Apple Might Have Fallen Unfairly, but Look Before You Take a Bite

The hype machine that is Apple (AAPL) has run into a series of Investor stumbling blocks of late. Not only is the degradation of the US economy foiling its plans for personal electronic revolution, the company has had to deal with an increased footprint, Greenpeace complaints, product leaks, and somewhat unrealistic expectations of itself and its results, while maintaining record revenues and profits. The Dec 07 quarter was no exception as Apple delivered earnings of $1.76/share.

Apple's own guidance, always thought to be conservative, for the Christmas quarter was seemingly aggressive in the $1.40/share range, while The Street pegged earnings in the $1.50s. Fast forward to right before earnings and The Street's consensus estimate had jumped to $1.62/share with whispers of Apple delivering close to $1.80. Consider that one year ago Apple delivered $1.14/share and their own guidance was already close to a 30% rate of growth year over year. Those ever ambitious analysts on The Street were expecting over 40% year over year growth.

So, broken down and battered by recession fears Apple delivered $1.76/share, representing a 54% year over year profit growth rate. Remarkable! With the sales breakdown producing even more records for the company. Revenues gained 35% year over year to $9.6Billion.

Over 2.3 Million Mac Computers soldOver 22.1 Million iPods soldOver 2.3 Million iPhones sold

And this just begins to scratch the surface of the company's historic and record-setting quarter. Now analysts had their own ideas and Apple matched, or bested all of them except for the numbers of iPod units sold, however, iPod revenue grew much faster than unit sales did (17% vs 5%), meaning the product shift had begun towards more expensive and higher margin models. Analysts were expecting higher unit sales in the neighbourhood of 23-25Million for Apple's very successful music player business.

Good old trusty Apple CFO Peter Oppenheimer gave the traditional spiel of "We give guidance we have reasonable confidence in achieving" just like every other quarter but analysts were taken aback at how soft the next quarter may be for Apple. Is the economic slowdown in the US going to effect this high profile firm this dramatically? Apple's guidance of $0.94/share looks soft on the outside, considering it reported $0.87/share a year ago at that time. How quickly analysts forget that Apple's guidance a year ago was around the $0.60/share mark.

But, for Traders $0.87/share represents only an 8% year over year increase in profit. And this sent the stock spiraling after hours. Apple, which had found itself at record levels above $200, just weeks ago, has seen shares fall to the mid $155 range at closing, and further down to below $140 after the results came in.The stock took an 11% hit to $138 after results and guidance were announced.

This is too much, even in a turbulent economic picture such as the one that's painted for the United States. Apple's trailing earnings with this result stand at $4.56 or a 30 P/E. For growth of 54% year over year, this is astonishingly cheap. But don't jump on the trigger just because of that. Even though the Price-Earnings Growth multiple looks very attractive, it doesn't paint the entire economic picture.

If recession is as likely as The Street makes it out to be, Apple could very well fall to a PEG of 0.5, from its current 0.55. Meaning that if next quarter's growth continues near 50% (regardless of conservative guidance) Apple could trade at a P/E of 25 given current economic conditions. On earnings of $5/share that would value Apple at $125. This I would see as an absolute bottom for the stock of this successful company.

Comments

[top_tier]

You speak on both sides when you say about Apple: "unrealistic expectations of itself and its results", but go on to say Apple has historically UNDER estimated earnings. The latter is correct, therefore what's the fuss about their lower guidance for the March Q. Just more of the same from Apple; underestimating. It's the analysts and those putting out made up whisper numbers trying to manipulate "stock action".

This is a great opportunity at least.

[2old2run]

Apple reported free cash flow of 2x earnings putting its cash position in the $18B range. Incredible! The company is a cash generating cow!
The movie rental business will just fuel their cash generation.

[krasowskic]

In the opening paragraph, the unrealisitc expectations and results are meant as part of the Investor stumbling blocks set by the world at large/investing community, not by Apple itself.

Hope that clarifies

[Tom B]

Also, their 18 B in cash isn't counted in the P/E because "cash" does not equal "earnings".

The low guidance could be either plain old recession jitters, or maybe they want to acquire a company. I can think of several that would be a good fit.

[ricker]

I wish they would buy back some stock right now.......