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As I have in the past, I released an official Apple (NASDAQ:AAPL) earnings preview before the latest quarterly results. A few of my numbers were dead on, and I felt good about that. In talking to some readers and investors after the quarter was posted, they asked if I could provide a preview earlier on. So I decided to do the following, provide a mid-quarter update on the stock, along with my projections for the current quarter. I'll discuss some of the factors I used when projecting my numbers, along with some comparisons to prior periods, and any other information I find pertinent. I still will release my official earnings preview before the actual Q3 report, which should be sometime in mid to late July.

Before I get into my numbers, there are a few important things to know about the current quarter.

  • Apple gave Q3 guidance of $34 billion in revenues, and earnings per share of at least $8.68.
  • Current Wall street estimates are for $37.47 billion in revenues, and $10.34 in earnings per share.
  • The iPhone 4S only went on sale in Mainland China during fiscal Q2. Fiscal Q3 will be the first full selling quarter there.
  • The new iPad was released in mid-March. This will be the first full selling quarter for it.
  • The new iPad was released in select Asia-Pacific countries during fiscal Q2, with the remainder scheduled to get it in Q3.

So how does this affect my thinking? Well, I obviously am going to project a quarter over quarter increase in iPad sales. It sold well to start, and I believe a full quarter of sales will be tremendous. When it comes to iPod sales, I am expecting another year over year decline, as we have seen with that product for the past number of quarters. When it comes to Mac sales, I am projecting a slight increase over last quarter. We have heard about new versions possibly coming out this quarter, so I have taken that partially into account. Should we actually get new versions during the quarter, I will up my numbers for my official earnings preview.

When it comes to the iPhone, there have been a number of concerns about consumers holding back, waiting for the iPhone 5, which we believe will be released later this year. While I believe that there will be a decrease from Q2, I think that it will partially be offset by a full selling quarter in Mainland China. Now we recently heard about Sterne Agee analyst Shaw Wu stating Apple may have cut iPhone production by 20-25% over last quarter. However, he noted that he didn't think they were cutting production because of demand. Mr. Wu took down his quarterly iPhone estimate from 28 million to 26 million. However, for Q2, he was at 29.5 million, and Apple sold over 35 million, so you might want to think about that.

So what are my estimates for the products? Well, I've thrown my numbers together in the following table. For comparison, I'm putting my numbers against fiscal Q3 from last year, so you can see my estimates for the year over year change.

Unit SalesQ3 2011Q3 2012Change
Desktops1,155,0001,250,0008.23%
Portables2,792,0002,900,0003.87%
Total Mac3,947,0004,150,0005.14%
iPod7,535,0006,250,000-17.05%
iPhone20,338,00031,500,00054.88%
iPad9,246,00015,000,00062.23%

I think we will see some year over year Mac sales improvement, but I don't see them selling a ton unless we get the new models real soon. Like I mentioned above, if Apple were to come out with some new versions this month or next, I would take my estimates up. The iPod is still in decline, so I have that declining. Per my forecast, iPod sales dollars would only be about $1 billion, so not much more than 2.5% of Apple's total revenues for the quarter. I do see a quarter over quarter decline for iPhone sales, but I'm not as bearish as some may be. I think a 10% decline over Q2 is reasonable, and that still would be about 55% growth over last year. I expect a very strong iPad quarter, along with most analysts out there. I may even take that number up later on.

I have those main products contributing a little more than $34.5 billion in total revenues. Apple does generate other revenues too, from iTunes, as well as other software and hardware sales. When I total everything up, I am currently modeling $39.042 billion in quarterly revenues. That would be down slightly from Q2's $39.186 billion, but still up very nicely from last year's $28.57 billion.

Now onto my margin analysis. We expect that there will be a smaller percentage of total revenues coming from the iPhone, so that will have an impact on their margins. We've also heard that the new iPad is a bit more expensive than previous versions. That could also hurt. I also mentioned in a recent Apple article about Apple seeing a decline in overall selling prices, and I feel that might impact margins slightly. I think that margins will be down a bit from the Q2 numbers we saw, but I still expect them to be a bit higher than the prior year's period.

MarginsQ3 2011Q2 2012Q3 2012
Gross41.73%47.37%44.75%
Operating32.83%39.26%37.50%
Profit25.58%29.66%28.25%

From those margin numbers, along with the above mentioned revenue number, I have Apple reporting a profit of about $11.03 billion. Apple is still seeing its share count rise from executive options and such, and they won't be buying back stock to cover that dilution for another quarter or so. Thus, I have the diluted share count (used for earnings per share calculations) at 945.5 million. That gives me my current earnings per share forecast of $11.67.

Now, I mentioned this in some of my recent articles, but I must emphasize it again. Analysts have already taken up their quarterly estimates quite a bit, thanks to a second big quarterly beat from Apple. It is very well possible that analysts could drive their estimates up to $38 billion or more in revenues and possibly $11 or more in earnings per share. If that is the case, we may not see the usual huge beat we have become accustomed to. Last quarter, estimates were for $10.04 going into earnings. Apple reported $12.30. This quarter, estimates are already 30 cents higher, and we are still roughly two months from them actually reporting. Expectations should be high after the last two quarters, but we don't want to set up a scenario like fiscal Q4 of 2011, where estimates got just too high.

As for the stock, we are now trading at just 11.9 times this fiscal year's expected earnings, which sit at $47 now. It is amazing how much this stock has declined, coming down all the way from its high of $644. Just think about it this way. Before Monday's near $31 point rise, Apple had lost, in market cap, the entire size of Facebook (NASDAQ:FB), at more than $100 billion. The stock still remains a very strong buy according to analysts, with the average price target above $708. That implies more than 26% of upside from here. Should the market continue to decline, Apple will still get hit, but this drop in the stock seems like a tremendous buying opportunity to me.

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

Source: Apple: Initial Projections For Q3

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