Apple, Coca-Cola Lead Strong Earnings Season

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Includes: AAPL, KO
by: Stephen Leeb
Earnings season is hitting its stride. Over 100 of S&P 500 companies have already reported first quarter results, and it appears we’re on track for a relatively positive season. In fact, of those who have released, over 80 percent have surprised on the upside, while less than 10 percent have come in below expectations.
The poster child for positive earnings surprises, Apple (NASDAQ:AAPL), reported another blockbuster quarter (its fiscal 2nd quarter) after the market closed Tuesday. Our Growth Portfolio member reported revenues of $13.5 billion, up 49 percent, easily outpacing analysts’ expectations of $12 billion. Earning per share beat expectations by even more at $3.33 vs. consensus estimates of $2.46, as the company reported impressive gross margins of 41.7 percent, almost 3 percentage points better than company’s earlier guidance. Earnings were helped by a strong mix of product sales, including higher-margined Mac computers, whose shipments grew by 33 percent vs. the year earlier period. The company’s largest revenue contribution came from the iPhone unit, with sales of $5.3 billion. The company sold 8.75 million units during the quarter, up an astounding 131 percent from a year earlier, and more than 3 times the 41 percent growth seen in the smartphone market as a whole. The phone, which is still new to many international markets where it's being released, is now a cornerstone of the company’s offerings, to say the least.
Apple is leveraging the iPhone’s (and Mac’s) success in garnering attention for its newest product, the recently released iPad. The tablet computer’s sales were not included the yesterday's release, however, consumers were made aware of the new device in January. This is important to note for a couple reasons: first, the impressive results were delivered without the new product, and second, the anticipated new product did not appear to cannibalize Mac sales. Obviously, we’ll learn more about that a few months from now, once we see the first iPad sales accounted for. The company also noted in its conference call the tremendous response seen for the new product (the demand was overwhelming enough that it had to delay international shipments). The company also noted that it plans on introducing more exciting new products this year.
Looking forward, Apple is showing no signs of slowing down. While the company’s earnings forecast came in below market estimates (as it does every quarter), revenue guidance of $13.4 billion was actually higher than analysts had predicted. The stock, which is already up 16 percent this year, rallied another 6 percent on the news. Even with the move, however, we continue to see shares as attractive. The stock is trading at 20 times full-year (ending this September) earnings estimates, and if you ex-out the almost $42 billion the company holds in cash and investments, shares appear even cheaper.
While Apple stole many headlines, Growth portfolio denizen Coca-Cola (NYSE:KO) also delivered its first quarterly results of this fiscal year Wednesday, also beating the average analysts' estimate. The reported EPS was $0.69, up 19% on a year-over-year basis, comparable EPS were $0.80, up 23%. This came as Coke delivered strong volume growth (in line with long-term targets and driven by international volume growth of 5%) and better margins than were generally expected.
Coke continues its strong cash generation record, as cash from operations increased 52% to $1.3 billion. Importantly, it gained global nonalcoholic ready-to-drink beverage value share and maintained global volume share, with strong brand Coca-Cola growth coming from a diversity of global markets, including double-digit growth in India, Vietnam, the Philippines, Brazil, Russia and Egypt. The ongoing acquisition for Coca-Cola Enterprises remains on track; management expects the transaction to close in the fourth quarter of this year.
Looking ahead to the year 2020, the company sees tremendous growth opportunities for its franchise system and for the entire nonalcoholic ready-to-drink beverage industry. Yesterday's report highlights the multiple strengths of Coke's franchise, and we view the market's lackluster reaction to the earnings beat as a buying opportunity.