An Apple Earnings Preview: Critical Numbers To Watch

| About: Apple Inc. (AAPL)

Next Tuesday, October 18th, Apple (NASDAQ:AAPL) will report its fiscal fourth quarter earnings after the bell. This will be the first quarterly report since Steve Jobs stepped down as CEO in August, and passed away last week. Many will be listening to the conference call intently to see what new CEO Tim Cook has to say about the company going forward. For a look at my article on Apple's performance over the last two years, click here. So now that we are just a few days away from the report, here are some critical numbers to look at.

Top line/bottom line: Currently, Apple is projected for 44% revenue growth to $29.37 billion. The current revenue range is about from $26 to $31 billion. I think there is a great chance that we will see Apple's first $30 billion plus quarter. So far this year, Apple's year over year revenue growth was 70%, 82%, and 82%, approximately. Analysts are only expecting 44% growth currently, so I think it will be an easy beat. I would guess 55% growth isn't too hard to do, which would put this quarter at $31.5 billion, so that's my expectation.

Analysts are expecting $7.25 in EPS this quarter. Over the past four quarters, Apple's EPS numbers have been expectations by an average of 21.4%. A beat of that size this quarter would imply $8.80 in earnings. I think that may be too high, as this is Apple's lowest margin quarter of the year. Based on my net margin expectation (which I'll discuss later), my forecast is for $8.33 in earnings. Apple is firing on all cylinders right now, and I think this is going to be a blowout quarter.

Product Sales: According to NPD last month, Apple's Mac sales for the first two months of the quarter were up more than expected, and Ipod sales weren't down as much as many expected. Quarterly expectations for the Mac appear to be around 4.5 million, and since Apple is beating handily right now, I'll put my expectation at 4.7 million. According to the article, analysts expect about 7.0 million IPod sales, with NPD expecting a range of 7.2 to 7.7 million. I think the upper end of the range is most likely, so I'm say 7.5 million. Analysts aren't expecting too much for the IPhone in the past quarter, as many were anticipating the newer IPhone that the company recently announced. According to the daily tech blog on barrons, Iphone estimates are in the 18 million to 20 million range. I think the midpoint, about 19 million is a fair estimate. IPad estimates are around 12 million units, but I think we will see a number greater than 13 million. Apple's dominance of the tablet market will only increase over time.

Margins: The following table, which is from my above mentioned Apple article, shows Apple's margins over the past eight quarters. As you can see, this quarter is the lowest margin quarter of the year for Apple. While I do expect some improvement in the margins, year over year, I do not expect them to reach the numbers of the past two quarters for the most part. That being said, I expect about 38.5% in gross margins, 31% in operating margin, and 24.5% in profit margins.

Margins 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Gross Margin 36.62% 40.88% 41.67% 39.08% 36.93% 38.51% 41.42% 41.73%
Operating Margin 22.22% 30.13% 29.48% 26.97% 26.78% 29.27% 31.92% 32.83%
Profit Margin 16.87% 21.54% 22.77% 20.72% 21.18% 22.45% 24.27% 25.58%

Balance Sheet: Apple has seen a lot of criticism lately, especially on this site, for vastly increasing the size of its balance sheet and not giving back to shareholders. Apple currently has $76 billion in cash, short term, and long term investments, of which $28.5 billion is in the cash and short term investment accounts. Apple currently has about $20 billion in working capital, which is about what the company says it needs to hold for company operations, R&D, and some other expenses throughout the year. I expect that working capital number to be roughly the same this quarter.

Apple's balance sheet has grown mostly in the long term assets section, with long term investments nearly doubling in the last 3 quarters from $25.4 billion to $47.8 billion. Apple has also increased its PP&E and intangibles a bit over the last few quarters, on a percentage basis. As well as Apple is doing, I would expect that group of cash and investments to grow into the $80 to $85 billion range, which will increase demands for Apple to do something with that large sum of money, be it a dividend or a buyback. I for one do not believe they should do either.

Overall View: Apple has done rather well lately, and I expect that to continue. People might be concerned if the quarter's IPhone number comes in low, but I think that number won't matter since you had the new release in this quarter. Apple's margins will improve year over year, but this is typically their lowest margin quarter of the year. I originally was a bit more rosy when I started this article, but my estimates are still at the upper end of expected ranges. With 3 more trading days before the report, there's a chance that Apple could be at or near a 52 week high when the report comes out. At that point, the stock could sell off if Apple sandbags its guidance like it has been known to do before, but that could be an attractive entry point for the stock.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.