Apple: Are Analysts' Expectations Sky High?

| About: Apple Inc. (AAPL)

The world's most valued company, Apple (AAPL), will announce its fourth quarter results on October 25. It may sound somewhat absurd to think that analysts have kept their estimations high. However, looking at the way they have reduced their estimations, whether for EPS or iPhone sales, it sounds logical.

The interest among investors for Apple stock is well known. Therefore, news about Apple's products, estimates and its share price keep flowing As a result, shares of the company are also reacting to such favorable or unfavorable news.

Currently, the street is estimating EPS of $8.84 compared to $10.22 predicted at the time of the company's third quarter results announcement and $8.85 a week back. However, the latest expectation is higher than $8.40 estimated two months ago. Incidentally, while releasing the third quarter earnings results, Apple guided EPS of $7.65 and revenues of $34 billion for the fourth quarter. This suggests analysts' expectation is 15.7 percent more than the company's guidance and 25.4 percent higher than the last year's EPS of $7.05.

Q4 11





Co's EPS Guidance in $






Previous year EPS in $






Actual EPS in $





Analyst Estimate in $






Co. EPS Guidance growth over previous year in %






Analyst estimate over previous year in %






Actual EPS growth or contraction Versus Analyst Estimate in %





Source: company website.

The above table indicates that the analysts' EPS estimation for the coming quarter is the lowest with 25.4 percent growth over the last year. However, if their initial estimation of $10.22 is taken into account, the growth would have been 45 percent. Another aspect is that analysts' growth estimate percentage was consistently above 50 percent from the previous year actual EPS until the second quarter. The growth percentage has come down to 33.1 percent in the third quarter and 25.4 percent in the fourth quarter. If there is any thinking that the analysts' expectations are sky high, it is also partly because of the company delivering the expected results in two out of the last four quarters. However, the company's failure to meet EPS predictions in the last quarter allows some investors to believe that the analysts' expectations are slightly on the elevated level.

Similarly, the analysts have cut down their iPhone 5 sales projections. The company announced more than 5 million units of iPhone 5 sales in the first three days, whereas analysts' were expecting 8 to 10 million units. This resulted in the stock dropping 3 percent during the intraday trading on September 24 before closing the day with a loss of 2 percent.

However, Verizon Communications (NYSE:VZ) recently disclosed that it could activate 650K iPhone 5 during the September quarter. This resulted in Jefferies & Co. cutting down its iPhone 5 sales predictions to 5 million units from 8 - 10 million units. However, the latest estimation leaves investors to wonder whether there were no further orders after the initial three days in which Apple sold "over 5 million" units.

But UBS has a different take. The brokerage continues to expect 8 - 10 million units of iPhone 5 sales in the fourth quarter. However, UBS has cut down its first quarter iPhone sales outlook to 38 million units from 44 million units, with the shipment unlikely to go beyond 40 million units, citing supply constraints.

There are other analysts who were expecting 50 million units or above shipment in the December quarter. For instance, RBC Capital Markets kept iPhone sales of 57 million units. Now, the brokerage had reduced it to 49 million units. However, RBC analyst Amit Darayanani bumped his third quarter iPhone sales to 24.8 million from the initial projection of 20 million.

In the iPad space, Apple has sold 100 million units. Of this, the company has sold about 84 million units by the June quarter. This suggests that the company could have sold about 15 - 16 million iPads in the September quarter. This is lower than the 17 million units sold in the third quarter. In the second and first quarters, the company sold 11.8 million and 15.43 million units respectively.

Meanwhile, looking at the EPS and iPhone estimation, it is clear that the analysts' current estimations have taken into account the supply constraints of iPhone 5 and the launch of iPad mini while reducing their EPS expectations. This suggests that the chances of Apple's EPS beating analysts' predictions are bright. However, the outlook for the first quarter will remain a thorn. This could be seen from the way estimations have been reduced for iPhone 5 for the December quarter. The holiday season is the busiest season for Apple and it could sell 37.04 million iPhones in the first quarter of 2012. Currently, Wall Street is expecting the company to deliver EPS of $15.44 and revenues of $54.84 billion for the first quarter.

The company will have a tough time in providing EPS and revenue outlook for the first quarter that may fail to either match or top consensus. This is due to the supply constraints of iPhone5, the proposed launch of Microsoft's Surface tablet PC and the headwinds it faces in the Asian markets, especially China.

Despite the challenges, Apple continues to be favorite stock among investors and analysts. In a research note to clients, S&P Capital IQ analyst Scott Kessler reiterated a Buy rating on Apple shares. The analyst added, "AAPL also describes opportunities for the iPad in the education and enterprise markets. Additionally, AAPL announces updates to its iMac, Mac Mini, and MacBook computers that are smaller, thinner, lighter and faster than their predecessors".

Looking at the stock price, the market seemed to have already taken into its strides the weakness in the supply side of iPhone 5. The technology companies' results last week have somewhat dampened investors' spirits. After reaching a 52-week high of $705.07 on September 21, the stock is trading 13 percent down based on the closing price of $613.36 on October 23.

As the holiday season and year end is approaching, investors and fund managers are likely to lock profits in the coming weeks. However, the prospects look to be good especially after the launch of iPad mini to take on the Surface tablet PC.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , Personal Computers
Problem with this article? Please tell us. Disagree with this article? .