Seeking Alpha
Long/short equity, special situations, growth at reasonable price, deep value
Profile| Send Message|
( followers)  

Summary

  • Apple reported Q3 results that surprised positively in some regards, disappointed in others, and generally did enough to hold ground for investors in the stock.
  • With the earnings event behind the company now, and with positive signs of what is to come found within its guidance, the stock should rise on anticipation of new products.
  • A long-time critic, increasingly turned proponent, I'm reiterating my buy recommendation here as I see the company finally catching a pretty significant second wind where complacency once threatened it.

Apple (NASDAQ: AAPL) earned $7.7 billion or $1.28 per share, which was better than analyst expectations for $1.23, based on FactSet data. It marked the best pace of EPS growth in seven quarters, however, the hard-to-please will note the result was only about in line with the whisper number. The shares were off fractionally heading into the conference call, but the after-hour loss dwindled as traders listened in and contemplated on what is to come later this year. I'm reiterating my buy call.

Apple's earnings grew 12% year-to-year in Q3, mainly on strong iPhone sales into emerging markets including China. The company also noted strong Mac sales, but iPad sales faded year-to-year more than analysts expected. Gross margin expanded to 39.4% against last year's 36.9% profit, which served as a positive surprise to a market that is paranoid and concerned about the risk of narrowing margins over the longer term.

Products

Apple sold 35.2 million iPhones in Q3, up 13% (unit growth) year-to-year in a period that should have seen a slowdown ahead of an expected new phone release. Blockbuster sales into China and other emerging markets far outweighed slower sales in developed markets. Sales have been expected to slow in the U.S. as anticipation replaces speculation about a new iPhone with a larger screen. Many consumers are waiting on the release of that product at this point, and so putting off current term purchases.

Mac unit sales of 4.413 million were up 18% year-to-year and also 7% sequentially. iPad sales slipped though to 13.276 million, down 9% year-to-year, with weakness attributable to both segment erosion and the significant degree of formidable competition now found in the segment from Google (NASDAQ: GOOG) Android and other driven gear. iPod sales continued to erode, falling 36% year-over-year.

Markets

Americas revenues edged higher by 1% year over year, to $14.577 billion. Recovering Europe marked 6% growth to $8.091 billion. It was impressive given the building anticipation for significantly upgraded gear later this year. The BRICS was where it was at though, as Greater China revenues grew 28% year over year, to $5.935 billion. That's amazing growth for such large numbers, but such is the opportunity available to the company in China. This next product cycle will be significantly lifted by the company's new market reach.

Guidance

The company's guidance seems to indicate it could release its new iPhone a couple weeks later than expected by analysts, in the last week of September rather than the middle of the month. Sequentially higher revenue growth, to $37 to $40 billion, for a quarter that typically shows flatness or decline is another sign of an imminent new product release. Gross margin expectations for 37% to 38% also indicates sell-through of aging gear ahead of new product release.

Reiterating Buy

All signs point toward further rise for Apple shares, in my view. The latest result was good enough to hold ground and now investors can look forward to the release of at least one new iPhone and possibly two, each with larger screens. Talk about a wearable watch release is intensifying as well, and rumors of a payments technology that might allow all iPhone users to do away with their wallets while making room for the new big phone in their pockets lingers. I've heard wild unit speculation about watch sales, as the lower priced product might draw new customers to Apple, if it's a standalone item. Most voices see the watch as an accompaniment to the iPhone though.

Never you mind the details, because the sort of speculation you find in the last paragraph here is the type of catalyst that should expand Apple's P/E valuation no matter. Its valuation has already benefited from the company's value-added efforts in paying out dividends, repurchasing shares, splitting its stock, entering China, partnering with IBM (NYSE: IBM), and talking up its game more. I have dogged management for a long time and not too long ago either, but as time has progressed I've increasingly found myself commending it. For the longest time, I said money invested in Apple seemed like dead-money, but my view changed when it just got too cheap and its margin of safety too wide, with the prospect of fabulous developments gaining in likelihood. Activist investors have served to light a fire as well for a company perhaps at risk of growing complacent. It's looking now like a company ready to catch a pretty significant second wind.

This is a company that has had starving fans in the investment arena waiting for the next greatest thing for too long now. Investors have harbored headaches over the penalized PEG value for this stock that represents the innovator of our age. Well, the headache is fading, and the stock's P/E of 13.5X the analysts' consensus estimate of $7.01 for fiscal year 2015 (Sept.) stands to benefit; it has already benefited greatly, but it will expand further in my view if things play out like I expect.

And 5-year growth estimates for 12.3% could get an upgrade if the company produces some interesting new products this fall. Indeed, Tim Cook teased us a bit (finally!) when he stated, "We are incredibly excited about the upcoming releases of iOS 8 and OS X Yosemite, as well as other new products and services that we can't wait to introduce." Entry into the China market was a huge win, and the latest deal with IBM will allow Apple to take on BlackBerry (NASDAQ: BBRY) at its last bastion, in stubborn enterprises that held off for security reasons. So Apple is guarding its ground, attacking new ground in current product segments and hopefully preparing to disrupt virgin territory. The stock should gain on speculation and anticipation heading into the fall now, and risk is limited now that this latest report is public. So, I reiterate my buy opinion here. As I continue to follow the company, you are welcome to follow along.

Source: Apple Reports Q3 EPS - Reiterating Buy Here