Apple Earnings Preview: Valuation Reasonable And Forward Estimates Moving Higher

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 |  About: Apple Inc. (AAPL)
by: Brian Gilmartin, CFA

Summary

Valuation is still very reasonable at 15(x) '14 EPS.

Margin compression looks to be ending.

EPS and revenue estimates starting to turn higher.

Apple (NASDAQ:AAPL) is scheduled to report their third fiscal quarter earnings after the bell on Tuesday, 7/22/14.

Analyst consensus is expecting $1.22 in earnings per share on $37.864 billion in revenue for expected y/y growth of 14% and 7% respectively.

That isn't too shabby of a growth rate for a company with a $574 billion market cap.

In fiscal Q2 '14, AAPL had its best beat on EPS and revenue consensus since early 2012.

In fiscal Q2 '14, AAPL revenue rose 5%, operating income rose 8% and EPS rose 1%. iPad units fell 3%, although iPhone units rose 15%, while ASP's fell in Q2 '14.

There have been many solid earnings previews for AAPL, so we won't re-hash the main points here for readers.

The key metrics we zero in on for most companies, after evaluating absolute valuation, is the trend in EPS and revenue estimates, from both a direction and rate of growth perspective.

But first let's look at margins:

Margin analysis 9/30/2014 6/30/2014 n/a 3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 9/30/2012 6/30/2012 31-Mar-12 31-Dec-11 30-Sep-11 30-Jun-11 31-Mar-11 31-Dec-10
AAPL gross margin
seq change n/a n/a n/a 1.53% 0.77% 0.15% -0.62% -1.14% -1.41% -2.77% -4.56% 2.69% 4.43% -1.47% 0.30% 2.91% 1.58%
y/y change (0.37) (0.37) n/a 0.02 (0.01) (0.03) (0.06) (0.10) (0.06) (0.00) 0.01 0.06 0.06 0.03 0.03 (0.00) (0.02)

AAPL operating margin

seq change n/a n/a n/a -0.61% 3.63% 0.72% -2.75% -2.77% 1.14% -2.62% -6.21% 1.83% 6.61% -2.02% 0.91% 2.65% 2.49%
y/y change n/a n/a n/a 0.98% -1.18% -3.66% -7.00% -10.46% -5.85% -0.38% 0.22% 7.34% 8.16% 4.03% 5.86% 2.44% -0.86%

AAPL net margin

seq change n/a n/a n/a -0.35% 2.70% 0.51% -2.36% -2.10% 1.13% -2.33% -4.46% -17.29% 6.63% -0.36% 0.90% 2.68% 4.59%
y/y change n/a n/a n/a 0.50% -1.24% -2.82% -5.66% -7.76% -22.96% -17.45% -15.48% -10.12% 9.85% 7.80% 6.72% 2.86% -2.03%
Click to enlarge

* Source: internal spreadsheet from quarterly results

As the reader can quickly see, AAPL's operating margin began to seriously compress in fiscal Q4 '12, which is the approximate date of the stock's original high tick over $700 per share.

Another key positive for AAPL has been the forward EPS and revenue estimate revisions have started to turn higher, per the attached spreadsheet.

It is important that revenue growth continue to move higher since it indicates that EPS growth isn't entirely EPS and share repurchase driven.

Apple

EPS Consensus Trends

Revenue Consensus Trends

fy '14

fy '15

y/y gro

fy '16

y/y gro

fy '14

fy '15

y/y gro

fy '16

n/a

2014

2015

est

2016

est

2014 rev

2015 rev

est

2016

current (7/12/14)

$6.32

$6.93

10%

$7.61

10%

$181,722

$195,049

7%

$203,835

5%

Jun '14

$6.30

$6.88

9%

$7.49

9%

$181,566

$194,351

7%

$203,873

5%

May '14

$6.30

$6.84

9%

$7.41

8%

$181,613

$193,608

7%

$203,475

5%

Apr '14

$6.28

$6.81

8%

$7.36

8%

$181,379

$193,341

7%

$202,828

5%

Jan '14

$6.12

$6.61

8%

$7.17

8%

$181,071

$191,459

6%

$203,213

6%

Oct '13

$6.18

$6.75

9%

$6.97

3%

$183,545

$195,123

6%

$206,289

6%

Jul '13

$6.06

$6.28

4%

$4.86

-23%

$181,119

$187,091

3%

$173,208

-7%

# of est's

49

49

17

49

49

21

* Source: ThomsonReuters current and historical consensus estimates

* fy = fiscal year

* AAPL's fiscal year ends September 30

Click to enlarge

Apple

EPS Consensus Trends

Revenue Consensus Trends

fy '14

fy '15

y/y gro

fy '16

y/y gro

fy '14

fy '15

y/y gro

fy '16

n/a

2014

2015

est

2016

est

2014 rev

2015 rev

est

2016

current (7/12/14)

$6.32

$6.93

10%

$7.61

10%

$181,722

$195,049

7%

$203,835

5%

Jun '14

$6.30

$6.88

9%

$7.49

9%

$181,566

$194,351

7%

$203,873

5%

May '14

$6.30

$6.84

9%

$7.41

8%

$181,613

$193,608

7%

$203,475

5%

Apr '14

$6.28

$6.81

8%

$7.36

8%

$181,379

$193,341

7%

$202,828

5%

Jan '14

$6.12

$6.61

8%

$7.17

8%

$181,071

$191,459

6%

$203,213

6%

Oct '13

$6.18

$6.75

9%

$6.97

3%

$183,545

$195,123

6%

$206,289

6%

Jul '13

$6.06

$6.28

4%

$4.86

-23%

$181,119

$187,091

3%

$173,208

-7%

# of est's

49

49

17

49

49

21

* Source: ThomsonReuters current and historical consensus estimates

* fy = fiscal year

* AAPL's fiscal year ends September 30

Click to enlarge

* Source - internal spreadsheet

Over the last 12 months, AAPL's consensus EPS and revenue estimates have started to move higher. This is very different from the period from September, 2012 through late 2013.

Technically, AAPL is overbought on the daily and weekly charts, but the valuation is reasonable at 15(x) expected 2014 EPS of $6.93 for 11% y/y growth.

At 7(x) 4-quarter trailing cash-flow (ex cash) and 8(x) 4-quarter trailing free-cash-flow (ex cash) the stock AAPL's valuation is very reasonable.

We haven't changed our position in AAPL since early, 2013. We currently have a 1.7% position within client accounts and remain comfortable with that weighting.

With $200 bl in expected revenues and a $545 billion market cap, we think it will be difficult for AAPL to grow at above "mid-single-digits" rates for a long periods of time. We think EPS growth of 15% will be the high end of its EPS growth given its size.

We would only consider adding to the AAPL position on a sell-off to the $70 - $75 area. A trade above the late September, 2012 high of $100.75 on volume, and the stock will have broken out to an all-time high.

Here are some of our earlier articles on AAPL, both here and here.

Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.