6 Key Earnings Previews: AAPL, MSFT, EBAY, POT, WFR, SPWR

By the time we know who the NFL Champion will be (Feb. 3), we will be just passing the apex of earnings. The next two weeks of earnings comprise about half of the companies that report for the first quarter. The Super Bowl will be the halftime show of the earnings season and what a way to have a cresendo!!!

This week Apple (AAPL), Potash Corp. (POT), Microsoft (MSFT), SunPower (SPWR), MEMC Materials (WFR), and Ebay (EBAY) earnings should cause volatile price movements in their shares.

Let’s talk about apples. I really like Honey Crisps, they’re delicious. I also like this other AAPL and it is set to ripen on Tuesday, January 22 after the bell. Apple is the defacto standard in computing and wireless products. A cash machine. You know Apple is the only store that has actual customers in it. Have you walked by a Coldwater Creek?

You know what fascinates me about AAPL? AAPL has so many revenue profit generators within their business model. I have lost count of the many ways AAPL has successfully leveraged their brand to make another source of income appear. They have successfully created a financial and business ecosystem rivaled only by few in the tech world.

Ok, I am going out on a limb here and I think they will beat! LOL, No kidding, duh!

No, I want predictions of how much they are going to beat, that’s the ticket! That’s the real whisper! Are they going to beat by five cents or twenty cents? Let’s take a look at the case shall we?

At MacWorld, Steve Jobs announced that AAPL had sold 4 million iPhones. The iPhone owns 19.5% of the US smartphone market, only behind RIMM. Spectacular results considering its infancy. Iphone sales have exceeded expectations for the 4th quarter. Steve also said they sold 5 million copies of Leopard, which adds to AAPL’s software sales growth. He also announced that iTunes movie rentals will be added as another AAPL cash generating machine (plug and play). Channel checks by analysts all season indicate that Mac sales were robust and higher than expectations. AAPL has a sales metric of $2,800 per square foot, the highest in the retail industry. That’s almost three times the sales generated by each Best Buy store.

APPL’s shares are trading at 25x forward earnings and when AAPL announces earnings next week, they are going to be valued a whole lot cheaper as forward earnings estimates must be moved up. Consensus estimates for AAPL’s current quarter is at $1.62 with a high estimate of $1.77 per share. They are expected to bring in $9.46 billion in revenue as a consensus estimate with a high estimate of $9.96 billion. In the past 30 days, we have had 12 analyst upgrades in the current quarter, next quarter, current year and next year.

Historically, AAPL gives conservative guidance. So guidance could be seen as a non event if it is inline with expectations and analysts will extrapolate from current earnings, creating new guidance with higher than expected growth momentum. Ipod sales, operating margins, Mac sales and its derivatives, and iPhone international sales as well as its first meaningful (full holiday quarter) peek into iPhone revenue and profit streams will be focused on. It will be interesting to see how subscriber revenue gets accrued under the AAPL iPhone accounting system and how much impact it will have on earnings. It is already known that AAPL will account for iPhone revenues over a period of time and may not show the breakdown of those revenues.

On Friday, we recieved some early information from international iPhones sales as France Telecom’s CEO Didier Lombard said sales of Apple’s (AAPL) iPhone device are going better than expected in France, the Associated Press reported. FT unit Orange did not provide figures, but said sales are going “very well” after the holiday season. Mr. Lombard said Orange has sold “very, very few” iPhones without a contract. British iPhone partner O2 said its partnership with Apple has resulted in a 300% increase in the number of people visiting its stores.

Also another very important recent development is that AT&T will announce iPhone compatibility for new and current business accounts on Monday according to the Boy Genius Report.

The whisper will be high, and I would guess it’s around $1.75 which is near the highest analyst estimate. I believe that there is a good chance of AAPL beating that whisper number and having a positive reaction but I am concerned about the current market environment. This market environment is more conducive to momentum short plays or bearish weighted earnings catalyst trades.

Personally I believe the higher probability trades will be made after earnings, except in a small number of cases. Looking at AAPL’s earnings history they have beaten four out of the last four periods and have beaten mightedly. On last year’s Dec 2006 holiday quarter, AAPL beat consensus by 36 cents! On the March 2007 quarter, they beat by 23 cents. On June 2007 and September 2007 quarter they beat by 20 and 15 cents respectively. I believe they will bring in revenues higher than the consensus of $9.47 billion and closer to $10 billion or higher for the quarter.

I also believe that they could earn above $1.80 for the quarter due to stronger than expected sales across their product lines especially Macs. First Boston came out on Thursday with a reaffirmation of their rating at Outperform with expectation of robust Q1 results of $1.76 with $9.8 billion. Barron’s recently noted, that if Apple can steadily gain market share in PCs this year, while bringing in more subscription revenue from the iPhone, it could generate $8 to $9 dollars in free cash flow per share in 2009, according to analysts. AAPL shares have lost 25% of their share price since the highs due to overall market weakness and could be setting up as a great long term entry point. The question is will there be a fire sale after the report or will the discount disappear once AAPL announces their blockbuster quarterly numbers.

As an option trader who likes straddles and strangles, I will be overweight OTM long calls with an OTM put hedge, as its going to be a volatile event. Another interesting thing to watch for is if AAPL decides to split the shares, that could be the cherry on top if everything else falls into place. We will be discussing several options as the market unfolds going into the event and after.

Potash Corp (POT) is reporting earnings on Jan. 24th Thursday before the bell. POT has excellent fundamentals but deteriorating technicals with its recent sell off of highs. POT has shown in its previous technicals wide ranging moves after earnings so a post event gap trade could provide better opportunities after considering all the facts and watching the price volume action. Analysts are expecting POT to bring in $0.98 on EPS and $1.22 billion in revenues. POT has shown some inconsistencies with beating consensus estimates in their previous four quarters (missed on two) but this earnings quarter could be different as grain prices and potash prices have gone up substantially during the past quarter. If you remember MOS, they beat earnings handily gapped up $5 sold off about $15 and proceeded to climb $30 after the results. POT could move just as violently after its results and I am more inclined to trade it after but I do expect them to beat handily and gap up.

Microsoft (MSFT) has earnings after the bell on Thursday Jan. 24th. Consensus estimates are for MSFT to bring in $0.46 per share and $15.95 billion in revenue. With strong global computer sales growth and working off of last quarter’s unexpected EPS beat and stronger than expected perforance, MSFT is poised to beat this quarter as their growth drivers in software sales and Xbox successes show up on the their financials. MSFT is really doing well in video games with the successful launch of Halo 3 in late September, I think you will see the “halo” effect on earnings with a gap up. I will most likely be going overweight long calls with a small put hedge strangle. I will be focusing on the February $35 calls and the $30, $32.50 puts. I have been fairly excited to see more novel development in artificial intelligence and human network leveraging by Google and Microsoft. I really think this is the new frontier for technology and that is leveraging technology to make life simplier and more productive rather than just aggregating data in a useful manner. Web 3.0 will be exciting as wireless products and software will use real time data to predict what you want and what you will think next in the form of artificial intelligence.

SunPower Corp.(SPWR) has earnings on Thursday Jan. 24th with a 12 PM ET release time followed by a conference call at 1:30 PM ET. It is unique for a company to release earnings during the day so this could change as a release before the bell Thursday but we’ll have to see.

SPWR is expected to have earnings of $0.36 per share for the current quarter and $220.63 million in sales. Out of the last four quarters they have beaten expectations. One recent analyst downgrade from $165 to $77 has been shaking up the shares. Satya Kumar from Credit Suisse questions SPWR’s costs and demand for its products. Kumar worries about future demand if there are changes in price or government support for solar modules. He added that SunPower uses more significantly expensive and complicated designs on its solar modules than rival companies do. Measured in terms of each watt of power produced, he said, the company has to pay more than twice as much for the key material polysilicon as its rivals. “This cost differential could come into play if polysilicon prices decline due to oversupply for Chinese suppliers,” he said. With the current market environment and contractions of growth multiples across the markets I would be wary of directly trading this earnings catalyst especially with options since the bid/ask spreads can be very wide.

MEMC Electronic Materials (WFR) has earnings on Jan. 24th Thursday after the bell. I expect them to beat with consensus estimates coming in at $0.96 a share and $545.92 million in revenue. WFR has shown historic volatility on an earnings catalyst so I do expect the shares to move. They have beaten earnings estimates four out of the last four times. Shares look ripe for a bounce after the recent selloff but market sentiment seems to rule all as new buyers are scarce. WFR has excellent margins and makes thier own polysilicone. Zack’s recently upgraded the shares to Strong Buy due to a better outlook for the semis than in 2007. Zack’s believes continued demand for new technologies will help semiconductor companies work off their inventory glut and continued growth in WFR’s solar panel line will help propel share prices up. A WFR hedged long position or an option play after earnings with a post-event IV implosion could be profitable and a higher probability play than a direct earnings catalyst play.

Ebay (EBAY) has earnings scheduled for after the bell on Wednesday Jan. 23rd. EBAY is expected to bring in $0.41 a share with $2.14 billion in revenue. EBAY has beat earnings expectations four out of the last four quarters. Analysts are worried about forward looking challenges to profit margins as PayPal and Skype grow significantly with lower profit margins than their higher online auction profit margins. Ebay could lower its fee structure when it reports in order to boost overall commission on sales in an effort to be more competitive with Amazon. Derek Brown of Cantor Fitzgerald kept his sell rating on the stock and notes that EBAY should not tamper with its fee structure too much. “In our view, significant changes coming to eBay’s core fee structure and searching/finding algorithms are potential long-term net positives,” Brown wrote in a Jan. 11 report. “However, these adjustments could materially disrupt near-term buyer/seller behavior, which could, in turn, negatively alter eBay’s GMV [gross merchandise volume] and revenue growth trajectories.”

This fee change could affect AMZN as Tim Boyd of AmTech Research says, “Make no mistake about it: this is a direct attack on Amazon, and we would be shocked if Amazon does not incorporate the possibility of third-party seller reductions into its 2008 guidance,” wrote Boyd in a Jan. 8 report, in which he kept a buy rating on eBay’s shares.

EBAY shares are at a one year low so expect some price volatility with low expectations going into the announcement.

Disclosure: Author is long shares of AAPL and MSFT.

Comments

[Thomas A,Gaughan]

option Dragon, Finally someone that work for seeking Alpha that knows what their talking about. Good Job.
Thomas A. Gaughan

[Webster]

You know what's wrong with AAPL as a Gold Standard in investments (which they will NEVER be)? The Greedy ba$tards in Cupertino have never paid a stinking penny in DIVIDENDS since evil greedy Stevie has run the company, and even though they have no debt and outragious profits and cash balance.

Only the day traders screw around with roller coaster AAPL ... which says it all.

[optiondragon]

Thanks Thomas.

[wykeman]

AAPL- I think most people are way to optimistic on there eps. I do agree they will beat $1.62. but as you noted for the last 4 quarters they have been "beating the street" by less and less. In other words it's become increasingly harder to grow at that pace. Be careful.

[Desperate.]

Brave position going long on the solars, the trend seems pretty obvious to me that the market has no tolerance right now for the spec growth stocks like solar right now. I think it's a pretty dangerous place to be trying to find a bottom, esp. in SPWR with such a high PE.

Keep in mind that Germany has been one of the best friends to the solar stocks and have recently passed legislation to start slashing subsidies starting in 2009. Which means they will have to sell even more product to offset the declining subsidies that start in 2009 and continue to get slashed in the following years (5% a year if i remember right)

Disclosure: Short SPWR & FSLR.

[mollytjm]

thank you for a great note on Apple. And, not giving dividends means they have a huge amount of cash protection. i'm a stock holder and i'm glad they don't give dividends...in the fast moving tech world, this is good insurance. and the stores!! they're wonderful! i've brought so many people into the one at the King of Prussia Mall (PA) and most went back and made purchases even though they had never owned anything Apple before that initial visit.

[digivision]

keep the dividends and use the cash for R&D that is one of the reasons I like Apple and it is also one of the reasons Apple creates great products
Jobs said it right in his CNBC interview
"take care of the top and the bottom line will take care of itself"

[optiondragon]

Actually I am not bullish on SPWR at all. Market sentiment will be the prime factor for going long into any of these earnings. MSFT and AAPL are the best longs going into numbers but who is really going to care what they bring in when the Dow drops 500 to 1000 points this week.
Post event IV implosion trades to the dwonside are the higher probability play right now. Looking at shorts in the energy sector, long on FXY, short on FXB, short on RIMM, short on AMZN.
short select XLB components such as MON.

[optiondragon]

The disclosure should say I am long AAPL and MSFT but thats it.
I will make sure they make the correct disclosures next time. Sorry about that.

[HarMegiddo]

once again , i like what you got up OD. keep your eye on CNH wednesday morning. Case/NewHolland. it trades thin and likes to make big moves. i know thats what you like, :).n

[StevePatterson]

OD,
When you strangle a stock like AAPL prior to the earnings, how far away do you purchase the options? 10% in both directions, 20%, etc. ?
Thanks

[optiondragon]

Har, yes, thanks for your support. CNH I like, I also like DE as a sympathy trade. But if you notice on CNH's historical candlestick daily chart, it really likes to move after the announcement or catalyst.
So post gap trade after should work well.

Ohio, it depends on the stock and its previous ranges on the average and more importantly on the extreme.
Market sentiment is also a consideration but more importantly risk/reward favorable trades , long volatility. Also time to expiration is a consideration as well.

[HarMegiddo]

i haven't owned apple in a little while. i just read the CC that SA has posted and it reads pretty darn good. i think i might be buying into the sell off tomorrow morning.
i just keep eyeing up ISRG in for jan.31. they have been my baby for so long. i just don't think hospitals will be cutting back like that analyst said. i don't think they can without falling behind other hospitals, plus what about all these boomers? hospitals should have plenty to spend for years.