Apple Earnings Forecast: Will The Stock Fall Further?

| About: Apple Inc. (AAPL)
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It seems as if every quarterly financial release is the most important ever for Apple (AAPL), but this quarter is certainly unique. Apple's stock has declined 22% in the past three months and has dropped nearly fifty percent since its peak of $705. Apple is one of the worst performing stocks in 2013 and optimism for the company has seemingly vanished. Apple's highly anticipated second quarter fiscal 2013 earnings will be released Tuesday and I have lost count of how many times people have asked me what to do with the stock before earnings. Is it time to capitulate and sell before the stock declines further? Is it time to start buying shares now that we are trading at such historical lows? Read on to find out.

To predict Apple's financial performance, I focus on the last twelve months of reported performance, new products, reported trends, and any other available information that I can access to refine my prediction. All of the below predictions are merely that - my best educated guess at what Apple will report. I make no guarantees about these predictions, and as any good analyst will say, material deviations are to be expected. I specifically try to exercise caution with my forecasts and will side with the more conservative option when given a choice. If you compare my forecasts to those of other analysts, you will see that they are fairly conservative; however, my final revenue and EPS targets are slightly higher than average. I hope that my accuracy in forecasting Q1 2013 results will give you confidence in trusting predictions. My fearless predictions are as follows:

  • Revenue: $43.2B (Up 10.3% YoY)
  • Profit: $12.4B (Up 7.0% YoY)
  • Gross Margins: 37.43% (Down 17BP QoQ)
  • EPS (Diluted): $10.46 (Down 15% YoY)
  • Dividend per share: $3.31 (Up 25% QoQ)
  • iPhone: 37.52M Units; $23.91B Sales
  • iPad: 21.72M Units; $9.66B Sales
  • Mac: 3.45M Units; $4.69B Sales
  • iPod: 6.97M Units; $1.13B Sales

This is summarized below.

I foresee Apple's second quarter revenue climbing approximately ten percent to $43.2B due to continued strong sales across the entire iPhone portfolio as well as the iPad's continued success. Verizon (NYSE:VZ) sold 4M iPhones last quarter, up from 3.2M iPhones in the same quarter last year. The iPhone continues to sell well on AT&T (NYSE:T) and crowds lined up for the iPhone's launch on T-Mobile. Gross margins are likely to contract slightly versus the previous quarter but will be down sharply from Apple's recent record of 47.4% in Q2 2012. The average gross margin over the past eight quarters is 41.93%, but the success of the iPad line has pushed overall margins lower. I expect the average selling price (ASP) for the iPad line to continue to decline, but the popularity of the iPad Mini should keep the product on track for record performance in later quarters, especially after an iPad refresh. Despite some increases for competing tablets over the holidays, the iPad has been regaining momentum. This makes sense as cheaper Android tablets can make for affordable gifts compared to more expensive iPads. Note that all ASPs are unadjusted for related product line accessories, as reported by Apple.

The hardest product line to predict this quarter is the Mac line as there have been rumors that Apple halted component orders in April. Macs have been surprisingly resilient in the face of declining personal computer sales; however, the decline in PC sales has been characterized as "unprecedented" and I have concerns about even Apple's ability to break the strong macro trends. Mac sales should continue to outperform the broader PC market, but I am forecasting for Mac sales to be at the lowest level in two years due to the lack of catalysts. Fortunately for Apple, Macs are growing less important to overall performance so this trend is not overly alarming. iPod sales always spike in the first quarter as iPods still make great holiday presents but this is another declining market opportunity for Apple. In comparison, iTunes revenue will likely be three times as high as iPod revenue.

(Source: Yahoo! Finance)

In summary, I am projecting that Apple will report a $43B quarter with ten percent year-over-year growth amid both positive and negative headwinds. I have been tweaking my Q2 2013 forecasts for Apple based upon a variety of factors and overall I believe this will be a solid quarter for the company. Remember that this is historically an 'off' quarter for Apple as there is commonly a letdown following the holiday quarter. Last year's second quarter was boosted significantly by very strong iPhone sales but the second quarter tends to be Apple's weakest of the year as new product launches and refreshes tend to come later in the calendar year.

Unfortunately I believe that Apple needs more than a solid quarter to appease the stock market. I do believe that we could see Apple increase the dividend twenty-five percent to $3.31, which could provide some excitement to move the shares higher. Again, I choose the conservative choice as many analysts are forecasting that Apple will increase the dividend by fifty percent. I believe it is important to have realistic expectations with Apple and its cash as the company has been very hesitant to deploy its capital. This would increase the yield nearly seventy basis points to 3.39%. At the current rate, the entire growth versus value debate surrounding Apple's stock will become irrelevant, as a four percent yield is very difficult for dividend investors to ignore.

Everyone knows how cheap Apple shares are based on its strong balance sheet and the stock is trading at its lowest price-to-earnings ratio in the last ten years, but the market's primary concern is that Apple lacks a blockbuster product to keep that "E" in the P/E ratio growing. Products such as the iWatch and iTV could be Apple's antidote but investors could have a very bumpy 2013 to contend with until then. I continue to stay long Apple because I believe there is limited downside at this price. Apple's ~5.5 P/E ratio excluding "cash" indicates that if Apple maintains its current earnings for six years in the future without any growth, the stock will have earned over $385 per share.

Note that Apple's TTM P/E will likely decline as the strong Q2 2012 is replaced but a portion of the decline will be mitigated by the rising cash balance. In comparison, Netflix's (NASDAQ:NFLX) P/E ratio of 555 means that it would take the company 555 years to generate enough earnings to match its share price. Apple's basic upgrades with the iPhone 5S, iPhone 6, and latest iPads only should generate growth for two to three years without a radical product.

With this in mind, the downside for Apple's stock is somewhat limited given its current cash and ability to generate cash going forward. The company currently has $146 per share in "cash" and almost $50 EPS forecast for next year. Apple has been generating approximately $15 in cash per share per quarter. If Apple experiences zero growth and is able to replicate this performance for two years, the stock would have $390.53 in intrinsic value as those earnings would be available for distribution. This is admittedly a simplistic calculation as I ignore a variety of factors but my objective is to show you that I believe Apple has approximately seven percent more downside potential and substantially more upside potential. When making an investment decision the best you can hope for is to make an informed decision and have odds in your favor. I believe the near term will continue to be rocky for Apple, but in the long term, the odds are in favor of investing in a company that continues to surprise the world with its innovations.

Disclosure: I am long AAPL, T, VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please refer to profile page for disclaimers.