Last quarter Apple (AAPL) reported earnings of $7.47 per share, compared to the consensus earnings estimate of $7.30 per share and the Earnings Whisper ® number of $7.43 per share. This was the first beat since April 2012 for the bottom-line, but the top-line still missed whispered expectations. The main reason the company was able to beat earnings per share expectations was a 36 million share buyback that took ten million shares out of the weighted average share count used as the denominator in the per-share math. The company had guided for revenue of $33.5 billion to $35.5 billion and revenue whispers were $36.5 billion compared to the consensus estimate of $35.2 billion. The company reported $35.3 billion. That revenue number gave more support to the realization that Apple is no longer Steve Jobs' company and the practice of low-balling guidance to easily hurdle later is a thing of the past. Few analysts believe there is much reason to expect that to change this quarter.
So, for the fiscal fourth quarter ended September 30, 2013, Apple guided revenue of $34.0 billion to $37.0 billion with gross margins of 36.0% to 37.0%. The company also provided guidance for operating expenses of $3.90 billion to $3.95 billion, other income of $200.0 million, and a tax rate of 26.5%. Plug those numbers in and you get an earnings per share range of $6.75 to $7.94 per share using 924.2 million shares. The consensus earnings estimate was set at $7.69 per share until September 23, 2013 when the company filed a statement with the SEC that it sold more than nine million new iPhone 5s and 5c models during the first three days of availability and, as a result, expects revenue and gross margins to come in at the high-end of its guidance range. The consensus earnings estimate is now $7.92 per share on revenue of $36.82 billion. The Earnings Whisper ® number is $8.02 per share, which is the very high end of the guidance range after adjusting the share count to 915 million. Regardless, as long as revenue is $37.0 billion or below and gross margins are 37.0% or below, the results will be viewed as in-line and that is what nearly every real analyst, on both the buy and sell-side, expects for the quarter.
The weakness in the report will likely be iPad sales which are expected to be around 14 million units, but it is the company's margin guidance that will be the number to watch. The company's guidance last quarter for 36.0% to 37.0% gross margins was the second quarter in a row for such guidance, but it was also the first quarter in several that gross margin guidance didn't go lower than the company provided the previous guidance. In the past, when Apple has launched new products, it helped drive margins starting in the subsequent quarter, and if that holds true, the launch of the iPhone 5s and 5c should result in the company raising margin guidance when it reports results.
With that, in the chart below, we have a stock that has bottomed and is now trending higher with a series of higher-highs and higher-lows; and this trend is supported by earnings estimates trending higher. As long as the company's margin guidance is increased, both trends should remain with earnings estimates getting revised higher. The higher stock prices and higher estimate revisions go hand in hand because, over the past 15 years, if you had bought a stock prior to a company's earnings release and held it until the close prior to its subsequent earnings release when forward earnings estimates were revised higher following the report you would have averaged roughly 10% for the quarter. If you had done the same for stocks of companies with estimates lowered, you wouldn't have made any money on average.
So, expectations aren't for a significant earnings beat for the quarter, at least not without the help of a lower share count, but since expectations are for the first increase in margin guidance and, thus, for estimates to move higher after the company reports, we were able to make the stock an Earnings Whisper Play on Wednesday, October 23, 2013. It is, after all, our primary criterion for a before-the-news long trade to focus on earnings releases that are expected to be strong enough so that earnings estimates are revised higher following the report. This was the first time Apple has met our criteria for a before-the-news long trade since January 19, 2012 when the trade gained roughly 5.5% over the four-day trading period.
This time, when it became a trade, we said that it had technical room to the $580 area as long as it held above $508, which isn't much different than the typical quarterly gain for stocks of companies that have estimates revised higher after their earnings release. Gross margin guidance above 37% should lift fiscal year estimates.
Apple is scheduled to report earnings after the market closes on Monday, October 28, 2013 with a conference call scheduled for 5:00 PM ET available here.