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Since Apple (NASDAQ:AAPL) is reporting earnings next week I chose to write this article because I have always been intrigued at how analysts get their estimates and thought I would try it out for myself and see how close I am when Apple reports on Tuesday the 24th of April. I will be using three different methods to come up with EPS estimates for Apple.

Method 1: Segment Prediction

I used the segment data of the previous quarter and forecasts for this quarter to get the total revenue, and used apples guidance on Gross Margins, Expenses and Tax rate to get the Projected EPS.

Table 1

[The data in the table below is from a PDF table from Apple.com]

The table below shows the units, revenue for each segment and Revenue/Unit for the last reported quarter which was Q1 2012.

Segment

Units

Segment Revenue

Revenue/Unit

Mac Desktop

1,479,000

1,936,000,000

1308.99

Mac Port

3,719,000

4,662,000,000

1253.56

IPod

15,397,000

2,528,000,000

164.19

Other Music

-

2,027,000,000

#DIV/0!

IPhone

37,044,000

24,417,000,000

659.14

IPad

15,434,000

9,153,000,000

593.04

Peripheral and other hardware

-

766,000,000

#DIV/0!

Software services ,other

-

844,000,000

#DIV/0!

Table 2

In the table below I entered the revenue/unit from above, and for the segments that did not have units, I entered the 2012 Q1 segment revenue multiplied by the sequential growth in that segment. Also, I was unable to find consensus estimates for Mac's and IPods so I multiplied the units from Q1 2012 by the year/year unit % change to get the units for Macs and IPods. I was able to find consensus estimates for Iphones and Ipads, and used the average estimate for each of those segments.

Estimates

Estimated Units

Rev/Unit

Revenue

Mac Desktop

1,789,590

1308.99

2,342,560,000

Mac Port

4,760,320

1253.56

5,967,360,000

I pod

12,163,630

164.19

1,997,120,000

Other Music

#DIV/0!

2,452,670,000

I phone

30,500,000

659.14

20,103,620,019

I pad

11,870,000

593.04

7,039,400,674

Peripheral and other hardware

#DIV/0!

919,200,000

Software services ,other

#DIV/0!

844,000,000

Total Revenue

41,665,930,693

Table 3

[Numbers in Millions] except EPS, and Percentages]

The following Income Statement uses the above Apple Total Revenue from Table 2 and Margins, Tax rate and Operating Expense as a Percentage of Estimated Revenue from Apples Guidance here.

Revenue

41,665.93

Gross Margin

42%

Gross Profit

17,499.69

Op ex as % of sales

9.08%

Operating Expense

3,781.41

Operating Income

13,718.28

Other, Net

125.00

Income Before Tax

13,843.28

Tax Rate

25.25%

Income Tax

3,495.43

Net Income

10,347.85

Shares Out

931.04

EPS

11.11

Method 2: Guidance Prediction

I used data from Apples previous 4 conference calls to get an average of how much there revenue guidance is off from the actual revenue, and apply the average to the current quarter. For the Gross margin rate, tax rate, other net, and Operating expenses, I used data from the last conference call.

Table 1

Average Apple Estimate

Actual

37,000,000,000

46,333,000,000

25.22%

25,000,000,000

28,270,000,000

13.08%

23,000,000,000

28,571,000,000

24.22%

22,000,000,000

24,667,000,000

12.12%

Average Under guidance

18.66%

Table 2

[Guidance Expectations from Apple Conference call]

Expectations:

Revenue

32.5 Billion

Gross Margin

42%

Op Expense

3.5 Billion

Target EPS of

8.50

Other , net

125 Million

Tax rate

25.25

Table 3

[Numbers in Millions] except EPS, and Percentages]

The following Income Statement uses the Revenue Guidance that Apple gave multiplied by 1+ the average Revenue Under guidance percentage so the math looks like this [ 32.5 Billion*[1+18.66%]] and that gets to the revenue number below of 38.565 Billion.

Revenue

38,565

Gross Margin

42%

Gross Profit

16197.39

Operating Expense

3500

Op ex as % of Sales

9.08%

Operating Income

12697.39

Other, Net

125

Income Before Tax

12822.39

Tax Rate

25.25%

Income Tax

3237.65347

Net Income

9584.74

Shares Out

931.04

EPS

10.29

Method 3: Historical Prediction

[Numbers in Millions] except EPS, and Percentages

For this method I used the comparison between 2011's Q1 and Q2 Earnings, to see what the drop off in earnings was for the quarter following the holiday shopping season. For example after Q1 2011 [Holiday] quarter, Apples revenue for Q2 2011 fell -7.76% from Q1 2011, so I used the revenue from Q1 2012 and subtracted out -7.76% of the sales to get a Q2 2012 estimated revenue of 42,739,470,000 as show in the table below.

Change

Q2 2012 Estimate

Revenue

-7.76%

42739.47

Cost of Revenue

-12.13%

22521.92

Gross Profit

-0.78%

20542.17

Gross Margin

7.57%

48.06%

Selling/General/Administrative Expenses, Total

-7.01%

2422.27

R&D

1.04%

765.91

Total Operating Expense

-5.14%

3190.15

Op ex as % of Sales

2.84%

7.46%

Operating Income

0.60%

17444.12

Other, Net

-80.88%

26.19

Income Before Tax

-0.79%

17338.73

Income Tax

-2.35%

4309.38

Tax Rate

-1.57%

24.85%

Net Income

-0.28%

13027.01

Shares Outstanding

0.43%

935.00

EPS

-0.71%

13.93

Final Data

Below is a table showing the EPS [Earnings Per Share] of the 3 methods above as well the average of the three methods, the EPS whisper number, and analyst EPS estimate from Whispernumber.com. The PE ratio is from the close on Friday 20th of April, and is from Yahoo Finance, and the last 3 quarters EPS from MSN Finance.

EPS Estimates

Method 1: Segment Prediction

11.11

Method 2: Guidance Prediction

10.29

Method 3: Historical Prediction

13.93

EPS Estimates

Last 3 Q's EPS Total

Total EPS

Current P/E Ratio

Price Target [PE* Total EPS]

Method 1: Segment Prediction

11.11

29.05

40.16

16.31

655.01

Method 2: Guidance Prediction

10.29

29.05

39.34

16.31

641.64

Method 3: Historical Prediction

13.93

29.05

42.98

16.31

701.00

Average of Methods

11.78

29.05

40.83

16.31

665.88

Analyst Estimate

9.99

29.05

39.04

16.31

636.74

Whisper Number

10.03

29.05

39.08

16.31

637.39

Closing Thoughts

This was a very interesting article to write since it was the first article I have written where I have gone through a whole earnings call transcript looking for specific details. I am looking forward to seeing which if any of the three methods is closest to the actual EPS, or if the average of the three methods is closest. If none of the three methods are close to the actual EPS I will probably stick to the analyst EPS estimates and whisper numbers.

Disclaimer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: My Attempt At Estimating Apple Earnings