.75 times my projected FY2012 earnings of $46 per share.

Because of the company's frenetic rates of revenue and earnings growth, Apple is in an equity class all its own. Apple will deliver a third consecutive fiscal year of revenue growth above 50% and eps growth above 60%. This fiscal year's strong performance begins with what I call "Apple's monster quarter."

Apple's Monster Quarter

Apple's first fiscal quarter of FY2012 will be fourteen weeks in length. It stretches from September 25, 2011 to December 31, 2011. The additional week in the quarter will encompass the immediate post-Christmas period. The quarter also includes the initial release of the iPhone 4S in the United States and other launch countries. The additional shipping week, the new Sprint agreement for the iPhone and pent-up demand for the recently refreshed smartphone handset will deliver revenue growth greater that 60% in the quarter and eps growth exceeding 80%. 

AAPL's Discount To Current And Future Growth
The chart below illustrates how much the rate of Apple's share price appreciation has fallen behind the rate of earnings growth over the past four quarters. Despite the 82.7% growth in earnings per share in FY2011, at Apple's closing price of $403.33 on Friday, December 23rd, the share price has risen only 24.64% year-over-year. The dates selected for the charts in this article represent the first trading day of the month following the release of quarterly earnings and the closing price on Friday, December 23, 2011.

Apple's PEG Ratio Signals Share Price Gains Ahead

On Friday, Apple (AAPL) closed New York trading at 343.26, up $7.59 on the day and up  $16.91 or 5.2% on the week. Although the week's share price advance was impressive, Apple remains significantly under valued based on the company's current rates of revenue and earnings growth. In the first six months of the current fiscal year Apple's revenue has risen 76.2% and earnings per share has gained 83.2%. In contrast, since the first trading of Apple's current fiscal year on September 27, 2010, the share price has responded with only a 17.9% gain.

Last week in a post titled AAPL: The Coiled Spring I compared the median price targets for three popular equities: Amazon, Apple and Netflix and the share prices for each of these companies. Apple is trading at a price-earnings multiple of 16.35 times trailing 12-month earnings of $20.99 per share and at only 76.3% of the median Wall Street price target of $450 per share. In comparison, both Amazon and Netflix are trading at much higher price earnings multiples and at or near their respective median price targets.

Apple's PEG Ratio: More Share Price Gains Ahead

For today's post I asked Jeff Fosberg of the Apple Finance Board to adapt his popular "coiled spring" graphic to reflect not the price-earnings multiples of the above-referenced companies but the PEG ratios of the companies at Friday's closing prices. 

Simply defined, the PEG ratio represents the price-earnings multiple divided by earnings per share growth. The lower the PEG ratio, the lower the current valuation relative to rates of earnings growth. Apple's current PEG ratio is 0.63 versus 2.92 for Amazon and 1.98 for Netflix. Compared to high-flying stocks such as Amazon and Netflix, Apple is bargain priced and the company's current PEG ratio signals more share price gains ahead. Because Amazon, Apple and Netflix operate in different product and service markets, the PEG ratio is a more effective way to compare and contrast the current market valuations of the three popular equities than a comparison of price-earnings multiples alone. This comparison accentuates the deep discount to growth at which Apple currently trades.  

AAPL: The Coiled Spring

On Friday AAPL closed New York trading at $326.35, down $4.88 on the day. At that price Apple is trading at a price-earnings multiple of 15.55 times trailing 12-month earnings of $20.99 per share. This lowly valuation includes more than $70 per share in cash on Apple's balance sheet and is in the context of an earnings per share growth rate of 83.2% in the first six months of the current fiscal year. 

On June 12th I published my updated 12-month price target for AAPL of $590 per share.  At Friday's closing price of $326.35 a $590 target price might seem ambitious. It's an anticipated 80% rise in the share price in roughly 12 months. But as I will detail in this article, AAPL is trading not only at a low historical p/e multiple since the elimination of deferred revenue accounting on the iPhone in FQ1 2010, but is also trading significantly below the current price targets of the Wall Street pros. 

AAPL: The Coiled Spring

For this article I asked Jeff Fosberg of the Apple Finance Board to update his popular "coiled spring" graphic to reflect Friday's closing prices for three popular publicly traded enterprises: Amazon, Apple and Netflix. The graphic compares the valuations of the three companies based on current price-earnings multiples and the gap between the current median price target from Wall Street analysts and Friday's closing prices.

I do not view price-earnings multiples as an effective means to compare companies in dissimilar industries. Amazon, Apple and Netflix do not compete directly in their respective core markets and Apple's hardware products are revenue conduits for products and services offered by Amazon and Netflix. The markets for the Amazon Kindle and the Apple iPad only partially overlap. However, comparing the gap between current trading prices and Wall Street price targets makes for a compelling contrast between the valuations of the three companies.

No matter the 82.3% rise in eps in the first six months of Apple's current fiscal year, the average estimate among analysts calls for eps in FY2011 (ending in late September) of $24.76 versus $15.15 in FY2010, a gain of 63.4% with less than six months remaining in the one-year period. For FY2012 the current average eps estimate of $28.72 represents only a 16% gain above the estimated current fiscal year eps performance. 

Posts At Eventide AAPL Price Target: $590 Per Share

Few enterprises in recent history have captured the imagination and stirred the emotions of consumers like Apple. Ask most anyone their view of Apple and one is apt to hear spirited responses ranging from high admiration and praise for the company  to complaints about the way Apple seeks to control virtually all aspects of the user experience and the content available to purchase through the various iTunes and app stores. No matter the strong sentiment about Apple, few can dispute the company's extraordinary success and potential for continued growth.

Apple's Share Price Today

At Friday's closing price of $325.90, the shares are trading at levels last seen in the closing days of calendar year 2010. This is despite the fact the share price reached an all-time high of $364.90 in intra-day trading on February 16th. 

There are, of course, macro economic factors impacting Apple's share price performance and investors are currently trapped in a challenging market cycle. But for the first six months of the current fiscal year Apple's revenue has risen by 76.2% and earnings per share has moved higher by 83.2%. These rates of growth and anticipated similar rates of growth for the remainder of this fiscal year are not currently priced into the company's shares. 

On May 31st I published a posted titled Why I'm Bullish on Apple. In that post I mentioned the company's prospects for growth and the factors that will deliver outstanding revenue and earnings growth well into next fiscal year and put forward my current 12-month price target for AAPL of $590 per share. In this post I'll mention a number of other important factors that will deliver an 80% share price gain over the next twelve months.  I anticipate Apple will move back into a share price trading range of 17 times to 20 times trailing 12-month earnings that prevailed prior to April of this year. That trading range in future periods will represent a compression of the share price relative to earnings when the company's high cash balances are factored into the numbers. 

AAPL Share Price Forecast

The graph and table data below detail Apple's share price on the first day of the month following the release of the company's quarter earnings over the most recent six fiscal quarters and my share price forecasts for the next four fiscal quarters. 

The AFB AAPL Price Target Index - June 2011 Edition

The Apple Finance Board is home to some of the best known and hardest working independent AAPL analysts on the blogosphere. As a service to the members of the AFB, a popular and well respected discussion board, I'm hosting the index of AFB AAPL price targets and share price forecasts developed by the members. 

Index participants submitted AAPL price targets for the first trading day of the month following the release of Apple's quarterly earnings reports through May 1, 2012 and associated ranges for the share price. The dates chosen for the quarterly price targets represent the first trading day of the month following the release of Apple's quarterly earnings reports, providing time for the markets to adjust the company's valuation based on the the most recent quarterly numbers. 

Comments on the index can be made at the bottom of this post and for registered members of the AFB in the topic created specifically for this discussion.  

The graphs and data table below indicate the average AAPL price targets of the index participants. The price targets and price range forecasts of each of the participants is listed below the averages. Thank  you to the AFB members participating in the index for the benefit of our readers.

	AFB	Index	Averages
	Date	Low	High	Target
	Aug 1, 2011	352	418	397
	Nov 1, 2011	394	470	445
	Feb 1, 2012	438	518	498
	May 1, 2012	478	558	547

Posts At Eventide Resource Guide

Posts At Eventide Resource Guide
As a moderator of the Apple Finance Board and an independent Apple analyst, two of the challenges I encounter in preparing quarterly estimates are finding useful historical information about Apple's quarterly results and formatting that information for purposes of analysis.

My AAPL quarterly estimates and share price forecasts are influenced by the company's most recent results. Consequently, finding and storing relevant financial information is essential in the estimate and forecast development process. As a benefit to members of the AFB and regular readers of this blog, I've posted a Posts At Eventide Resource Guide comprised of  links to Eventide posts that provide financial information for use in the developing quarterly estimates for future periods based at least in part on the company's recent results. 

It's my desire for this work to be a benefit to all readers seeking to understand Apple's recent quarterly performances and to serve as a repository of information about the company's quarterly financial results for the benefit of other independent analysts preapring quarterly estimates and share price forecasts. 

To maintain relevance and timeliness, the listing below includes only AAPL-related articles published over the most recent 12 months. 

Posts At Eventide AAPL analysis articles listed by month of publication. 

Robert Paul Leitao

The AFB AAPL Price Target Index - February 2011 Edition

The AFB AAPL Price Target Index - February 2011 Edition

The Apple Finance Board is home to some of the best known and hardest working independent AAPL analysts on the planet. As a service to the members of the AFB, a popular and well respected discussion board, I'm hosting the index of AFB AAPL price targets and share price forecasts developed by the members here at Posts At Eventide.

This post is an update to the initial AFB AAPL Price Target Index published in January. The participants in this index represent a cross section of AFB members ranging from well known AAPL analysts Horace Dediu, Daniel Tello, Turley Muller and Andy M. Zaky, to long-time AFB members Mark Beauch and Ron Smith and newer members such as Dennis Hildebrand. In all, twenty four (24) members of the Apple Finance Board are represented in the index.

AFB AAPL Price Target Index Averages

Index participants submitted AAPL price targets for the first day of the month following the release of Apple's quarterly earnings reports through February 1, 2012 and submitted associated ranges for the share price. Comments on the index can be made at the bottom of this post and for registered members of the AFB in the topic created specifically for this discussion.  Thank you to the index participants for submitting their share price targets and anticipated trading ranges. 

The graph and data table below indicate the average AAPL price targets of the two dozen index participants. 

AAPL 12-Month Price Targets

AAPL 12-Month Price Targets

On February 1st I posted a five-quarter review of Apple's price-earnings multiples with and without the company's burgeoning cash balances factored into the share price valuations. Over a one-year period ended on February 1st, Apple's share price rose 77% against a 75% rise in reported earnings per share.

Looking forward 12 months to February 1, 2012, I anticipate about a 70% rise in Apple's share price to $590. This is based on an expectation of a continuing rise in quarterly earnings per share at a pace close to the 75% realized in the December quarter for the balance of FY2011 with strong eps growth continuing through FY2012. 

The dates chosen for the quarterly price targets represent the first trading day of the month following the release of Apple's quarterly earnings reports, providing time for the markets to adjust the company's valuation based on the the most recent quarterly numbers. 

The graph below illustrates the growth in Apple's share price over the past four quarters and my quarterly target prices for the next 12 months. The table data provides a delineation of the share price changes over the past four quarters and the share price changes projected in my estimates. 

				Quarterly
	Date	Price	Target Price	Price Change
	2/1/10	194.73
	5/3/10	266.35		36.78%
	8/2/10	261.85		-1.69%
	11/1/10	304.18		16.17%
	2/1/11	345.03		13.43%
	5/2/11		405	17.38%	Projected
	8/1/11		454	12.10%	Projected
	11/1/11		519	14.32%	Projected
	2/1/12		590	13.68%	Projected