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Apple (AAPL) has decided to continue their unusual EPS guidance. For Apple's third quarter earnings guidance, they will give a revenue and profit margin range where they believe they'll reasonably hit.

Apple is providing the following guidance for its fiscal 2013 third quarter:

  • revenue between $33.5 billion and $35.5 billion
  • gross margin between 36 percent and 37 percent
  • operating expenses between $3.85 billion and $3.95 billion
  • other income/(expense) of $300 million
  • tax rate of 26%

Source

Let's use those numbers above to make some simple calculations and come up with a potential EPS range for Apple's third quarter results.

Best Case Earnings:

  • Revenue = $35.5 billion
  • Gross Margin = 37%
  • Operating Expenses = $3.85 billion
  • Other Income = $300 million
  • Tax Rate = 26%

Earnings Formula = ((Revenue x Gross Margin) - Operating Expenses + Other Income) x (100% - Tax Rate)

  • = (($35.5 billion x 37%) - $3.85 billion + $300 million) x (100% - 26%)
  • = ($13.135 billion - $3.85 billion + 300 million) x (74%)
  • = (9.585 billion) x (74%)
  • = $7.0929 billion

Worst Case Earnings:

  • Revenue = $33.5 billion
  • Gross Margin = 36%
  • Operating Expenses = $3.95 billion
  • Other Income = $300 million
  • Tax Rate = 26%

Earnings Formula = ((Revenue x Gross Margin) - Operating Expenses + Other Income) x (100% - Tax Rate)

  • = (($33.5 billion x 36%) - $3.95 billion + $300 million) x (100% - 26%)
  • = ($12.06 billion - $3.95 billion + 300 million) x (74%)
  • = (8.41 billion) x (74%)
  • = $6.2234 billion

Based on the current 946,035,000 diluted outstanding shares, Apple would produce a third quarter EPS in the range of $6.58 - $7.50.

As you can see, EPS can be easily calculated from the above figures. So the question you should be asking yourself is why didn't Apple just give us that range for EPS. Therein lies the twist - Apple could use their cash hoard to buy back a substantial amount of outstanding shares during the third quarter. Something Apple could have been doing a lot of already this quarter.

Apple could easily buy back 10% of their outstanding shares right now. Let's say Apple does that and pays an average share price of $400 for 100 million shares, totaling $40 billion. Total outstanding shares remaining would then become 846.035 million.

If we then recalculate the profits for the third quarter and recalculate the EPS based on the new outstanding share amount, we would be left with the following:

Based on the current 846,035,000 diluted outstanding shares, Apple would produce a third quarter profit in the range of $7.36 - $8.38.

That EPS is a lot closer to last year's third quarter of $9.32. And as we have seen in the past, Apple has a record of underselling its projected EPS and over-delivering.

Conclusion

Apple's reluctance to share exact EPS guidance for future quarters will leave Wall Street in the dark, and even more so by using their $145 billion cash hoard to buy back shares. Through those buybacks, Apple could easily set a floor under the stock and drastically increase EPS for future quarters.

Source: Apple's Earnings Projections Continue To Irritate Wall Street

Additional disclosure: I plan on purchasing more AAPL shares while under $500.