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The much anticipated earnings report from Apple (NASDAQ:AAPL) came out after the bell Tuesday. It was a mixed report. AAPL beat on the top and bottom line. It also upped its dividend and substantially increased its buyback program by some 500%. The one significant negative is around guidance for the next quarter. Apple has always been a second half story for 2013. Let's take a look at Apple's earnings report, massive buyback, guidance and what will drive the stock higher in the second half of the year.

Key highlights from earnings report:

  • EPS comes in at $10.09 a share versus $10 consensus.
  • Revenues came in at $43.6B, quite a bit over the expectations of $42.3B.
  • Apple sold 37.4M iPhones, 19.5M iPads, just under 4M Macs in the quarter.
  • The company is raising its dividend by 15% to $3.05 a share.
  • Management announced it was increasing its stock buyback program by an incredible $50B to $60B. (No, this is not a misprint)

Guidance: The company projects FQ3 revenue of $33.5B-$35.5B versus the current consensus of $39.3B. It also it expects margins to be around 36% versus the 38% consensus.

Reaction: Despite guidance, shares are up some 5% in after hours. This is in part due to very low investor expectations on the stock currently, the huge stock buyback increase, a nice dividend hike and a decent performance in China.

Valuation -

Apple sells for just over 9x this year's expected earnings. Analysts expect revenues to increase in the mid-double digits for both FY2013 & FY2014 and the stock sports a minuscule five year projected PEG (.47). AAPL sells for less than 7 x operating cash flow. Accounting for net cash on the books, the shares are much cheaper selling at less than 6x 2014's projected earnings and less than 5x current operating cash flow. The stock buyback will remove over 15% of the company's float at current prices.

Balance Sheet & Dividend -

Apple has more cash & short term marketable securities on its books that any other publicly traded company on earth by a wide margin. Its cash hoard is now near $145B. APPL also yields over 3% after this just announced dividend hike.

Product Cycle -

Apple was also destined to be a second half story with refreshes expected for both the iPad and iPhone. In addition, other possible new products that have been rumored to be released sometime this year include an iPhone with a bigger screen, a cheaper iPhone for emerging markets, an iWatch as well as a possible iTV. Both the iPhone and iPad refreshes should drive revenues, earnings and excitement in the second half of the year. I also would be surprised if at least two of the rumored products listed above don't also get released by the end of the year.

Sentiment -

After falling more than 40% in a consistent downward trend over the past seven months, it is hard to imagine sentiment on AAPL getting worse. Analysts have downgraded the shares and/or took down their price targets. Media pundits and columnists have run dozens of "Has Apple lost its mojo?" and "Can Apple be fixed?" stories. I believe we are in the trough of the decline and the $50B stock buyback will support the share price until new products drive the stock forward in the second half of the year.

Source: Apple: Massive Buyback Powers Shares After Hours