Earnings Disappointments Bruise the Apple
Apple disappointed investors and analysts by posting underwhelming quarterly earnings; now all eyes are on possible new product releases, including an iPhone 5, as the company tries to burnish its performance.
Should Apple’s (AAPL.O) big miss on its fiscal third-quarter earnings and revenue rattle the nerves of investors?
That’s the question on many minds as the market continues to digest the unpleasant surprise the darling of the technology stock universe delivered after the market closed on Tuesday. Its $35 billion of revenue in the quarter fell below analysts’ consensus that it would earn $37.2 billion; while analysts had been forecasting earnings of $10.36 per share, the actual profit was only $9.32 per share. Just as daunting was the dramatic slowdown in the rate of growth in both revenue and net income on a year-over-year basis. In the first quarter of 2012, profits were up 94% and revenue was 59% higher than year earlier levels; in the second quarter, those figures had slipped to 21% and 23%, respectively. Apple’s CEO, Tim Cook, attributed much of the decline to the quarter-over-quarter [Q2 to Q3] decline in iPhone sales in China, although about half of that deterioration, in turn, was due to changes in channel inventory rather than a slump in demand.
This was a rare misstep for Apple, and not surprisingly, the stock has fallen since the announcement. Going forward, the question appears to be whether the launch of new products, such as the iPhone 5 and a mini iPad, will help the company return to its winning ways in the second half of the year. Certainly, some investors may view the second quarter as an anomaly, and see the sluggish sales of iPhones as a sign that there will be pent-up demand for the next generation smartphone which Apple is rumored to be ready to introduce in the autumn. (Apple said it sold only 26 million iPhones during the second quarter, compared to expectations that it would find buyers for 28 to 29 million of the devices.)
As usual, Apple has been wary when it comes to projecting future earnings and revenues, erring on the side of conservative figures. Gross margins, company executives cautioned, are likely to be about 38.5% in the fourth quarter, ending in September, down about 4.3 basis points from the period just ended. For that fiscal fourth quarter, the company guided analysts to a figure of about $7.65 a share in profits, significantly lower than the consensus of $10.22 a share. It suggested that it might generate revenues of $34 billion, compared to analysts’ estimates of $38 billion.
Adding that earnings per share forecast to the results Apple has posted for the first three quarters of its fiscal year results in earnings per share for the year of $43.14 giving the company a P/E ratio of about 13.4. At that valuation, the stock doesn’t look very pricey, compared to its five-year median forward 12-month P/E ratio of 17 and the trailing 12-month P/E of 14. Still, it’s unlikely that either analysts or investors will believe that Apple’s actual results for the fourth quarter will be as bad as the company has suggested, given its history of issuing conservative guidance. Nonetheless, the company cautioned that a full quarter of back-to-school promotions and the impact of the higher U.S. dollar will take a toll of some kind on results, as will the fact that Apple won’t be receiving a warranty benefit that it enjoyed during the just-ended third quarter.
In contrast to Apple’s fiscal second quarter, when the large positive Predicted Surprise just ahead of the reporting date gave StarMine analysts and clients an indication of the huge upside surprise that followed, we had no such analytically-based indicator of another positive surprise in the third quarter. Indeed, over the last 30 days, analysts had cut their consensus revenue estimate by 0.5%. Looking at the 16 of the 41 revenue estimates that fall within the ambit of the more sophisticated StarMine Revisions Cluster since July 9, these revisions, on average, were a more noteworthy -1.5%. (This indicates why it’s usually more effective to adopt a revisions cluster approach rather than simply focusing on a random date – say, 30 days earlier – as an arbitrary period to examine.) Still, the average earnings per share estimate remained little changed in the run-up to Tuesday’s announcement.
If Apple wasn’t Apple, such a big earnings miss combined with a cautious note when it comes to guidance for the next quarter, might be far more worrying. As it is, Apple’s history of conservative guidance and of launching blockbuster products into the market may help investors to look ahead to what comes next, rather than brooding for the rest of the summer over a disappointing quarter’s results. It does, however, mean that Apple has more at stake with its fourth-quarter results.
Learn more about how StarMine analytics can help you pinpoint critical developments in your portfolio or watch list.
Request a free trial today.