No company in the market gives more worthless guidance than Apple (AAPL). While most companies try to manage expectations, Apple has guided significantly below consensus estimates for many years.
Analysts' estimates for Apple's revenues have almost always been more accurate than their estimates for the company's earnings, and while Apple analysts have consistently had significant trouble gauging the company's earnings, analysts' sales estimates have been much more accurate during the last year.
Analysts have been fairly accurate at assessing Apple's likely iPad sales, and while the iPad has been Apple's strongest growing product since the popular tablet was launched several years ago, the iPad is also Apple's lowest margin product. While Apple's iPhone launches have been the hardest product for the Apple analysts to gauge, the company's recent launch of the iPhone 4s has also given analysts a fairly strong model to base likely iPhone sales and margins off of as well.
Analysts have a hard time projecting a company's earnings when margins fluctuate significantly, because the gap between revenue and earnings growth can vary widely. With Apple usually only releasing a new iPhone a year, the company's profit margins for this product have fluctuated significantly over the last several years.
While Apple's recent quarterly results weren't particularly noteworthy, I thought one important and overlooked change was how much more accurate Apple analysts' estimates for the company's earnings have became. Apple analysts have been well-known to significantly underestimate the company's earnings power, and analyst estimates were still off by nearly 10% in the recent quarter. Still, recent analyst estimates have still been increasingly more accurate over the past year.
Apple recently reported fairly disappointing fiscal third quarter earnings of $9.32 a share, well below analyst estimates for the quarter at $10.30 a share. The company also issued its usual conservative guidance for the fiscal fourth quarter, with Tim Cook saying the company expects to earn $7.65 a share in the fiscal fourth quarter, significantly below analyst estimates of $10.65 a share.
Analysts' consensus estimates for Apple's fiscal fourth quarter of last year were very accurate as well, and analysts continue to have a fairly strong model for predicting the company's likely product sales as well. Apple analysts' estimates for the fiscal fourth quarter last year called for earnings for $7.35 a share, only slightly above Apple's earnings of $7.05 a share. While consensus analyst estimates were very poor for the first and second fiscal quarter of this year because analysts significantly underestimated iPhone sales and margins, analyst estimates for iPhone sales have become increasingly accurate. Consensus estimates for third quarter iPhone sales of around 25 million were very accurate, and analysts can now use the recent iPhone launches to better model the company's likely margins and sales in the near future as well.
Apple's margins have fluctuated widely over the last several years, and the company's margins have expanded significantly since the first iPhone was launched in 2007. While the iPad has obviously been an incredibly successful product that has significantly increased Apple's growth and revenue, the iPad is also Apple's lowest margin product. Apple's iPad revenues continue to grow strongly, with the company recently reporting 84% year-over-year growth in iPad sales, but the company's average price per iPad sold dropped significantly from $653 to $538 over the last year. While most analysts expected iPad sales and margins to drop in anticipation of the company's most recent iPad launch at the end of last quarter, Apple's margins still came in below analyst expectations at around 42%.
This is why I think it is more important than many Apple longs think that Apple's earnings were below analysts' revised estimates last quarter. Obviously, Apple traders and most market participants are well aware of the company's planned launch of the hotly anticipated iPhone 5 in October. Still, analysts are becoming more accurate in assessing this company's earnings as margins have compressed, and the gap between the company's earnings and revenue growth has narrowed significantly. While the iPhone comprises around 55% of Apple's revenues, the iPad remains Apple's fastest growing product. Apple's recent iPhone launch also provides analysts with much stronger models to build the company's expected margins and sales than these individuals have had in the past.
While most analysts' estimates for the fiscal fourth quarter have been revised down from $10.40 a share to $8.40 a share in the last several months, consensus estimates for the first quarter have not changed at all. Analysts are still expecting earnings of $15.33 a share in the first quarter of next year, down just $.20 from estimates three months ago. While most analysts' fourth quarter estimates have been revised by 20%, consensus first quarter estimates have also remain basically unchanged.
Apple's recent earnings in Europe showed anemic sequential growth and there are strong recent signs that China and Japan are slowing significantly as well. China and Japan's recent export growth was anemic, and Germany's July PMI also recently came in at a six month low. Leading retail companies, such as Tiffany's (TIF), also reported disappointing recent earnings in Asia. Recent retail sales data in North America was below expectations as well.
To conclude, the iPad has significantly increased Apple's growth over the last several years, but this new product has also significantly compressed the company's margins, and may cannibalize PC demand in the future as well. As Apple's margins continue to fall, the gap between the company's revenue and earnings growth rate will narrow, and analysts' estimates will likely become more accurate in assessing the company's likely quarterly and annual earnings growth.
While Apple's recent iPhone 4s launch helped the company doubles its revenues in China, analysts have much better models to forecast Apple's likely sales in the world's second biggest economy as well. Apple's much more compressed iPhone launches also make it much easier for the analysts to project sales and margins for the world's largest company's most important product. With iPad margins continuing to fall and first quarter estimates virtually unchanged after the company's very disappointing recent results, consensus estimates are likely too bullish as well. While no company has managed expectations better than Apple over the last several years, even this tech giant may find first quarter estimates too high.