MorningWord 7/22/13: Last year, at this time, AAPL investors and Wall Street analysts alike were in a frenzy of what they perceived to be the perfect storm of potentially positive catalysts for the stock in the back half of 2012; the rumored new form factor for the iPhone, the hope for a product resembling a TV prior to Christmas, a distribution deal with China Mobile and an increased cash distribution plan. In hindsight, some catalysts panned out and some didn’t and the funny thing is with the stock down 40% from the all time highs in Sept 2012, you don’t hear much anymore about China Mobile or AAPL TV, and if it were not for the increased dividend and monster share repurchase program the stock would likely be well below $400 at the moment.
As we head into AAPL’s fiscal Q3 report tomorrow after the close (we will have a detailed preview prior, stay tuned), I wouldn’t say that expectations are running high, despite the fact that analysts still have an overwhelmingly positive rating stance on the stock, 49 Buys, 14 holds and only 3 sells, this compares to 49 Buys, 5 Holds and only 1 Sell last year at this time when the stock was $600. What I find most interesting about the very slight ratings change in a year is that last July when the stock was $600 heading into the Q3 print, the avg 12 month price target was $735, or ~23% higher, while this year with the stock around $425, the avg 12 month price target is ~$528, also about ~23% higher. What does this say to me? Fairly simply, Wall Street analysts for the most part are sheep and while very few had the guts to, or did good enough work to, predict the earnings and margin deceleration in the last year (despite what was the largest qtr over qtr earnings deceleration in the prior qtr in years), very few now are willing to miss a potential turn in the business.
One thing is certainly clear from where I sit (but is still hotly debated), AAPL appears to be flat footed at the time being from a product innovation stand-point. Just last week there were rumors that the iPhone 5s would be delayed from the expected Sept/Oct launch as the company is testing both larger screen sizes (as reported this morning in the WSJ here) for the iPhone (currently 4 inch, rumored to be 4.3inch) to better compete with Android offerings that avg around 5 inches. Tim Cook as recently as April suggested that they have given a lot of thought to screen size and they think they have it right. One thing is for certain, since introducing the first generation iPhone and iPad, AAPL couldn’t have been more wrong on what consumers wanted from a size standpoint.
If you are tuning in to tomorrow’s call for any product info you are not likely to get it but guidance could speak to whether or not we will get and iPhone 5s in their fiscal Q4 as iPhone usually sees a seasonal drop off in demand prior to a launch. For months I have been in the camp that AAPL would continue to make lower lows and see a crescendo below $400, last month we got a touch below, but no capitulation, but we came very near pulling the trigger on the long side. I SEE ABSOLUTELY NO REASON TO STEP IN ON LONG SIDE PRIOR TO THE PRINT, but we definitely lay out a few strategies that we think make sense for current longs to add yield/leverage and/or protect gains.