Archive for the 'earnings conference calls' Category

AAPL’s awesome 1Q12

Published January 26, 2012 earnings conference calls , Industry Analysis , Stock ideas , Technology , Wireless Leave a Comment
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the report

After the close of New York trading on Tuesday January 24th, AAPL announced results for 1Q12 (AAPL’s fiscal year ends in October).

The company reported its best single quarter ever, with diluted earnings per share of $13.87 on revenue of $46.3 billion.  Sales were up by 73% year on year for the three months; eps were up by 116%.  Wall Street analysts had been anticipating earnings of $10.16 per share.  AAPL not only handily beat that figure, but also blew through the high end of the estimate range at $11.26.

Management’s (notoriously lowball) guidance for 2Q12 is for revenue of $32.5 billion and per-share profits of $8.50.

AAPL shares rose by 6.3% in the Wednesday market.  On the surface at least, this strikes me as a tepid response to the numbers.  More on this topic below.

the details

quibbles first…

–AAPL is another one of those companies that uses the week rather than the month as their basic unit of time.  This creates a problem, because a year is equal to 52 weeks plus one day for regular years, plus two days for leap year.  So companies like AAPL have to throw in an occasional quarter that has an “extra” week in it to keep their reporting year and the calendar in sync.

1Q12 was one of those adjustment quarters.  Not only that, but the extra week was the high-volume sales period between Christmas and New Year’s Day.  So AAPL’s sales for the three months were likely 10% or so higher than they would ordinarily have been.

–the introduction of the iPhone4S shifted revenue out of 4Q11 and into 1Q12, because AAPL ran down inventories of its older phones and consumers deferred iPhone purchases until the new model became available.

–don’t make the same mistake I’ve heard from Bloomberg radio commentators of saying that this quarter’s earnings were more than AAPL made in a whole year not that long ago.  This sentiment is correct, but the comparison isn’t.  AAPL changed its accounting treatment for iPhone sales a couple of years ago to recognizing all the profits from a sale (markup on the device + a share of revenue collected by the telecom company over the life of a contract) up front, rather than recognize them gradually over the (usually two-year) contract term.

…followed by stunning numbers (ex the iPod)

iPhone

In 1Q12 AAPL sold 37 million iPhones, with iPhone4S leading the way.  That’s up 126% yoy, in a market that expanded by 40% over that time.  It’s also 17 million more than AAPL’s previous record for a quarter.   Sales would have been even higher except AAPL ran out of phones to sell in key areas.

iPhone 4S wasn’t available in China during 1Q12.  It went on sale there earlier in the month.  Demand has been “staggering.”

iPad

APPL sold 15.4 million iPads during the quarter, up 111% year on year.  According to CEO Tim Cook, the launch of AMZN’s new Kindle lines has had no effect, good or bad, on sales.

Macs

AAPL sold 1.48 million iMacs and 3.72 million laptops, both records, during the quarter.  Desktops were up 21% in units yoy; laptops were up 28%.  Industry growth was zero.

iPods

This declining category of devices was up 133% quarter on quarter for AAPL, but down 21% yoy.  iPod Touch remains the lion’s share of sales.  APPL retains a 70% share of the MP3 player market in the US and is the top-seller in most other markets (not that any investor is going to buy AAPL’s stock because of the iPod anymore).

other stuff

Sales at the Apple Stores, which make up almost a third of retail revenue for AAPL, were $6.1 billion during the quarter.  Average revenue per store was $1.7 million, up 43% yoy.

The iTunes store took in $1.7 billion.

Weak worldwide demand for tech components gave AAPL a lot of buying clout for NAND flash and DRAM during 1Q12.  As a result, the company’s gross margin was unusually high at 44.7%.  To give a basis for comparison, full-year 2011 gm came in at 40.5%.  This favorable development probably also boosted net income by 10%.

AAPL has $97.6 billion in cash on the balance sheet.  Of that, $64 billion is being held offshore.

the stock

Trying to “normalize” 1Q12 eps by correcting for the extra week and the elevated gross margins, I come up with a figure of $11.50 or so for the quarter.  If I had to guess, I’d peg full-year eps at least $40, even after a downward adjustment of 1Q12 results–meaning reported figures could be closer to $45 a share.

If I’m correct, AAPL shares are currently trading at, at most, 11x this year’s earnings, with 40%+ earnings growth in prospect.  That strikes me as really cheap.  Subtract AAPL’s cash from the equation and the forward multiple is 8.5x.

In contrast, WMT, which has nothing like the recent growth record or current prospects of AAPL, is trading at about 12x.

COH, a global semi-luxury company, whose stock has paralleled AAPL over the past year, and which has far better growth characteristics than WMT, trades at almost double the PE of AAPL.  But even COH probably won’t grow as fast as AAPL this year.

Why the low valuation for AAPL?

I think Wall Street views AAPL as a firm built at present on a single product, smartphones.  It perceives the global transition from feature phones to smartphones, which is at least part of what’s driving the company’s extraordinary growth, to be mostly played out.  Therefore, investors theorize, AAPL will sooner or later–and probably sooner–be reduced to depending on replacement demand.  When that happens, its earnings growth will shift into a much lower gear.

There’s some truth to this idea.  Look at the breakout of AAPL’s revenues during the current quarter:

iPhone     53% of sales

iPad     20%

Macs     14%

iPods     6%

Music services     4%

Other stuff     3%

Total = $46.3 billion.

After iPhone and iPad, nothing else moves the needle that much.  A half-decade ago, the iPod doubled the size of AAPL; the iPhone then doubled (a much larger) AAPL again.  Can iPad perform the same trick for AAPL a third time?  Eventually, maybe, as part of a transformation of the personal computer market over the next decade.  But I’m not sure many people would like to bet on that.

And, of course, NOK and RIMM are reminders of how fast the tech world can change.

Potential pitfalls may be Wall Street’s current focus, but it’s by no means the whole AAPL story.

As I’ve been writing for some time, AAPL shares have suffered immense PE contraction over the last four or five years, both in absolute terms and relative to the market.  According to Value Line, AAPL traded at a 40% premium to the market multiple in 2007 and a 60% premium in 2008.  By my reckoning, AAPL is now selling at a 25% discount to the market–a much lower level than firms (like WMT) with weaker business models and balance sheets.

That’s actually the good news.  The fact that a huge amount of potential future bad news seems to me to be already baked into the stock price is a powerful argument for owning the stock.  In fact, I think the market is discounting a far worse future for AAPL than is likely to develop.

Can AAPL do anything to help its own cause?  The company could begin to pay a dividend or split the stock.  Either would give the shares a short-term boost.  In the final analysis, however, all AAPL can really do is continue to post strong earnings to show that Wall Street fears are overblown.

INTC: 4Q11, prospects for 2012

Published January 24, 2012 Current Market Thoughts , earnings conference calls , Industry Analysis , Portfolio management , Stock ideas , Technology Leave a Comment
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the report

4Q11

After the close of trading in New York on Thursday January 19th, INTC reported 4Q11 results.  Revenues came in at $13.9 billion.  Profits were $3.4 billion, eps $.64.  Both figures were down slightly quarter on quarter during what’s normally the company’s seasonally strongest period.  Eps surpassed the Wall Street consensus of $.61, though.  Wall Street’s habitually somewhat downbeat stance toward INTC was certainly influenced by the firm’s early December warning that near-term orders for its PC chips were being cancelled by device manufacturers who are unable to get enough hard disk drives to make new PCs.

On a non-GAAP basis (adjusting for acquisition-related goodwill),  eps came in at $.68.

Investors were pleased with the results.  INTC shares rose by about 3% in a flat market on Friday.

full year 2011

During 2011, INTC achieved lots of all-time financial highs, including:  revenues at $54 billion; net income at $12.9 billion; eps at $2.39 (non-GAAP, $2.53).

one-time factors

There are two:

–Historically, INTC has used the week as the basic time period for its accounts rather than the month.  Because  52 weeks x 7 days/week = 364 days, or not quite a year, this approach requires the company to have occasional 53-week years to keep their accounting in sync with the calendar.  2011 was one of those “extra-week” years.  That probably added $.05 to 2011 eps.

(By the way, INTC has just shifted to the month as its basic time measure, so the “extra week” adjustment will no longer be necessary.)

–Thailand produces about 40% of the world’s hard disk drives. Massive flooding there during 4Q11 took many HDD factories out of commission.  In early December, unable to build PCs without storage, device makers began to cancel orders for the INTC chips slated to go into those machines.   INTC thinks we’re now passing the worst of the HDD shortage and that Thailand will be back at full HDD production late in 2Q12.  INTC is adamant that component supply, not a falloff in demand, is the problem.  Assuming the company is correct–and I see no reason to doubt it–the result of the cancellations has probably been to shift $.10 – $.15 a share in earnings for INTC from 2011 into 2012, as well as to make the firm’s 2o12 eps more second-half loaded than normal.

prospects for 2012

INTC expects another up year in 2012, with revenues advancing by “high single digits” and gross margins expanding by 1.5 percentage points to around 64%.  Despite a massive increase in R&D spending to $10.1 billion this year (up by 21% from the 2011 level) this company guidance probably implies eps on a GAAP basis of $2.60 ($2.75, non-GAAP).  If we correct for the one-time factors I’ve cited above, I read the guidance as being for flattish eps on, say, 5% revenue growth.

my thoughts

down Memory Lane

At the peak of the internet bubble in 2002, INTC was a $75 stock.  It traded at 36x eps (a relative multiple of 2.4x the market) and yielded .1%.  After a decade of wretched relative performance, the stock is now trading at less than 10x 2012 earnings, yielding 3.4% and at a price earnings multiple discount to the market of about 25%.

If you think that’s bad, in early October 2011 INTC was trading at 7.3x 2012 eps and yielding 4%+, more than the 30-year Treasury!  Interestingly, despite Wall Street skepticism, INTC shares are enjoying their longest period (and one of only a few) of relative strength in the last decade.

where to from here?  (I wrote this on Sunday January 21st)

I think there are four potential positive points to the INTC story:

1. valuation.   …low PE, high dividend yield, massively cash generative operations

2.   demand for PCs.   …that emerging markets have reached wealth levels where average citizens are able to afford PCs.  According to INTC, two-thirds of PCs worldwide are currently being sold to customers in emerging economies.  None of these markets are as yet well-penetrated.   So this business, INTC’s biggest by unit volume, appears to me to have much better growth prospects than is commonly thought.  Ultrabooks, using reference designs supplied by INTC, may well be an added plus.

3.  servers/the cloud.   …the continuing evolution of the internet is creating strong demand both for the INTC chips that drive sophisticated servers for the cloud and for those used for general corporate purposes.  These tend to be advanced (read: expensive and high-margin) chips.

4.  INTC’s immense technology investments.     …in 2012, INTC plans capital expenditures of $12.5 billion, in addition to R&D outlays of $10.1 billion.  In 2011, those figures were $10.8 billion for capex and $8.3 billion on R&D.  The two-year total comes to $41.7 billion!

Three possible consequences:

–increasing INTC’s already large technological lead over other manufacturers

–creating chips that will be accepted by makers of cellphones and tablets.  For instance, Lenovo has announced its first INTC-powered smartphone for the mainland Chinese market.

–creating an environment for collaboration on design of increasingly complex multi-function chips, either with independent design firms or with device manufacturers.  In other words, INTC would use its advanced chip fabs to attract and lock in customers.     …like AAPL?

It seems to me that at $20 a share, Wall Street was factoring into the INTC stock price a belief that:

–none of its turnaround efforts would be successful,

–that the parlous state of the PC market in the US and Europe is indicative of the global market for these devices,

–that INTC parts will be displaced by ARMH components, and therefore

–that INTC will gradually go out of business.

the stock

To buy the stock at $20 a share, you’d only have to believe that stories of INTC’s demise have been greatly exaggerated.

At the current $26 or so, in contrast, it seems to me the price already factors in a grudging acceptance that the PC business may not be on its deathbed.  I don’t think, however, that the value of the server business is fully reflected.  Nor is there anything, in my view, for the possibility that ultrabooks may expand the PC category or that INTC will have any success cracking the smartphone or tablet market.  Wall Street analysts are merrily downgrading the stock, meaning they don’t want to be seen as endorsing any of these possibilities.

$30 a share seems to me to be the next price objective.  At that level, I think the idea that the current business, PCs and servers, is viable would be in the quote.  But I don’t think there would be very much for new products.  In addition, I don’t think that very many have considered the thought that, after more than a decade of foundry success, the economic winds may be shifting in favor of integrated design/manufacturing firms like INTC or Samsung.

My bottom line:  INTC is no longer the one-way street it was in October, but I think it still has very attractive prospects.  I have no desire to sell any of the stock I own.  On the other hand, given the strong run it has made over the past four months, the size of my holding, and the possibility that good news probably won’t arrive before 2H12 begins, I don’t feel a powerful urge to buy today.  I do think the stock will outperform the S&P over the coming year, though.

TIF’s 4Q11 earnings misstep

Published January 16, 2012 Current Market Thoughts , earnings conference calls , Industry Analysis , Luxury goods , Retail , Stock ideas Leave a Comment
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background

When TIF reported 3Q11 earnings (Tiffany’s fiscal year, like that of most retailers, ends in January), it lowered its 4Q profit guidance (see my post).

By then, the company had seen sales for virtually the entire month of November and had detected weakness in spending by residents of the Northeast and Mid-Atlantic regions of the US.  At that time, it still expected a “low-teens percentage increase” in worldwide sales during 4Q11.  But it effectively clipped $.10 from its estimate of per share profits for the year’s final three months, saying it expected to earn $1.48 – $1.58 per share during the period.  That would be 6.3% more than the $1.44 it earned in the comparable period of fiscal 2010.

the weakening holiday selling season

Last week, TIF reported the results of its worldwide sales for November plus December.

The news wasn’t good–especially in the US and Europe.

Rather than the low-teens increase in sales the company had been anticipating, revenues were only up by 7%.

By region, they broke out as follows:

Americas    total sales = +4%,     comp store sales = +2%  (3Q11 comps = +15%)     ←

Asia-Pacific (ex Japan)     +19%, +12%, (+36%)      ←

Japan     +13%, +6%, (+4%)

Europe     +1%, -4%, (+6%).

In the US, sales to residents were down year on year.  Buying by foreign tourists pushed results into the plus column.

In its press release, TIF reduced its eps forecast for 4Q11 by another $.10-$.15.  It now expects to earn $3.60 – $3.65 for the full year.

The stock fell 10% on the news.  Unlike other stocks with negative earnings surprises, TIF hasn’t rebounded.

my thoughts

December must have been a particularly disappointing month for TIF, since management had already revised down its expectations  based on November weakness.

Recent macroeconomic reports are almost universally signalling that the US economy is improving.  In the jewelry industry in particular, Signet reported on the same day as TIF that its same store sales in its Kay business were up +9.8% and in Jared, +10.0%.  Similarly, Zale reported that its non-kiosk US jewelry business had same store sales growth of +9.0%.  Neither is showing anything like the weakness in TIF’s business.

TIF is much farther up-market than either Signet or Zale.  Presumably, that’s the source of the difference.  It looks like TIF’s high-end US customers left their credit cards at home last month.  My guess is that the problem resides in the waning fortunes of executives in financial services and the industries, like legal, which support it.

Look at the Asia-Pacific figures above, as well.  TIF didn’t highlight this area.  Same store sales are still high at +12%. But three months ago they were growing at a +36% pace, or 3x the current rate.

what to do

At last Friday’s price of $59 or so, TIF is trading at 16x fiscal 1011 eps and yielding 2%. That looks cheap to me.

On the other hand, we have only guesses as to what’s causing the current deceleration in company sales.  They’re probably good guesses, but still…

For investors, the more pertinent question is probably when earnings comparisons will begin to pick up again.  My tentative answer is–not soon.  In fact, earnings comparisons could be negative or flat until late in 2012.

So my thoughts remain unchanged from late November.  I don’t feel any need to sell the stock I own, but I don’t think I have to hurry to buy more.  If I didn’t own any I might buy a small part of a position now, but no more than that.

 

Thai floods mean lower earnings per share for Intel

Published December 13, 2011 earnings conference calls , Industry Analysis , Recent Market Action , Stock ideas , Technology Leave a Comment
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the INTC announcement

Yesterday, INTC issued a press release and conducted a brief conference call to say that earnings per share for 4Q11 were going to be lower than anticipated. The stock fell about 4%, in a weak market, on the news.

The reason?

Recent flooding in Thailand (see my post) has put most of that country’s hard disk drive manufacturing capacity–about 40% of the world’s HDDs are made there–out of commission.  Production won’t be back to normal until May or June.  INTC’s original supposition that inventories of HDDs in the supply chain would be enough to tide makers of PCs and servers over has proved to be too optimistic.

About two weeks ago, HDD makers began to tell device makers how many HDDs and of what type they would be able to deliver in 1Q12.  The numbers are low.  Device makers immediately cancelled orders for large numbers of chips they’d planned to buy from INTC, since there’s no sense in buying components that will be gathering dust in a warehouse waiting for HDDs so a PC can be assembled and shipped.   Hence the public announcement of lower 4Q11 results.

1Q12 eps will doubtless also be less than Wall Street had been expecting, although INTC had not given formal guidance.

eps for 4Q11…

The press release was very brief.  Previously, INTC had expected revenue of around $14.7 billion for 4Q11.  Due to order cancellations, the company now thinks revenue will be closer to $13.7 billion.  Margins will be relatively unaffected.  Yes, volumes will be lower, but device manufacturers are putting the HDDs they are allocated into their highest-profit products (duh!)–which typically also contain INTC’s highest-margin chips.

Analysts had been figuring that INTC would earn $.69 per share for 4Q11.  I think the actual outcome will be around $.63.

 

Looking at the figures another way, INTC was selling chips at a rate of $1.13 billion a week before the industry became aware how low 1Q12 production of HDDs would be.  Subsequent cancellations amount to a bit less than one week of INTC’s December production, or about a quarter of its monthly output.

…and 1Q12

This is anyone’s guess.  Everything depends on how quickly HDD output in Thailand can be restored and on whether it comes back in a linear fashion or in big lumps.  It’s possible, for example, that INTC will be selling at 75% of a normal rate for most of the quarter and then have a huge number of chips fly out the door during the last two weeks.

My stab in the dark is that earnings per share for the quarter could be as low as $.50 but will probably be higher.

more important, earnings will be deferred–not lost

INTC said repeatedly during its conference call (analysts kept asking the question, over and over) that the revenue decline it is experiencing is due solely to lack of HDDs from Thailand.  Its monitoring of sell-through of PCs and servers indicates that end-user demand remains strong and is growing in line with INTCs expectations.  True, Europe may be a little weaker than INTC thought, but Asia is better.

Servers are unaffected.  Device makers are simply not producing the lowest-priced PCs.

Once HDDs are again available, INTC expects the market to return to normal.  Device makers will doubtless boost purchases from INTC to restore the inventory levels they are now running down.

impact on INTC’s production

INTC isn’t going to slow production down, even though my guess is that about 25% of what it is making will, in one form or another, remain in inventory for a while.  Several reasons:

–it can take months to make semiconductors, so INTC can’t just turn production on and off

–INTC is just beginning to ramp up production of its next generation 22 nanometer chips, so it doesn’t want to slow down on them

–the company believes (correctly, in my opinion) that there will be a pickup during late 1Q12 or early 2Q12 that’s just as rapid as the current slowdown.  It would be crazy to miss that sales opportunity just to save a penny or two in eps now.

what about solid state drives?

…the ones made from flash memory.  So far, INTC sees no move by PC makers to substitute more expensive SSDs for HDDs.  INTC, however, believes the future of laptops is in Ultrabooks, sleek Macbook Air-like devices.  So it’s going to see what it can do to use the shortage of HDDs to push device makers to transition more quickly to SSDs.

the stock

INTC shares lost 4% yesterday, in a market that was down 1.5%.  I interpret this as meaning Wall Street is going to ignore the current eps weakness and focus instead on INTC’s low valuation, high dividend and reasonable prospects for growth.  I think that’s the right thing to do.  (A purist might argue that a deferral of, say, $.20 in eps for six months is really a loss of at most a penny, so that the $1 a share fall in the INTC stock price is excessive.  But you’ve also got to factor in something for the uncertainty of the situation and the fact that the market as a whole was down.)

I still think the stock is cheap.  There may be a better buying opportunity when the market gets around to thinking about 1Q12 earnings, or if the current period of market weakness continues into next year–which it could.  On the other hand, there may not be.  I own a lot of INTC, so I’m not tempted to buy.  If I owned none I might be.

Tiffany(TIF): strong 3Q11 + weak guidance = 8.7% stock drop

Published November 30, 2011 Asian economic development , China , Current Market Thoughts , earnings conference calls , Hong Kong , Industry Analysis , Japanese development , Luxury goods , Recent Market Action , Retail , Stock ideas Leave a Comment
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the results

TIF reported its 3Q11 (ended October 31st) earnings results before the start of New York trading yesterday morning.  For the three months, the company took in revenue of $821.8 million.  It earned $89.7 million, or $.70 per share.  This represents a 52% increase over the $.46 a share the company earned in 3Q10.  The 3Q11 figure handily beat the Wall Street consensus of $.60 a share, even exceeding the most optimistic estimate, which was $.67.

TIF also continues to buy back stock at around the $65-$66 level.

the guidance

TIF says it expects 4Q11 earnings to come in between $1.48-$1.58 per share.  This represents a (mere) 6.3% increase over the $1.44 per share the company posted for 4Q10.  This guidance falls near the bottom of the 4Q Wall Street analysts’ estimate range of $1.51 – $1.69.  The median estimate, which  may be revised down, has been $1.64.

Just for reference, a year ago TIF guided to eps of $1.29 and reported $1.44.  If we adjust management guidance for possible lowballing of the same magnitude, we arrive at a figure around $1.65.  That would be a year on year gain of 15% or so.

the details

3Q11 business was stellar.  By areas:

–the Americas, 47.9% of TIF’s sales (49.7% a year ago), rose by 17% yoy.

–Asia Pacific, 22.6% (19.6%), was up by 44%

–Japan, 18.1% (19.1), rose by 12%

–Europe, 11.4% (11.6%), was up by 19%.

Strength was in high-end merchandise.

Where’s the problem?

In its guidance, TIF alluded to “recent sales weaknesses” it has noticed in Europe (no surprise there–and it’s still a tiny part of TIF’s overall business) and in the eastern US.  In its conference call, the company said the western US remains strong and buying by foreign tourists continues to be a significant positive.  But it has noticed a slowdown in purchases by domestic customers in the Northeast and Mid-Atlantic states.  That’s the reason for its relative caution.

my thoughts

On the surface, the Boston-Washington corridor slowdown seems odd.  The just-released National Retail Federation survey (see my post) highlights the Northeast as an area where holiday spending is surging.  However, I’d already heard the same story as TIF’s from another (privately held) luxury retailer doing business along the East Coast.  I’d attributed that to company-specific problems, but it’s sounding like I’m wrong.

What could be the cause?  …pent-up demand from the recession being satisfied over the past year?  …lower bonuses on Wall Street?  …Newt Gingrich taking a lower spending profile (a joke)?

TIF is still projecting sales in the Americas to be up by 15%-20% yoy in 4Q11, but is now expecting the lion’s share of the sales growth to come from buying by foreign tourists.  This contrasts with the 50-50 split the company has seen in sales growth  between locals and foreigners during recent quarters.

TIF is currently earning at a $4 per share annual rate.  This means it’s now trading at a bit over 15x earnings.  That’s an unusually low multiple by historic standards.  It’s also where the TIF management sees considerable value, as evidenced by its stock buybacks.  In addition, Asia Pacific sales probably amount to about a third of revenues, if we factor in sales to tourists in the US and Europe.  Those sales alone seem to me to be enough to grow the entire company’s profits by at least 10% per year.

On the other hand, if US sales of luxury goods to domestic buyers are beginning to flatten out after an extraordinary burst of buying over the past year–and continue flat for a while–then earnings comparisons for TIF over the next few quarters will likely be lackluster.  Any potential bids from European luxury goods firms (I’ve regarded this possibility as very small, in any event) will likely stay on the shelf until the EU’s economic future is less cloudy.

All in all, I’m content myself to wait before adding to my holding.  If I owned no TIF at all, however, I’d be tempted to buy a small amount now and await further developments.

 


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