North America

Earnings Preview: Apple Q3 2018 (AAPL)

By: Craig Bowles

Overview

Apple, Inc. (AAPL) is slated to report 3Q 2018 earnings after the bell on Tuesday, July 31st. 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 $2.18 (range $2.10 to $2.28) (Source: Yahoo! Finance). Consensus was $2.19 three months ago.
  • Revenues: Company guidance is for $51.5 bln to $53.5 bln. Analysts expect a 15.2% increase y/y to $52.34 bln. Consensus was $52.04 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: Analysts expect 42.05 mln (range 39.8 mln to 43.28 mln).

Revenue Guidance:

  • 4Q 2018 Revenue Guidance: Analyst consensus is a 13.3% increase y/y to $59.57 bln (range $55.87 bln to $63.11 bln).
  • Apple’s trailing P/E of 18.6 compares to a five-year average of 14.1; Price/Book of 7.5 compares to a five-year average of 4.8; Price/Sales of 4.0 compares to a five-year average of 3.1; Price/Cash Flow of 14.8 compares to a five-year average of 10.1. Dividend yield of 1.4% compares to a five-year average of 1.8%.
  • Analysts view Apple with 29 Buy, 15 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 197,834 shares in the last three months and 2,233,451 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 3.91%. Options are pricing in an implied move of 2.68%.

Recent News

  • 7/25: Morgan Stanley’s Huberty says the cheaper smartphone will launch in October, while the second generation 5.8-inch iPhone X and 6.5-inch “iPhone X Plus” will “see no delay” and debut in September. All three devices are expected to be revealed during an event in September, according to a post on Macrumors.com.
  • 7/24: Morgan Stanley has an Overweight rating on Apple and expects an in-line June quarter but providing a slightly weaker-than-consensus September quarter outlook due to a possible October launch of the 6.1-inch LCD iPhone, according to a post on Barron’s.com.
  • 7/23: Goldman’s bearish note included a 12-mth price target of $164. Slowing iPhone sales remain a worry and were 62% of total revenue last quarter, according to a post on TheStreet.com.
  • 7/05: Apple analyst Ming-Chi Kuo uses China supply sources and suggests Apple is preparing to release three iPhone lines this fall. One, a 5.8-inch iPhone X with improved specs and lower price. Two, a new 6.5-inch iPhone X Plus with an OLED screen. And three, a 6.1-inch iPhone with Face ID, which is said to come in a variety of colors including grey, white, blue, red and orange, according to a post on Techcrunch.com.
  • 6/28: Guggenheim forecast Apple’s revenue surpassing >$260B in CY18E (+9%Y/Y). The company is evolving into a company for which recurring service revenue is increasingly important, according to a post on Barron’s.com.
  • 6/27: Apple is considering creating a single subscription offering that would encompass its original TV shows, music service and magazine articles, according to a post on theinformation.com.
  • 6/19: Tariffs on China are not expected to affect Apple products, according to a post on zerohedge.com.

Summary

The iPhone X and iPhone 8 disappointed, so Apple will release an updated iPhone X and an X Plus along with a cheaper 6.1 LCD iPhone supposedly in September but the 6.1 LCD iPhone may be delayed due to a production issue. Slowing demand for high-end phones was a worry among analysts after last quarter and still is, according to Goldman. Increased stock buybacks have helped support the stock price and that is expected to continue with the $252 bln repatriation of money held abroad. Insider selling eased up the past three months. Analysts are somewhat less bullish than they were six months ago with expectations for revenue growth to slow to 4.5% in FY2019. The company has beaten earnings estimates by an average of 10c the previous four quarters. Estimize consensus for an EPS of $2.23 on revenue of $52.92 bln compares to analyst consensus of $2.18 on revenue of $52.34 bln. iPhone shipments and revenue guidance relative to expectations will be factored into the market reaction.

 

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