Revising Apple's Outlook in Line with Reality

Bullish Cross is readjusting its outlook on Apple (AAPL) to a view that is more commensurate with the increasingly bleak economic environment. As unemployment continues to rise and discretionary income contracts, Apple will undoubtedly struggle to keep up its explosive growth in 2009. The current consensus estimates for 2009 have Apple earning $5.15 in EPS on revenue of $35.14 billion. While the current research data is less than favorable, the consensus is still overly pessimistic on the current period.

However, given the relatively high lack of transparency with regard to iPhone and Macintosh sales going forward, Bullish Cross holds an increasingly cautious view with regard to Apple's fundamentals and earnings estimates in 2009. Bullish Cross now expects Apple to earn about $5.78 in EPS on $36.591 billion in revenue down from $6.63 in EPS on $41.196 billion in revenue. This reduction in estimates is due in large part to Apple's intentionally making it more difficult, if not impossible, to track iPhone sales using IMEI data. However, if the third generation iPhone is well received by the consumer this summer or if the economic climate becomes substantially more improved in the latter half of 2009, there is ample room for Apple to handily beat these estimates.

For fiscal Q2 2009, I expect Apple to earn about $1.19 in EPS on $8.318 billion in revenue on a GAAP basis versus the consensus of $1.09 in EPS on $7.94 billion in revenue. The consensus estimates for Q2 are far more fairly stated than they've been in previous quarters. On a non-GAAP basis, I expect Apple to earn $1.59 in EPS on $8.798 billion in revenue. One can interpret the recent research data as indicating that Apple could sell about 10.5 million iPods, 2.45 million Macs and about 3 million iPhones.

Andy Zaky's Earnings Estimates for Q2 2009 (in Millions, except for per share data)

	GAAP-Based Est.	Non-GAAP Est.	Difference
Revenue	$8,318	$8,798	$480 (5.7%)
Cost of Goods Sold	$5,490	$5,455	-$35 (0.06%)
Gross Margin	$2,828	$3,343	$515 (18.2%)
Operating Expenses	$1,370	$1,370	-
Operating Income	$1,458	$1,973	$515 (35.3%)
OI&E	$85	$85	-
Net, Before Taxes	$1,543	$2,058	$515 (33.4%)
Taxes	$463	$618	$155 (33.5%)
Net Income	$1,080	$1,440	$360 (33.3%)
Earnings Per Share	$1.19	$1.59	$0.40 (33.6%)
Diluted Shares	905,000,000	905,000,000	-

Revenue Breakdown by Product Summary for Q2 2009

Product	Unit Sales	ASP	GAAP Revenue	Non-GAAP Revenue
iPods	10,500,000	$145.00	$1.523 Billion	$1.523 Billion
Macintosh Computers	2,450,000	$1400.00	$3.43 Billion	$3.43 Billion
iPhone Sales	3,000,000	$660.00	$1.500 Billion	$1.980 Billion
iTunes	-	-	$920 Million	$920 Million
Software	-	-	$575 Million	$575 Million
Peripherals	-	-	$370 Million	$370 Million
Total Revenue	-	-	$8.318 Billion	$8.798 Billion

Andy Zaky's GAAP-Based Earnings Estimates for FY 2009 (in Millions)

	Q1 2009	Q2 2009	Q3 2009	Q4 2009	FYE 2009
Revenue	$10,167	$8,318	$8,728	$9,378	$36,591
Cost of Goods Sold	$6,635	$5,490	$5,760	$6,114	$23,999
Gross Margin	$3,532	$2,828	$2,968	$3,264	$12,592
Operating Expenses	$1,406	$1,370	$1,410	$1,510	$5,696
Operating Income	$2,126	$1,458	$1,558	$1,754	$6,896
OI&E	$158	$85	$100	$180	$523
Net, Before Taxes	$2,284	$1,543	$1,658	$1,934	$7,419
Taxes	$679	$463	$490	$561	$2,193
Net Income	$1,605	$1,080	$1,168	$1,373	$5,226
Earnings Per Share	$1.78	$1.19	$1.29	$1.52	$5.78
Diluted Shares	901	905	905	905	904

Disclosure: No Position in Apple.

Comments

[Gregory Pepin:]

I guess the big news on your article is your disclosure.
You sold your position on Apple ? I though you were a long term investor and if it's the case then you should keep your Apple Stock.
2009 is a tough year (like 2008) in term of consumer spending. But Apple has so much room to grow in each business unit :
- Macs : They are leaders in the student segment. If you take into account the very low conversion from MAC to PC, there is a high probability that the market share of apple will grow along with the student that will get older.
- Ipods : There is a saturation in all Ipod Section except the Touch. The Ipod Touch has a big growth potential thanks to the App Store. We can almost separate the Touch from the Ipods business Unit.
- The Iphone : The long term potential of the Iphone is tremendous due to the same reason as the Ipod.
- Others potential product : If you look at the new potential of OS 3.0 you realize that Apple can create a new set of product build with OS 3.0 that is a full operating system.

So i don't know what Apple will do this quarter, i have to say that i don't really care because i clearly believe that the long term growth of this company is greater then the market expects (knowing that the market only look on a 3month basis...)
Therefore i don't see any reason to sell any position on the stock. I would more advice to increase position if there is a drop due to earning or whatever news (including Jobs potential departure).

Apr 20 07:26 AM

[winindthedust:]

I would agree. Looking at ALL of Apple's products, they have a great business based on just one of these! And they are expanding into new areas, which will create further excitement. I've said it before, and I'll say it again, Apple shares are better then gold with what they have in the pipeline with their products.


On Apr 20 07:26 AM dzr_greg wrote:

> I guess the big news on your article is your disclosure.
> You sold your position on Apple ? I though you were a long term investor
> and if it's the case then you should keep your Apple Stock.
> 2009 is a tough year (like 2008) in term of consumer spending. But
> Apple has so much room to grow in each business unit :
> - Macs : They are leaders in the student segment. If you take into
> account the very low conversion from MAC to PC, there is a high probability
> that the market share of apple will grow along with the student that
> will get older.
> - Ipods : There is a saturation in all Ipod Section except the Touch.
> The Ipod Touch has a big growth potential thanks to the App Store.
> We can almost separate the Touch from the Ipods business Unit.<br/>-
> The Iphone : The long term potential of the Iphone is tremendous
> due to the same reason as the Ipod.
> - Others potential product : If you look at the new potential of
> OS 3.0 you realize that Apple can create a new set of product build
> with OS 3.0 that is a full operating system.
>
> So i don't know what Apple will do this quarter, i have to say that
> i don't really care because i clearly believe that the long term
> growth of this company is greater then the market expects (knowing
> that the market only look on a 3month basis...)
> Therefore i don't see any reason to sell any position on the stock.
> I would more advice to increase position if there is a drop due to
> earning or whatever news (including Jobs potential departure).<br/>

Apr 20 09:39 AM

[mikesan:]

apple continue to create, dominate and own any market segment that they choose to enter, they set the rules and the standards which all other manufacturers aspire to, everyone else is constantly playing catch up, do i need to say more??

Apr 20 10:45 AM

[mollytjm:]

i'm not sure about saturation of the ipod...that new little one is selling very well and children are still being born so there are always new customers. but overall, even in a tight economy, Apple gains market share on all fronts at a constant (and wonderful, i'm long AAPL) rate.
it's a great company with a wonderful future.

Apr 20 10:46 AM

[constantnormal:]

Just what do you guys mean by "long-term"?

If you are talking "long-term" as in long-term capital gains, then Andy should take his profits now, before the bear-market rally gives out and AAPL sinks (along with everything else -- slower, but sinking just the same) as PE multiple compression drives valuations toward the single-digit regimes that occur at real bottoms.

Of course, if you are talking "love-of-my-life" long-term, well then you are correct and nobody should ever sell a well-run profitable company that they are in love with, certainly not over a small thing like losing money.

There were people buying at the top in 1929 (and 1937), some buying excellent companies (at inflated values, considering the impending future) and it took decades for them to break even.

There were people in love with gold, back in the 70's, and it took 30 years to regain the levels they loved it at.

Buying a stock for love can blind one to the fact that even the best-managed, most profitable companies can have their stock prices suffer for a very long time, if the larger market environment is bad enough. The name of the game is not to own the best stocks, it is to make money owning them. Those who forget that (or have never learned it) are doomed to be parted with their money.

Apr 20 11:04 AM

[Bastion:]

Actually, no. If you are looking "long-term" and see that this recession is temporariy and that the company products and long-term outlook are strong, you look at this short-term slide as a *buying* opportunity.

Ever heard of dollar-cost-averaging?

If you think a company will be in a better position in 9 months, 12 months, or more than it is now, you BUY and HOLD.

Duh. There is a reason that Warren Buffet is a billionaire and you are not.

It's the day-traders and quarter-to-quarter traders (apparently like you) that have ruined this economy. Those objectives *change* behavior, and it drives people to make short-term optimized decisions that often are bad for the long-term health of a company, or the economy as a whole.


On Apr 20 11:04 AM constantnormal wrote:

> Just what do you guys mean by "long-term"?
>
> If you are talking "long-term" as in long-term capital gains, then
> Andy should take his profits now, before the bear-market rally gives
> out and AAPL sinks (along with everything else -- slower, but sinking
> just the same) as PE multiple compression drives valuations toward
> the single-digit regimes that occur at real bottoms.
>
> Of course, if you are talking "love-of-my-life" long-term, well then
> you are correct and nobody should ever sell a well-run profitable
> company that they are in love with, certainly not over a small thing
> like losing money.
>
> There were people buying at the top in 1929 (and 1937), some buying
> excellent companies (at inflated values, considering the impending
> future) and it took decades for them to break even.
>
> There were people in love with gold, back in the 70's, and it took
> 30 years to regain the levels they loved it at.
>
> Buying a stock for love can blind one to the fact that even the best-managed,
> most profitable companies can have their stock prices suffer for
> a very long time, if the larger market environment is bad enough.
> The name of the game is not to own the best stocks, it is to make
> money owning them. Those who forget that (or have never learned it)
> are doomed to be parted with their money.

Apr 20 12:41 PM

[amankj:]

Let's stay objective. While, I agree with Andy that Apple will not see the blockbuster growth of 2008, I do believe that there are a couple of catalysts that will hold Apple's stock up.

1) Markets have generally normalized. Hedge fund have started to see re-assuring signs not necessarily in the fundamentals of stocks, but in functioning of the markets. Due to the prior irrationality and potential capital withdrawls, most hedge funds had dropped below a 100% gross by the end of 2008. This should increase closer to 150% over time, and in doing so, a hedge fund favorite, Apple, will see buying pressure.

2) iPhone in China? Who knows, but call it an option on significant growth. Options have value, and if the probability increases that a deal is done, that option will only increase in value.

3) Huge shift to smartphones continues. As phones have longer-lives, people (90% of people still have jobs out there, so don't give me that, well, no one has a job crap) will begin to justify spending more money on both their handset, as well as service.

4) The current administration has made a commitment to making America's education system competetive. This will take a significant investment in technology and Apple is the major player in the space - books on iProd (not mispelled), anyone?

5) Apple has >$30Billion in cash, today. If they are able to acquire a low P/E company, it will add significant value to to the multiple Apple garners in the market. More realistically, Apple will need to start paying a dividend, even if it is $1 a share, which they FCF in a month or two. They may be able to justify $30B, but they won't be able to justify the ~$38 at the end of 2009.

6) iPhone 3.0 will, dare I say, revolutionize the revolutionary iPhone?

While all these things are great, Andy's probably right about the stock seeing short term pressure. Personally, I see them below 9.5 million iPods, which will cause the market freak out and iPhone sales will be weaker than expected given all the press about the new iPhone coming out this June (not to mention terrible guidance due to no short term catalysts).

The only potential redeeming feature (as seen by the Street), would be a dividend announcement. Don't hold your breath, though.

Apr 20 06:41 PM

[User 399381:]

Seems the lead Bull at Bullish Cross has been castrated.

Apr 21 04:31 PM

[sjs:]

On the positive side, in Apple's target market, unemployment has not been a real factor.

In the US thus far, net job losses have been 100% blue (ish) collar. Zero net job losses in the white collar, professional, college-educated type categories.

However, Apple's target market IS in a mode of paying down debt which will cause a flattening of sales.

-Scott

Apr 22 11:06 AM

[totheabovej...:]

thats why i took this alias.. for comments above by sjs

are you a fool?? Lehman workers were blue collar right?

Apr 22 11:30 AM

[chleoku:]

Is msft really going to open retail store?

www.wealthalchemist.co.../

how's it going to affect apple's retail strategy?

Apr 22 01:25 PM

[Zoltan L. K...:]

Why play the old style earnings game? In the long term AAPL is a growth company: its products and markets can still be further developed with healthy margins.

Apr 22 01:59 PM

[optionsgirl:]

Why is Apple always smacked down whenever it reports? It's stellar.

Apr 22 02:48 PM

[bcncv:]

My favorite comment of all:

"Duh. There is a reason that Warren Buffet is a billionaire and you are not."

So how many billions have you made following Buffet? He obviously knows what he's doing, but there are millions of people following his strategy and only one billionaire. Unless people were replicating his results consistently, I hardly think following his ideas will work outside of Omaha.

I know I'm off the topic of Apple, but I couldn't resist a comment like that.

Apr 22 03:59 PM

[winindthedust:]

Hey Andy,

You still were closer then most everyone else, though know one ever would have believed Apple's fantastic blow out GM and EPS numbers!

Thanks for the balanced article, though I hope you're feeling a bit like your old optimistic self!

Apr 22 09:56 PM

[sjs:]

Dear friend who called me a fool:

Not once but TWICE in my comment I stated that there were zero "net job losses". Most readers of this site understand the meaning of the word "net".

Have a nice day!

On Apr 22 11:30 AM totheabovejerkface wrote:

> thats why i took this alias.. for comments above by sjs
>
> are you a fool?? Lehman workers were blue collar right?

Apr 30 04:53 PM