Apple’s Guiding Light

How will the market respond to Apple’s (AAPL) Q4 earnings expected out later today? What key factors should we look at to determine if Apple is a Buy at these levels?

I see four key elements to analyze regarding Apple’s current position and today’s earnings release:

1. Liquidity
2. Sentiment
3. Expectations
4. Guidance

LIQUIDITY

In today’s market, liquidity is king. A simple and effective measure of liquidity is to look at a company’s balance sheet and calculate its quick ratio. A quick ratio is Current Assets less Inventory divided by Current Liabilities. This ratio shows a company’s ability to meet its short-term obligations. The higher the quick ratio, the better.

click to enlarge images

The preceding chart compares the quick ratio for Dell (DELL), HP (HPQ), and Apple over the past four quarters. As the chart clearly shows, Apple’s quick ratio is not only rising every quarter but is currently about 3 times that of either Dell or HP.

Combine this improving quick ratio with Apple current cash position of approximately $21 billion, and it is safe to say that Apple is extremely well positioned for the future.

SENTIMENT

With more and more people sitting on the sidelines in this market, I like to look at sentiment indicators to see how people perceive a company and its products thru a voting or polling style application. One such application, Piqqem.com, allows a user to vote on the price direction of a stock as well as pick an actual future price.

By looking at the preceding screenshot, Piqqem shows a price direction for Apple as being up ‘one arrow’ or generally positive with a price of $109.58 predicted for November 22, 2008. So the sentiment on this stock is positive with an expectation of a 12.28% price increase in the next thirty days.

ANALYST EXPECTATIONS

If we compare Apple’s fourth quarter company guidance, traditional analyst expectations, and the so-called real analysts, we will hopefully see some interesting trends. The real analysts are comprised of Andy Zaky (Bullish Cross), Deagol (Stashbox.org), and Turley Muller (Financial Alchemist) and they have a history of being right.

As we can clearly see, the consensus estimates (traditional analysts) are more optimistic than the typically very conservative company guidance, while the real analysts are substantially more positive than the consensus estimates. Are we looking at a blow-out quarter? The Real Analysts are predicting 7.27 million iPhones sold this quarter – 81.75% more than the consensus estimate.

GUIDANCE

As we have learned with Apple, all the positive fundamentals, sentiment, and beating of expectations can easily be trumped by generally conservative guidance by Apple’s management team. So where do we expect to see Apple’s guidance for next quarter?

If we look at the preceding graph we can see the difference between the Q4 EPS estimates 90 days ago, the estimates today, and the company’s guidance. The estimate 90 Days Ago is 19.35 % greater than the company’s guidance while the estimates today are 10.48% higher than the company’s guidance. So the analysts are comfortable being about 10% above company guidance.

If we apply these factors to the Q1 estimates, than a 19.35% reduction of the 90 Days Ago Q1 estimate of 1.93 is 1.55. The analysts are currently at 1.66 a share, so the 1.55 guidance is within the 10% comfort zone

On the other hand, if guidance is less than 1.50, then expect the analysts to take their Q1 estimates down and for investors, at least in the short run, to take the price of Apple’s stock down.

SUMMARY

Apple will beat its consensus estimates today and remain one of the best fundamental companies in the world. But all eyes will be on Apple’s Guiding Light and if that Guiding Light is less than $1.50 a share, expect a very rough opening tomorrow.

Disclosure: Author is Long AAPL 2009 Calls

Comments

[fatcat:]

AAPL had apretty rough close today..

2008 Oct 21 04:14 PM

[Short Apple:]

So Apple gave forecast less than 1.50....now what...the stock is trading up in after-hours...

2008 Oct 21 05:24 PM

[KenC:]

Now what? I'll tell you now what, look at those stunning non-GAAP numbers. Stunning.

2008 Oct 21 10:20 PM

[Neil Anderson:]

Definitely stunning.

2008 Oct 22 12:08 AM

[Jett Winter:]

The non-GAAP numbers were stunning as they defer iphone and Apple TV revenue. The cash position now at $25 billion creates a rock solid balance sheet.

But the analysts are at 1.66 for Q1 and Apple at the top of their is at 1.35. Do the analysts sit tight or do we see guidance from them taken down tomorrow?

Maybe nobody cares, but a series of downgrades my provide a great buying opportunity.

2008 Oct 22 12:17 AM

[TanToday:]

If AAPL reported normally, without provisions to NOT SHOW all the real earnings, a requirement forced upon them by Sarbanes Oxley, since they give free upgrades to the software on the product that forces them to split the earnings over EIGHT quarters, so a real $1 earned NOW, will be reported at 12 cents for eight quarters.

Anyway, here is the REAL numbers as released by AAPL to show what they would have been without the subscription accounting forced on them by the government.

NOTE: -> They REALLY "made" $2.69 per diluted share, MUCH MORE than the reported $1.26. This means that in a complete financial hellhole, an economy that is tanking......they BEAT THE STREET by ...

DRUMROLL HERE...... 142% !

And that money is RIGHT NOW all in the bank, meaning they will have a built in cushion over the next eight quarters come what may, AND they now have over $24 BILLION in the bank for whatever needs come up.

Here is the complete chart:

i38.tinypic.com/2emn15...

2008 Oct 22 08:07 AM

[winindthedust:]

Spot on: Apple had to spell it out to the "street". They blew the doors off ALL of the consensus numbers. 11.68 billion in sales, nearly 4 billion MORE then consensus!

2008 Oct 22 10:30 AM

[winindthedust:]

Additionally:

Apple will have another record quarter. They made a mistake with their guidance, and should not give it at all. Hopefully, the "street" which consists of ignoramus buffoons, finally looks at the company's actual performance instead of the meaningless guidance.

Why will Apple have a record quarter despite the economic slowdown?

1) The election will be over; the wag the dog media will reverse it's negative sky is falling course.
2) The election will be over; people will feel better with all this behind them- positive consumer sentiment will rebound.
3) Holiday seasons always mean more to people during hard times. Purchases will be limited to those that have real value and appeal- Apple's iconic brand is in an excellent position.
4) Fuel prices are way down, and will continue down: this will justify more consumer spending in the holiday quarter. Home heating oil is down, people have been saving for this winter, they will now feel more positive about the future, and spend for the holidays.
5) The dollar is strengthening. This will translate into more purchasing power from both Apple and consumers.
6) Apple has the best products on Earth, and EVERYONE knows it. Even die hard Windows enthusiasts know it... the advertising has worked, the stores have worked, M$ has bombed, Dell is selling factories and laying off, while Apple is innovating and hiring....
7) 25 BILLION in the bank to invest in R&D, while others shrink back, Apple has the money to garner the best component pricing, and leverage sick tech at the best prices. If Apple were a bank, it's stock would be sky high based on this alone.
8) Apple's management is brilliant. Economic downturns are always a business opportunity for tremendous growth & expansion. This will leave competitors in the dust.
9) Apple finally spelled out the REAL numbers by converting it's subscription accounting for the idiot "street"- these numbers are nearly DOUBLE the consensus, and are truly "stunning" as Steve said. Any analyst that ignores these REAL numbers and promotes negative bias based on a guidance that never meant anything, anyway, will go down in flames in their credibility.
10) Stock prices are not a real indication of company performance, and do not prevent real people from making real purchases. Apple is on the top of consumers list of things to buy.

There are many other positives for Apple; bottom line, this all translates into the perfect storm for Apple to dominate in all that they touch.

2008 Oct 22 10:30 AM