Apple's Annual Earnings Estimates Are The Ultimate Sandbag And The Ultimate Opportunity

| About: Apple Inc. (AAPL)

Much effort goes into figuring out Apple’s (NASDAQ:AAPL) quarterly earnings. Each quarter right before earnings release Phillip Elmer Dewitt does the heavy lifting (thank you) and consolidates the professional and amateur EPS estimates. Quarter after quarter, the results are predictable. Wall Street severely under estimates and everyone is yet again shocked. The amateurs do much better, but they are actually trying to hit the mark and are not too worried about overshooting.

If you think The Street’s quarterly estimates are way off, take a look at their estimates for the next fiscal year. The current FY12 (September 2012); consensus EPS estimate is $33.05, 19% above the FY11 consensus estimate of $27.77, and only 10% above my current FY11 estimate of $30.00. The consensus for both FY11 and FY12 has been climbing steadily over the last year. This pattern is typical, as Apple blows away The Street quarter after quarter. I’ve been observing it for several years, but it wasn’t until recently that I started collecting the data so I could see how it looked over time.

The graph below shows the progression of FY11 and FY12 annual consensus EPS estimates for Apple over the last year.

(Click to enlarge)

Some interesting statistics:

  1. The one-year ago FY11 Street estimate of $18.03 was subsequently increased by 54% to get to the current estimate of $27.77.
  2. The May 2010 data point for FY11 of $15.40 (captured in a previous article ) has undergone an 80% increase to the current estimate of $27.77.
  3. The FY12 estimate has increased 57% in the last year from $21.04 to $33.05.

To see where the FY12 estimate may go, I added high, low and middle trend lines. I don’t know if the pattern is linear, and only time will tell. The trend points to the $45/share range for FY12 earnings, which is not too far off from my estimate of $43. I also have some company in the EPS stratosphere. Back in June, Andy Zaky was estimating $40/share: "At $325 a share, Apple currently trades at 8.13 times our 2012 earnings estimates.” At the end of September, Daniel Tello (a.k.a. Deagol) was estimating $44.14/share. Compare this to where the FY12 consensus started one year ago at $21.04.

To be fair to the pros, last May I was predicting 2011 EPS of $23 and 2012 EPS of $30. Between Q2 and Q3 2011, Apple exceeded my FY11 estimate, and it is looking like they have already met my old 2012 estimate. Basically in the last 1.5 quarters of FY11, Apple will have made all the EPS gains I had predicted for FY12.

I will continue to monitor FY12 estimates over the next year and provide periodic updates. I will also commence tracking the FY13 estimates when they start shortly after the 18 October earnings release. Estimating two years out in tech is fraught with danger, but if Apple can limp in with a 33% EPS gain, for FY13 we are looking at $60/share, a forward p/e of 7 with close to $200B in cash (more than half the current market capitalization), or a forward EV/Income of 3.5. Even after weighing the serious macro risks around the globe, this is the reason I like (and own) Apple 2014 LEAPS.

For the record, my Q4 FY11 estimate is $9.38/share on sales of $34.7B.

Disclosure: I am long AAPL.