North America

Earnings Preview: Apple Q1 2018 (AAPL)

By: Craig Bowles

Overview

Apple, Inc. (AAPL) is slated to report 1Q 2018 earnings after the bell on Thursday, February 1st. The earnings release is expected at approximately 4:30 p.m. ET with a conference call to follow at 5:00 p.m. that is webcast through Apple Investor Relations. Aside from Apple, look to the major US equity index futures, ETF’s, component providers, and competitors to move off of the upcoming results.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): Apple normally reports a “clean” number for comparison. The current Street estimate is $3.81 (range $3.41 to $4.12) (Source: Yahoo! Finance). Consensus was $3.77 three months ago.
  • Revenues: Company guidance is for $84.0 bln to $87.0 bln. Analysts expect an 10.7% increase y/y to $86.75 bln. Consensus was $85.91 bln three months ago.
  • Gross Margin: Company guidance is for 38.0% to 38.5%. (Press release only gives dollar amount to be divided by sales for the percentage.)
  • iPhone Shipments: Consensus is 79 mln, according to Factset. Estimize has the Wall Street consensus at 81.6 mln.

Revenue Guidance:

  • 2Q 2018 Revenue Guidance: Analyst consensus is a 27.9% increase y/y to $67.68 bln (range $60.53 bln to $83.20 bln).
  • Apple’s trailing P/E of 18.6 compares to a five-year average of 14.1; Price/Book of 6.5 compares to a five-year average of 4.8; Price/Sales of 3.9 compares to a five-year average of 3.1; Price/Cash Flow of 14.2 compares to a five-year average of 10.1.
  • Analysts view Apple with 34 (40 last qtr) Buy, 11 Hold, and 1 (0 last qtr) Sell ratings. (source: MarketBeat.com)
  • Insiders sold 122,652 shares in the last three months and 3,065,253 shares over the past year (source: NASDAQ.com). In April 2016, a 2-year plan was announced to spend $250 billion on stock buybacks and dividends.
  • Apple shares have a 1-day average price change on earnings of 4.42%. Options are pricing in an implied move of 4.55%.

Recent News

  • 1/29: Apple will slash iPhone X January-March output by half, according to a post on asia.nikkei.com.
  • 1/24: Apple announced plans to roll out a new feature in iMessage, Business Chat, that will allow consumers to chat directly with businesses through Apple’s messaging platform, according to a post on TechCrunch.
  • 1/23: JP Morgan now believes “high-end smartphones peaked even earlier than our expectations.” The note went on to predict that manufacturing of the iPhone X — the latest flagship phone — might be down 50 percent quarter-over-quarter, according to a post on Zerohedge.com.
  • 1/23: Apple’s iPhone 8 and iPhone 8 Plus, representing a much more traditional upgrade to the iPhone platform, made up 41 percent of iPhone sales during the quarter, compared to the 20 percent share that was earned by the iPhone X. The 61 percent share of the three new models compares poorly to the 72 percent share gained by the iPhone 7 and iPhone 7 Plus one year previously, according to a post on Forbes.
  • 1/22: Atlantic Equities downgraded Apple to Neutral from Overweight citing “signs that iPhone demand is starting to soften, limited visibility into the potential for future iPhone cycles and emerging challenges to the smartphone’s dominance at the centre of consumer technology,” according to a post on CNBC.com.
  • 1/17: In response to the recent tax reforms, Apple plans to bring hundreds of billions of overseas dollars back to the U.S., pay about $38 billion in taxes on the money and spend tens of billions on domestic jobs, manufacturing and data centers in the coming years, according to a post on Bloomberg.com.
  • 1/7: Apple allegedly delayed the HomePod in December after discovering that the device’s software required some tweaks to how it interacted with the hardware. Apple has since worked out those problems and is now moving forward with its release plans, according to a post on Fortune.com.
  • 1/2: Apple has dealt with a wave of negative press and a handful of shareholder lawsuits related to the iPhone slowdown. Critics have accused the company of slowing down iPhone speeds to help drive customer upgrades to newer, pricier devices. Apple says it is simply trying to avoid the automatic device shutdowns that can happen when iPhone batteries become overworked, according to a post on U.S. News & World Report.

Summary

Following tax reform, Apple plans to bring hundreds of billions of overseas dollars back to the U.S. The iPhone X Q1 production target was cut in half from the 40 million units planned in November after a disappointing holiday season. The iPhone 8 went on sale in September but lags the iPhone 7 which Apple co-founder Steve Wozniak says is basically the same as the iPhone 6. Despite annual spending of $12 billion on R&D, the worry remains that Apple may have reached a ceiling in creativity. Increased stock buybacks have helped support the stock price. Insider selling continues. Analysts are slightly less bullish. The company has beaten and missed earnings estimates by an average of 13c the previous four quarters. Estimize consensus for an EPS of $3.82 on revenue of $86.189 bln compares to analyst consensus of $3.81 on revenue of $86.75 bln. iPhone shipments and revenue guidance relative to expectations will be factored into the market reaction.

 

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