Apple Third Quarter Earnings May Put You To Sleep

Jul.14.13 | About: Apple Inc. (AAPL)

Apple Inc. (NASDAQ:AAPL) will release Q3 results July 23, 2013 and hopefully provide some guidance for the balance of the year. Based on recent IDC and Gartner forecasts, I have pulled together a simple model of what Apple's quarter might look like.

IDC reported PC sales fell 11.4% year-over-year in the June 30, 2013 quarter, while Gartner forecast an 11% decline. Apple is likely slightly worse than trend this quarter, and I am forecasting it to sell 3,200,000 units at an average selling price (ASP) of $1,200. IDC is calling for industry sales of 229 million tablets in 2013, up from 145 million in 2012. Assuming Apple can hold a 40% share and adjusting for the weak second quarter, I forecast Apple to sell 20 million iPads this quarter, at an ASP of $425.

Smartphones are the key to Apple profitability making up the bulk of its sales and income. IDC now forecast worldwide smartphone sales at 959 million units, up from 722 million in 2012. Apple has a shot at holding a 20% market share, although this is not a shot with significant competitive pressures. For the June quarter, which is seasonally soft, Apple might reasonably sell 35 million units at an average selling price of $600, down slightly from the prior quarter's results.

The balance of Apple's revenues comes from iPods and sale of applications and iTunes, which I expect will be on the order of $5 billion in total. Adding up the foregoing, Apple should report about $38.5 billion in revenue and $7 billion in Net Income:

Product

Units sold

ASP

Revenue ($B)

Mac PCs

3,400,000

$1,200

$4.0

iPads

20,000,000

$425

$8.5

iPhones

35,000,000

$600

$21.0

iPods and other

$5.0

TOTAL REVENUE

$38.5

GROSS MARGIN (36%)

$13.9

EXPENSES

$4.0

TAXES (26%)

$2.6

NET INCOME

$7.3

Click to enlarge

In terms of earnings per share, this amounts to about $8.00. My forecast is slightly better than Apple's guidance at the revenue line which was $33.5 to $35.5 billion, and slightly less in terms of gross margin at 36%, where Apple's guidance was for between 36% and 37%. I have used slightly lower margin rates to reflect intense competition and the likelihood that Apple's sales mix tilted towards lower-margin devices.

In the absence of any product announcements, the quarter should elicit a big yawn. The results appear likely to be within a reasonable distance of Apple's guidance, thus I don't expect any material impact of the quarterly report on Apple's share price unless Apple's guidance for the balance of the year is bleak, in which case the shares are likely to sell off.

Apple's share price has been flat lining for a while now, in large part because there are no catalysts to prompt aggressive buying or selling. Until Apple announces a product event later this year or early next year, there aren't likely to be any. I have no position in Apple at this time, but may write both calls and puts at the market price to straddle what I believe will be an uneventful quarter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may write both puts and calls straddling the market price of Apple shares on the eve of the earnings call, expecting the stock to drift and both options to expire worthless.