Seeking Alpha
Long only, portfolio strategy, dividend investing, ETF investing
Profile| Send Message|
( followers)  

Yesterday I wrote an article on estimating Apple (NASDAQ:AAPL) earnings and this article will be about the lessons I learned from the process I used in the article.

Lessons Learned:

  1. Finding data on individual product categories was a lot more difficult than I thought. I was not able to find consensus estimates for Mac and iPod sales, but I did find estimates for Apple's two largest segments: iPhone, and iPad.
  1. I learned that in addition to using Apples previous 4 conference calls to get an average of how much its revenue guidance is off from the actual revenue, and apply the average to the current quarter; I should have used the same process for gross margins. After going back through the transcripts and taking the average of the gross margins that Apple under guided by an average of 8.77%. The below table on the left is from my original article with just Apple's revenue guidance from at the end of the previous quarter multiplied by the average under guidance over the last four quarters, which was 18.66%, which is the revenue number of 38,565. So the math looks like this [32.5 Billion*[1+18.66%]]=38,565.

Now in the table on the right I used the same revenue number, but I also replaced the 42% gross margin estimate that Apple gave at the end of last quarter with the average of gross margin under guidance of 8.77% over the last four quarters multiplied by 42%, to get a 45.68% gross margin. So the math looks like this [42%*[1+8.77%]]=45.68%. The difference was immediate when looking at the EPS estimates when no gross margin under guidance was not included it was 10.29, and when it was included the EPS estimate was 11.43, which is much closer to the actual of 12.30.

Apples Estimate

Revenue

38,565

Gross Margin

42.00%

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

3237.6535

Net Income

9584.74

Shares Out

931.04

EPS

10.29

Apples Estimate

Revenue

38,565

Gross Margin

45.68%

Gross Profit

17617.575

Operating Expense

3500

Op ex as % of Sales

9.08%

Operating Income

14117.575

Other, Net

125

Income Before Tax

14242.575

Tax Rate

25.25%

Income Tax

3596.2501

Net Income

10646.32

Shares Out

931.04

EPS

11.43

  1. The final thing I learned is that using historical data without taking into account any guidance does not account for new products a company has offered over the last year. The historical method does give a good comparison of what has happens after a large quarter with a lot of seasonal sales, which shows up in many retailers which tend to have the most revenue in the last quarter of the year because of multiple holiday's during the last quarter of the year.

Closing thoughts on Apple earnings Methods

Based on the lessons I learned from estimating Apple earnings, in future attempts at estimating Apple earnings I will use the all three Methods for Apple, and will use Method 1, a modified Method 2 as detailed above, and the same Method 3. If I had decided to use the average under guidance gross margins of Apple the average of my three methods the average EPS of the methods would have been 12.16 compared with the first article, which had an EPS average of 11.78. But hind sight is 20/20 so I will have to wait until Apple's next earnings report to see if this way works.

Also, I took a serious look at using the same process with other companies, but found that other companies do not report the same metrics or guidance metrics that Apple does, so I would have to make a whole process for every single company based on what data is in their earnings transcript. Based on that fact, I will stick to only estimating Apple's earnings in the future. Overall I was very pleased with my original methods average coming way closer than the analyst consensus and the whisper number, and I am looking forward to estimating Apple's earnings next quarter.

Disclaimer

Source: Lessons Learned From My Attempt At Estimating Apple Earnings