Earnings season is in full force, and the market’s daily moves can be dictated by individual companies’ successes and failures. Apple (AAPL), the S&P 500’s second-largest stock by market cap, is one such company. Apple reported its quarterly earnings after the close on Monday, the report that was somewhat overshadowed in yesterday’s trading session as China’s decision to raise interest rates brought both commodities and markets down.
The stock dropped over 6 percent in after-hours trading as analysts started digesting the company’s report, but it snapped back during the regular session yesterday to close down about 3 percent – despite the market’s overall sell-off. From our point of view, the lower share price looks like another buying opportunity.
For the period ended September 30th, the company reported yet another record quarter. With $20.34 billion in revenue and earning per share of $4.64, Apple easily surpassed consensus estimates of less than $19 billion and $4.10, respectively. Further, earnings increased by over 70 percent versus the year earlier period. The company also provided a forecast (that is notoriously a lowball figure) that exceeded expectations as revenue in the current quarter is seen to come at roughly $23 billion. What concerned investors, however, was that gross profit margins will slightly decline to 36 percent, from 36.9 percent last quarter, and 41.8 percent in the year-earlier period.
The reduction in profits per device likely comes from the company’s push towards making its products more affordable for the mainstream. With the exception of its Mac line, the company’s products arguably dominate their respective product classes, whether it is a personal music player (iPod), smartphone (iPhone), or tablet computer (iPad) – which is essentially a market Apple just created. In its most recent report, unit sales of the devices were generally impressive. The company sold 14.1 million iPhones during the quarter at an average selling price of just over $600. This easily exceeded most analysts’ estimates which were in the neighborhood of 12 million (that, of course, would have been an impressive number too). On the conference call, Apple executives noted that they probably could have sold more if they weren’t held back by supply issues. Also adding to the bullish case for more iPhone sales ahead is that the phone has been welcomed with open arms by consumers in China (the device went on sale there during the last day of the reported quarter). iPhone continues to be such a success that it now accounts for 43 percent of company sales, and will likely continue to grow as it becomes increasingly available around the world and by more carriers (including reportedly Verizon here in the US).
While supply issues may have restrained iPhone sales, they, as we’ve said, still did outperform expectations. This wasn’t the case, however, with the iPad, whose 4.19 million unit sales were largely shy of expectations. The device, however, has been well received by consumers, and will likely be a hit during the holiday shopping season. With supply issues apparently solved, the company has opened up additional distribution channels, including Wal-Mart and Target, as well as AT&T and Verizon stores.
Steve Jobs, in an unorthodox move (for him), joined the conference call after the earnings release. He took time to cover the competitive landscape; while noting Google’s Android operating system as Apple’s primary competitor in the space, he also highlighted Apple’s advantages. Again entering the public spotlight, Jobs released new products for the company in a press event today. Among them, new versions of the MacBook Air – a netbook computer that is almost as thin and light as the iPad – were made cheaper (and better) to appeal to a greater number of customers.
Also of note in the company’s report, is that the balance sheet now boasts over $51 billion in cash and marketable securities – a sizeable war chest to say the least. The stock has been on an incredible run, yet still appears attractive by standard valuation metrics. Company stock currently trades at 14 times next year’s expected earnings, and with a 20 percent earnings growth for the next 3-5 years, has an attractive PEG of 0.7.