Apple's Crib Sheet: Stay Focused On Earnings

Aug.31.11 | About: Apple Inc. (AAPL)

Invest in companies you can count on to deliver great earnings. So many companies disappoint investors. They give quarterly guidance and blow it. Worse, some give no guidance at all and you're left forecasting in the dark. Apple (NASDAQ:AAPL) has something few other companies have: earnings visibility. Apple consistently makes more money each quarter than it did the last year.
More important, Apple not only gives its guidance for the upcoming quarter, it kills that guidance, each and every time. What more could an investor want?

How about being handed the crib sheet? Knowing where earnings are going with a good deal of accuracy?
It's actually easy. Apple skillfully manages expectations for future earnings. It wants to lower the bar and then vault over, dazzling you with its muscular earnings beat. How has it done that?
In Part 1, I looked at Apple's prowess managing investors' expectations. In this article, I dig deeper into the widening chasm between the company's guidance and its EPS. The graph below plots the last 15 quarters of Apple's outlook for earnings and the actual EPS delivered. Quarter 15 is Apple's last quarter. The dollar "spread" between Apple's forecast and delivered earnings is increasing.

Clearly, Apple's guidance hasn't kept pace with its actual earnings. This slugger is modest beyond words. It's as if Apple predicts a base hit next game and then wallops three home runs on a regular basis.
Yet, the company does have a system very much in place. Promise a good quarter, deliver an even better one. As you can see from the chart above, Apple has made good on that promise.

Let's drill down further.Take the above graph. Subtract Apple's guidance from its actual EPS, plot, and presto, you've got the crib sheet shown in the graph below. Apple is beating its quarterly guidance by greater amounts. The trend is exponential and predictable. Following the trend line gives a better picture of future earnings than any professional analyst's estimates. Apple guided $5.50 EPS for the upcoming quarter. The graph suggests Apple will deliver $9 to $9.50 EPS.

Apple's guidance gives investors a clear window into its future earnings. As can be seen from the chart above, Apple has an established pattern of beating its guidance. You only have to follow the chart out to estimate Apple's subsequent quarters. It's easy to calculate the trajectory path of Apple's earnings. By adding the "trend number" to guidance, you get an accurate view of the upcoming quarter.

The only uncertainty surrounding Apple just got taken off the table: the fate of their tremendous CEO. With Steve Jobs' departure and the Tim Cook's CEO position made permanent, investors can focus on the earnings. No distractions. Apple, in a nutshell, got a whole lot easier to evaluate.
Now that the uncertainly surrounding its CEO has been resolved, Apple's strong earnings should propel the stock much higher.

Disclosure: I am long AAPL.