Apple (NASDAQ:AAPL) will report fiscal second-quarter results Wednesday. And investors are biting their nails anticipating another "disappointment." I say "disappointment" because as evident by the 5%+ declines the stock has suffered following the company's last three earnings reports, the Street has never appeared pleased with the results. But it needs to be kept in context. While Apple no longer boast astronomical growth, the company has, in fact, met or exceeded its own guidance for three consecutive quarters.
So what, then, is an investor to do ahead of Wednesday's report? As with anything else, I recommend having a clear head and appreciate what CEO Tim Cook is trying to do.
There reality is, regardless of what Apple's absolute numbers say, they are never going to be enough. Apple has become a victim of its own success. And the company will forever live in the shadows of its gaudy numbers from two years ago. But these numbers, including growth rates of 60% year over year, aren't coming back. Let's accept that. Tim Cook appears content with prolonging Steve Jobs' ideals and growing Apple's cash. The way I see it; these aren't bad objective.
Despite what Apple's stock has done over the past 18 months, Cook has never lost his resolve to return Apple back to its root of innovation. And it's unfair for him to be assessed solely on his stock's performance. Fairly or unfairly, that the situation.
On Wednesday, Cook will take another crack and regaining investor confidence when Apple announces its results for the fiscal second quarter. And if my suspicions are correct, these 5%+ declines we have seen following previous reports are a thing of the past. Apple breaks this string tomorrow with better-than-expected guidance.
You might be surprised, but despite rumblings about margin compression, analysts seem more optimistic ahead of tomorrow's report. The Street will be looking for $10.21 in earnings per share, which has risen over the past month from prior estimates of $10.20. For the fiscal year, analysts are projecting earnings of $42.72 per share.
In terms of revenue, analysts are looking for $43.55 billion for the quarter. Considering that the year-ago revenue registered at $43.60 billion, this would represent a year-over-year decline of less-than half of a percent. For the full year, analysts are expecting revenue to come in at $180.22 billion. Bears aren't impressed by these results.
There are goring complaints about Apple's declining margins, which has resulted in declining net income, which has fallen year-over-year by an average of 3% over the past four quarters. This is even though the company has been profitable for the last eight quarters. Investors were spooked in the third quarter when profits dropped 22%. But that's not reason enough to get carried away.
Declining margins is a reality for all electronic companies, including Samsung (OTC:SSNLF). It's an industry where it is impossible to maintain high margins for a sustained length of time. But over the last four quarters, Apple's revenue has increased 12% on average year-over-year, including posting its highest-ever quarterly iPhone sales of 51 million units. And when you consider Apple's iPhone deal with China Mobile (NYSE:CHL) earlier this year, now is not the time to turn bearish. The worst is over.
Buying shares of Apple here is a "no-brainer." Regardless of what the second-quarter numbers say, remember Tim Cook has remained aggressive with his share buybacks and dividends. Despite criticism, Cook has owned up to his promise of returning cash to shareholders. Apple is in the midst of a $60-billion buyback that it recently extended through 2015. In February, Cook said Apple repurchased more than $40 billion shares in the last 12 months. During that span, the stock has soared 41%.
My scorecard says Apple has $20 billion more shares to buy, and has less than a year to do it. Investors should expect continued aggressiveness from Cook in the next 30 days, which should drive Apple shares higher. I also expect Apple to raise the dividend and double the buyback program to $120 billion. With the stock trading at around $531, the more aggressive capital plan should push the stock to (at least) $700, which is 31% above current levels.
With $160 billion on the balance sheet and $53 billion in operating cash flow, financing will be no issue. With the cash earning next-to-nothing on the sidelines, Cook will continue betting on his own company.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.