It's Only July, But Here's My Apple Q4 Estimate

Jul.21.11 | About: Apple Inc. (AAPL)

When, asked to comment on future iPad numbers, COO Tim Cook responded, "Well, we don't predict unit sales." Well, I do, and, so far, with a high degree of accuracy.

For instance, this quarter, Apple sold 40.9 million iPads, iPhones, iPods and computers. I predicted 39 million, far more accurate than both the analyst and blogger consensus. In fact, my EPS estimate of $7.00 a share beat every one of the professional analysts and all but two of the bloggers posted by Philip Elmer-DeWitt.

How did I arrive at my figures? I looked at 2 metrics: devices sold and operating income per device.

The first metric is simply the total number of units sold by Apple (NASDAQ:AAPL). I don't try to guess how each of Apple's product lines will do. It's just too difficult. Instead, I concentrate on one number: how many devices is Apple selling. I lump iPads, iPhones, iPods and computers all together and plot the totals quarter by quarter. That way it's easier to see the trends, allowing me to compare quarter by quarter, and see how Apple is growing its unit sales, helping to forecast unit sales for upcoming quarters.

You don't struggle with each individual product line. It's simpler to evaluate Apple by looking at the whole orchard rather than concentrating on its individual trees.

Next, I graph Apple's operating income earned per device sold. Again, all products are grouped together. The numbers generated are quite powerful. Plotted over time, the graphs show clear trends. My forecasted operating income per device (OPD) is influenced by the quarter graphing line, how other quarter graphs have done, the seasonality, for example.

This quarter I predicted an operating income per device of $224, under the $229 Apple delivered. Multiplying operating income per device times devices sold, gives you operating income. The model works well. Using trend lines for these 2 metrics gives a much more accurate prediction than those obtained by more traditional methods. Below are the graphs of the two metrics: devices sold and operating income per device.

It's July. Apple's Q4 quarter is 3 months away. Yet, the above graphs can get us a lot closer to Apple's actual Q4 EPS than most analysts.

Each quarter, Q1, Q2, and Q3, the device lines have been steepening, indicating that Q4 is going to show stronger unit sales. Q1 grew 42%, Q2 grew 59%, and Q3 grew 67%. Q4 should see a continuation in that growth, possibly 72% to 76%, giving at least a total 54 million unit sales.

Operating income per device is a little trickier. Last Q4, Apple's OPD dipped slightly, in part due seasonal promotions, something that likely will recur. In addition, with the launch of iCloud and Mac OS Lion, Apple is deferring $11 to $22 in revenue per unit depending on the device sold. With significant revenue deferraIs, OPD should see a hit of $17 a device on the deferrals alone. I see Apple's operating income per device being cut to $203 with a range of $194 to $212.

Thus, taking into account 54 million units selling at an average OPD of $203 we get $11 billion in operating income. Using a 24% tax rate and 939 million share count, Apple should conservatively earn $8.87, higher than current consensus $6.42. Over the next 3 months, analysts will raise their estimates closer to mine, likely to $7, and I will likely raise mine.

Disclosure: I am long AAPL.