Q2 2013 - Gross Margin YOY make for a tough compare

On my last post, I said that Apple would report an EPS of $12.00 for Q2 2013. It turns out I was being optimistic again.

Last years Gross Margin was a stellar 47.4%.  I'm giving Apple an optimistic GM of 39.1%, which is a 17.5% decrease from last year. This fact alone will wreak havoc on the EPS.  My calculations have Apple's EPS at $10.39, which is a 16% YOY decline....

Compounding the tough compare is the tax rate, which last year came in at 25.19%  This year, I have Apple at an optimistic 25.71% which places additional downward pressure on the EPS.  My preliminary numbers are as follows:


Revenue - 42,226,400,000   +8% YOY
EPS - $10.39   - 16% YOY
GM - 39.1%  - 17.5% YOY


iPhone - 37,500,000   +7% YOY
iPad - 17,500,000      +48% YOY
iPod - 6,300,000         -18% YOY
Mac - 3,800,000         -10% YOY
Software / iTunes / other - $3,750,000,000  +154% YOY


With this YOY tough compare, it appears that Apple's growth has come to a screeching halt. Long term, this is not true, as I see the GM's staying in the 38% range, and the growth will show up again in the Q3 and Q4 quarters as the "tough compares" go away. (Albeit - a slow rate of growth)

My opinion is that Wall Street will brutalize the stock with these YOY results in Q2, and I see the share price dropping to 390. Hopefully, it stabilizes and starts the climb back up as seasonal product refreshments generate excitement.  I still see the share price at 511 come March 2014, with a strong showing in the fall and Christmas quarters, continuing into early 2014.

The Samsung/Android juggernaut coupled with Microsoft's recent innovative resurgence is muting the iPhone growth, as well as iPad's, but not to the degree of the iPhone.  I view Microsoft as a huge threat to Apple, (and Samsung) with their new and improved integrated operating system strategy amongst all platforms. The Nokia/MS partnership is looking like it will be successful.  I personally have checked out the new windows 8 operating system, and I see it as a winner from MS.  The fact that MS office can be integrated on all platforms easily just enforces their position.

More to come

I do not own AAPL shares.

March 1, 2014 price target

Happy March 1st!

Readers of this blog will notice a pretty radical change in sentiment here.  I have been giving AAPL much, much thought, and this is the most realistic post that I have made in a year, I believe.  If AAPL does what I think its going to do, I will get back in at the sub 400 level..  I see a very rough 3 - months ahead, and a comeback beginning in the midst of the Christmas quarter.  

On a personal note, I have backed off tremendously on my obsession with AAPL.  I believe that I was too involved, and spent too much time, and basically needed to unplug and come down to earth..  This has been a good change.  I want to post more on this blog, and would like to post some different ideas on stocks, and would love to hear some other ideas from you guys. I'll still post about AAPL, and participate in PED's smack-down, but hopefully with my feet planted firmly on the ground.  Below is my post in the Braeburn Group.

I welcome any / all comments.

AAPL Price on March 1 2014 = 511.50
TTM earnings March 1 2014 = 46.50  (PE = 11)
YOY EPS growth = 5.39%
Revenue growth = 5%

EPS by quarter - starting in Q2 = 12.00 / 10.00 / 9.50 / 15.00

This is going to be a difficult year for Apple.  This company will have to move mountains to get a PE north of 12.  The negative sentiment, FUD, coupled with the Android dominance, and emerging windows smartphone / tablet marketshare will flatline Apple’s growth. I believe the Amazon line up of Kindles will also see incremental growth. I do believe the growth will pick up again to as much as the 20 percentile range in the summer of 2014 when an Apple TV is launched, and growth in China takes hold.  I also see investor sentiment changing around the same time.  In the near term, I see AAPL dipping to the sub 400 level, especially after reporting fractionally negative growth in the Q2 earnings report. I see the stock coming back in the Christmas quarter because of the annual cycle of device upgrades. However, I do not see any large moves evidenced by my March 1, 14 price target.  I do not currently own any AAPL shares.

Dennis Hildebrand

"We have met the enemy...and he is us."

                                                        -Pogo

Q1 13 - The most important earnings report of all.

Happy New Year!

Some updates - Some times you just have to turn off the noise.

Other than PED's quarterly smack down, I haven't been posting, and have really almost completely stopped participating in my favorite forum The Braeburn Group.  I have a couple of reasons for this:

1. All of the negative news releases are depressing. It's come to a point of ludicrousness.  Yeah I know, that's not even a word, but I don't care because that's how it feels. How bad could it be?  Apple has been growing earnings, and continuing to launch popular products that sell extremely well.  It just seems as if the world is looking for Apple to fail, and so many are clamoring for FUD.  I get tired of hearing it, and reading about it.
2. I have started a new job, and my total concentration is needed in navigating a successful transition.  The publishing company that I work for has gone to a 100% outsourcing model for our products, which are printed products, music CD's, and marketing materials.  This also includes an intense focus on a digital publishing transformation.  Very exciting, and requires my 100% focus.  The recent drop in the share price, coupled with all the nonsense being published about Apple is incredibly distracting.  Turn it off.

With that being said, I do have a set of numbers to share, and I'll do that here and now.  First let's look at what happened last year, compared with what I predicted.  As you will see, I underestimated by a large margin on EPS, but hit some of the metrics pretty accurately.

 Dennis prediction                 Actual

iPhones - 34m       37.04m -  missed by 3million - (killed me)                                                                    

iPads - 15m           15.4m   -  missed by 400k
iPods - 15m           15m      - dead nuts
Macs - 5.25m         5.2m    - missed by 50k
Rev - 43.36b          46.33b  - missed by 3b! (iPhones)
EPS - 11.59          13.87    - missed by $2.28 (iPhones and GM)

GM - 42.3%           44.7% - missed by 2.4%  

My iPhone estimates missed by 3 million and change, which of course is why I missed the revenue by 3 billion.  Also, my gross margin was off by a couple of percentage points which really affected the accuracy of my EPS number.  My iPads / iPods / and MAC numbers were VERY close.  In fact, I hit the iPod number right on the money - 

Here are my numbers for Q1 13:

Revenues: $63,485,000,000

Earnings:   $16.33

iPhone unit sales: 51m

iPod unit sales: 11.5m

Mac unit sales: 5.5m

iPad unit sales: 32m

GM%: 39%

Compared against my peers, these numbers are extremely bullish.  In fact, my iPad number is the highest of all participants in the quarterly smack down on Fortune.  I'm sticking with it.  I have said all along that I believe the iPad will overtake the iPhone in unit sales eventually. The only fly in my proverbial ointment, is if the mini cannibalized the regular sized pads.

Everything will be revealed Wednesday.  I think that Apple will need an EPS number north of 15 to be viewed positively.  Street consensus has actually called for a YOY decline in EPS.  This could bode well for us being that the expectations are usually extraordinarily high..  We shall see.  

My Estimates for FY Q4 2012

Apple reports earnings after the close on October 25th, a Thursday, which is unusual.  The world is trying to guess, "Why Thursday? It's usually Tuesday..  I don't care.

The numbers:

Revenues:  $39.82 b (41%YOY)

Earnings:    $10.67    (51%YOY)

iPhone unit sales: 25.5m (49%YOY)

iPod unit sales:   6.0m  (-9%YOY)

Mac unit sales:   5.25m (7%YOY)

iPad unit sales:  21.5m (93%YOY)

GM%: 42.25%

What I care about is that Apple keeps growing, and by growing, I mean growing their installed user base.  I'm talking about getting people (like me) hooked on the cloud.  Why do I say "like me?" Because I'm just a regular old Joe.  I wouldn't consider myself a fanboy.  I just like stuff that works and makes my life easier.  I like being able to take a picture with my iPhone, then the next day, while using my iPad in a meeting, I can show a colleague the picture on my iPad, and I never even gave one thought to syncing.  I'm taking meeting notes on my iPad, and later on I'm out in the field, and I can quickly reference my notes (any note) on my iPhone if needed.. again, no syncing - it's just there.  Yes - I love it.

Not many people read this blog, but a few people do, especially around earnings time. I average about 1,000 hits a month, and that doubles around earnings time. Investor's are hungry for information. Whoever you are, thanks for stopping by, you make me feel relevant.

Investors want to know what Apple will report on earnings day, enough so that they even come over to my little corner of the internet.  This is kinda like my little front yard that I keep manicured, just my little plot of land that I'm responsible for.  One of the reasons that I do this is literally because I'm trying to prove that a layman like me can come closer to the numbers than wall street can.  Also by participating, and actually publishing my predictions, it forces me to become something of an Apple expert. This summer, my friends and family were asking me questions like:

When will the next iPhone come out?
Is there going to be a smaller iPad?
How does iCloud work?

Asking moi?
Like I am an expert!  I'm not.  I'm merely a person that is very informed because my entire investment portfolio is 80% Apple.

No one ever asks me how many iPhones Apple sold.
No one ever asks me what the EPS will be
No one ever asks me how much revenue Apple will generate in Q4.

What's my point?  Regular people just do not care about the financials until Apple hits a milestone like 500/share and it's all over the news.. Then everybody at work is talking about it.  The common phrase I hear is - Apple's at 500 a share!  I wish I owned the stock!  It's too late now!  I wonder how my 401k is doing?  Believe me when I say that I am grinning ear to ear when I hear these conversations knowing that I originally got in at 44 share.  Do I brag?  Sometimes..  not much anymore - no one cares really. Am I bragging now?  Hell yes!  I hope you own Apple too.  Yes the price has dropped 70 pts lately.  But like my good friend Robert Leitao says:  "It's earnings that drives the share price"  Yes it's tough to take these 70 point drops when I'm 80% invested, but I have to remember that 1 year ago,  October 10, 2011, sitting on 379/share, I was dreaming about 650 / share, and here we are at 640.  65 points down from the all time high, holding a 15 PE.. Amazing.

With the iPhone 5 launched,
The rumored iPad mini on the way (I believe this is true),
An earnings call in 2 weeks,
The Holiday quarter coming up,
China and the rest of the BRIC's yet to be conquered,
and Android market share to grab,

There is just no way that I'm getting out.  Unless Europe  does totally collapse or someone nukes their neighbor... Oh, and let's not forget the US' fiscal cliff.  If I have to, it's 2 quick trades and I'm on the sidelines, and you know how fast that can be done.

Back to the numbers (now that I've finished my diatribe)

Revenues:  $39.82 b (41%YOY)

Last years Q4 was a huge disapointment to the world, yet it was 39% growth.  My call is the same percentage growth, but this time the shock will be muted because the expectations are not as high.

Earnings:    $10.67    (51%YOY)

Last year was 52% growth and again a huge shocker to the world - The sky was falling!  Yet here we are 1 year later, 250 points or so higher. The world doesn't feel better, but I do.

iPhone unit sales: 25.5m (49%YOY)

Last's years growth was 21%.  I'm doubling up to 49% growth based on last years number being so low, and this year's sales positively affected by the launch of the "5" in September.

iPod unit sales:   6.0m  (-9%YOY)

Sticking with my slow decline due to cannibalization. The iPod's are now the greatest and most coveted gift for a child for the holidays.. We will get back to the 15 million range for Q1.

Mac unit sales:   5.25m (7%YOY)

Even with iPads cannibalizing Mac sales, we still see 7% growth.  Mac grew 26% last year, but only 2% YOY last quarter, I'm bumping it up to 7% growth based on back to school sales, with the cannibalization factored in.

iPad unit sales:  21.5m (93%YOY)

This amazing device is continuing the explosive growth. Last Q4 was 171% growth YOY.  We will stay in the 100% range of growth through 2013 in my opinion..  Yes thats right, I'm calling this one right now.  Next year, Q4 iPads will be 40 million sold.

GM%: 42.25%

Same as last quarter and a little higher than last year..  The margins were higher earlier in the Fiscal year, but with all of the re-tooling for the iPhone 5, and the alleged start up manufacturing of the mini, the margins will stay in the 42% range.

If my numbers seem a little more conservative than usual, it's because they are.  I have been too high on my last few quarters, and I'm trying to tone it down a little..  This really is not easy, but it's fun trying. Hopefully one of these days, I'll nail the darn thing.

Last but not least, I reiterate my $910 one year price target that I published on August 19th, 2012. (For September 1, 2013.

Thanks for checking out my tiny little corner of the internet.

Dennis Hildebrand - Still long AAPL

Braeburn Group 1 year price target

I belong to a group of independent Apple analysts called the Braeburn Group.  Every quarter we publish a new 12 month price target.  This is an average of the analysts that participate.  Here's the link. My personal 1 year target is still 910, which is documented on my last post.

Just for fun, let's review my prediction on May 29th 2012.  I posted the following price targets on that date:

Sept 1 - $46.24 = $624.24 (13.02)
Dec 1 -  $54.69 = $738.31 (15.50)
Mar 1 -  $63.32 = $854.82 (22.50)
Jun 1 -  $69.02 = $931.77 (18.00)

What was the price on May 29th? - $574.00 at the close.  We closed on Sept 1 at $668.60.  I missed by 42 bucks / share, even a mega bull like me was caught off guard with the huge run up in the last few months.

Weird - TTM earnings are at 42.55 - Missed that by $3.69 lower, but the share price is higher. I just didn't expect the PE expansion to be like this..  I hope this is a trend that continues..

Here's some more fun - On September 30th 2010,  with Apple's share price at $283.75, I posted that Apple's share price would hit 400 / share by January 2012.  Closing price on January 3, 2012 - $409 / share.. not bad for an amateur.

I will keep checking in to see how my May 29th targets fare, even though I adjust / update as the year progresses.



   Dennis

My September 1 2013 share price for Apple

Today TTM earnings are at 42.55

Apple will grow earnings 53% to $65.00 TTM earnings at Sept 1, 2013.
Current PE is at 15.23
I’m giving Apple a PE of 14 on Sept 1, 2013.

$65.00 x 14 = $910.00 - That is 40% share price appreciation to go with 54% projected earnings growth.

My share price projection for Sept 1 2013 = $910

This feels somewhat conservative, but it feels right.  What’s amazing to me is the fact that Apple reported a disappointing Q3 quarter in most people’s eyes, but here we are 1 month after reporting and sitting on the all time high, and MAJOR MAJOR catalysts right around the corner.  There have been media reports that Apple will sell 250 million iPhone 5’s, and with the iPad mini coming on board before Christmas….  well, let’s just say The immediate future is bright. 

For Q4 - my rough numbers are:

iPhones = 23.5 million
iPads = 20 million
Macs = 5 million
iPods = 6.5 million
iTunes / software = 3.5 million

Rev = 38.25 b
EPS = 10.56

iPhones - This is based on 2 weeks of iPhone 5 sales to boost what will be viewed positively - based on woeful 4S sales and overall number greatly lifted on what I hope will be documented iPhone launch sales records reported.

My FY13 Q1 projections remain the same:

72 billion rev - 22.50 EPS (57 million iPhones / 33 million iPads)

FY13 Q2 - 18.00 EPS
FY13 Q3 - 14.00 EPS

I’m figuring sequential decline from Q2 - Q3, based on what happened this year, however that could change based on what occurs with iPad mini, iTV, iWallet etc etc. - My numbers above assume none of that.

Thanks for checking in and let me know what you think.

Dennis Hildebrand

A huge miss for Apple, my cronies, and me

Apple's numbers came in yesterday, and if you are reading this, I'm sure you know what they are - My reaction in bits and pieces over the last 27 hours:

My initial reaction is one of shock.  I did not believe that reporting an E.P.S below $10 was possible for Q3 12.

The fallacy in my individual thinking is that I did not (again) factor in anywhere near enough “end of product cycle slowdown”  for the iPhones.  I have to re-evaluate my analysis, and put a much heavier weight on this when it happens again.  And with the guidance of 34b and $7.65, I can absolutely expect a post October launch of the iPhone 5.

The upside to the guidance being that low, is that we (I) can now manage a more realistic set of expectations.  This all points to a Q1 that will be incredible, and it presents an amazing buying opportunity for those of us that believe.

More perspective:  It seems as if Apple is content in being the “tortoise” to Androids “hare” in this race for global market share.  Long run, this will pay off for those of us that are patient, I believe.  With the eco-system in place, and the best products available, they will grow their marketshare slowly.  This might be a good strategy, it’s the quality of the products that will win this race.  I will admit to feeling some frustration over Apple being slow to launch their biggest revenue product in their portfolio.  Again the upside here is the build up of pent up demand, that Apple seems to always do.

On the surface, it appears that Samsung/Android has a leg up, but the “tortoise” approach could prove to be successful when looking long term…. more to come

Wednesday 5:20pm

It’s now been over 24 hrs since the earnings report, and given time to absorb the information, and I have deliberately not been reading blogs, articles, opinions, and reactions so that I can clear my mind of clutter and of others opinions.
I’m going over my models for Q4, Q1, Q2, and Q3, and have radically changed my views to the downside which doesn’t mean that I’ve turned into a bear, it’s more of coming down to earth, and realizing that Apple is going to move at their own pace, instead of everybody else’s pace, or even better, my expected pace.  The bottom line is they are still growing.  The other bottom line is Q1 WILL be a monster quarter. 

Apple’s guidance was so low, that I’m moving my EPS down to $9.00 for Q4 - Yes - the 3rd sequential decline in a row, but 20% YOY increase.  In Q1 I’m staying with 22.50 EPS, but I’m going to model the same percentage sequential declines in EPS in 2013, that we are experiencing now.  I’m expecting a yearly EPS at the end of Q3 of $61 and a PE of 14 with a new price target of $854 / share on Sept 1 2013.

This is far lower than my previous model, and represents my radical shift in my mindset of what was once over exuberant, to now just plain bullish on the company and the stock.