AAPL Fiscal Q4 Preview

by Dan October 24, 2012 1:48 pm • Commentary

EVENT: AAPL reports fiscal Q4 earnings after the close tomorrow. The options market is implying about a 5.5% move (the at the money straddle is about $33.50 vs the stock at ~$620.50) which is shy to the 4 qtr avg move of ~6.25% and rich to the 8 qtr avg move of ~4.17%.

SENTIMENT: As we are all well aware, Wall Street analysts are overwhelmingly positive on the stock with 53 Buys, 7 Holds and 1 Sell rating with an avg 12 month price target of ~$777, or ~25% higher than current levels. Short interest sits just below 2% of the float.

PRICE ACTION: Just to put things in perspective with AAPL up ~52% ytd, the stock has gained ~$200 billion in market cap so far in 2012, and lost about $100 billion in the ~13% decline since it’s Sept 21st high. There are only 15 companies in the U.S. that have market caps greater than $200 billion and less than 50 with market caps greater than $100 billion. Oh and AAPL’s ~$120 billion is cash is greater than the market cap of 467 companies in the S&P 500.

TECHNICALS:  The chart is fairly simple, the uptrend from the 2011 was just broken, the nice round number of 600 is massive support dating back to the break-down from the previous all time high made in April prior to fiscal Q2 earnings, and the 200 day moving avg will likely not serve as much of support of the stock breaks down.

AAPL 1 YR chart from Bloomberg

VOLATILITY:  Implied Vol has picked up fairly dramatically of late reaching levels not seen since April when the stock had made an all time high only to retreat 13.5% into their Q2 results.

The chart below shows at the money 30 day implied vol in blue over the last 2 years vs the 30 and 60 day realized vol.  What becomes apparent is that spikes to about 40 pre-earnings are not uncommon, as is a usual quick retreat to about 30 and then a gradual bleed to the low 20s.

AAPL 2YR chart of 30 day Implied Vol vs 30 and 90 Day Realized Vol from Bloomberg


Given the way the stock has been moving in the last 5 trading days, one move of 2%, two moves of 3% and one move of 4%, the implied move seems a bit cheap when you consider that the stock has moved on avg about 4% over the last 4 qtrs, and that the stock has just sold off 12.5% from an all time high….THE AT THE MONEY STRADDLE AT ~32.50 (stock ref $615) LOOKS CHEAP TO US.

VALUATION: A major tenet of the bull case is AAPL’s below market multiple at about 11.5x expected fiscal yr 2013 earnings, ex-cash below 10x. This seems unusually low for a company expected to grow earnings 20% next year and literally dominates the fastest growing secular trends in personal computing in the last decade.

FUNDAMENTALS: It is frankly hard to believe that things can get much better for AAPL which is expected to grow sales this fiscal year 44% over last. The company has over 65% market share in tablets and commands a massive lead in gross margins to every one of their competitors in every category they compete. AAPL’s amazing earnings and sales growth over the last 10 years has largely to do with innovation that has basically put many competitors almost out of business (MOT, NOK, RIMM, DELL).

But what’s next? With yesterday’s announcement of the iPad Mini, the refresh of Macbook and iMacs, coupled with last months refresh of iPod Touch, Nano, MacAir and iPhone, the product portfolio seems fairly well established for 2013. At some point when we get a bit bored with the new iPads and iPhones, the focus will once again shift to the iTV, but AAPL conquering the living room will require much greater risks than refreshes and tweaks of existing category killers.

Bears on the stock have for years been calling for the “law of large numbers” to crimp earnings and sales growth, next year could be the year where maturing product lines that are merely evolutionary cause growth rates to plateau for good.

Q4 EXPECTATIONS: While most analysts have tempered their Q4 estimates since the disappointing Q3 results and guidance back in July, consensus estimates for Q4 for $36.2B in sales and $8.85 in earnings are still above the company’s guidance of ~$34 billion in sales and ~$7.65 in earnings for fiscal Q4. The company also guided Gross Margins to ~38.5% vs consensus at 40.4%, which would be down 2.4% sequentially, and down 7% from fiscal Q2.

iPhone and iPad units will be of particular focus as they are such large contributors to AAPL’s earnings. Estimates are all over the place for units as there is a large expectation for a drop off in iPhone 4s sales in front of the 5 launch on Sept 21sr, and the well publicized supply constraints of the 5 that have recently been echoed by VZ and T on their Q3 conference calls in the last few days. Consensus estimates for iPhone are probably btwn 24-26 million units and btwn 16-18 million for iPad.

MY VIEW: Given the potential push out of iPhone, iPod and iPad demand in front of all 3 product launches in the last 6 weeks, the company could actually miss their already lowered guidance. Back to School is obviously an important period for AAPL, but this came at a time when availability of new iPhones and iPods were basically non-existent, and rumors of iPad Mini could have caused buyers to take pause.  A good bit of any push-outs should be made up in the current qtr, but given management’s propensity to sandbag guidance, investors may not be thrilled with an inline or a miss of Q4 and typical conservative guidance.  The company will not likely guide for the full year 2013.  One wild card going forward is the potential for AAPL to sign a distribution deal with China Mobile who currently has 685 million subscribers who do not have the option to buy subsidized iPhones as they do on ChinaTelecom and China Unicom.  The next leg of growth will be emerging markets for AAPL, but will this just off set flattening growth in more mature markets?  We think the days of parabolic stock gains for AAPL are over to be fair I thought that $200 points ago, but yesterday’s intro of the iPad Mini speaks to defending their turf, rather than innovating as investors and consumers have become accustomed too over the last 5-10 years.

At this point, without picking a direction, the idea of “buying the move” looks attractive, but we will be sure to check back tomorrow prior to earnings.