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After the close yesterday AAPL announced its 1Q13 earnings results (the company’s fiscal year ends in October). AAPL earned $13.81 per share on revenues of $54.5 billion, both all-time records. Sales were up 18% year on year, EPS were down by $.06. EPS exceeded the Wall Street consensus by a little. Revenues were a tiny bit lower.
Note that 1Q13 had 13 weeks in it, 1Q12 had 14. On an apples to apples basis, sales would have been up by about 25% and eps would have shown a gain of 10%+, I think.
AAPL also announced it was changing the way it would give forward-looking earnings guidance–and provided the first figures using the new method. Under Steve Jobs, the company gave what inevitably proved ludicrously low single-number suggestions about what its sales, margins and EPS for the following quarter would be. I’m not positive AAPL intended its “guidance” to be funny, but the process ended up being almost a parody of the way most other companies proceed. My strong impression is that AAPL knew the figures it suggested were wildly inaccurate.
Under Tim Cook, AAPL has decided to become a bit more conventional. During the conference call the CFO said that 2Q13 revenue will likely be $41 billion – $43 billion. Gross margin will be between 37.5% and 38.5%, operating expenses $3.8 billion – $3.9 billion. Other income will be about $350 million and the tax rate will be around 26%. Unlike the past, no EPS figure was given.
All that would imply EPS of around $10 for 2Q13–a figure substantially below the brokerage house consensus of $11.50. Of course, until we have actuals to compare with we won’t know whether the new company guidance protocol is intended to be any more accurate than the old.
Nothing on the call thrilled Wall Street. As I’m writing this in mid-afternoon, AAPL shares are down about 12% in an otherwise flat market.
The iPhone is fine. Units were up 29% yoy (30%+, apples to apples), revenues up 28%. iPhone 5 was capacity constrained for most of the quarter, iPhone 4 for the entire period. So sales could have been higher. Despite this, sales were in line with the growth of the smartphone industry. Remember, too, that smartphones are AAPL’s main business, comprising 60% of revenues and more than 2/3 of operating profit. So this is the business that counts.
two points of weakness
Macs (10% of sales)
AAPL was capacity constrained with new iMacs. AAPL’s PC unit volume was down 22% yoy (-15% is probably a better apples to apples number), in a market that declined by 6%, however. So having more iMacs on the shelves would have affected the degree of market underperformance, not the fact. Higher unit selling prices meant that revenue declined by about 10% ata.
iPads (20% of sales)
Units were up 48% yoy (60% ata). That’s good. But revenues were up only 22% (30%? ata). That’s bad.
Yoy the average selling price of iPads in total (minis, iPad 2s and the newest models) dropped from $568 in 1Q12 to $467 during 1Q13. In other words, during the year AAPL saw a massive move away from its flagship tablet offering toward cheaper models. My back of the envelope guess is that the company sold around 13 million newest model iPads during the 2011 holiday season …and only about half as many this time around.
A while ago, AAPL decided to move its computer line upmarket. My guess is that it’s now suffering from a cyclical falloff in demand caused by macroeconomic weakness–and made somewhat worse by the high price points.
The iPad numbers say to me that the tablet market is already quickly evolving away from the original high profit margin format of the original iPad, either toward a $400 price point for corporate/ education use and a $200-$300 price for consumers. If I’m correct, the tablet market may end up being much bigger than previously thought, but it won’t follow anything like the high profit trajectory of the smartphone. Note, too, that mini production was capacity constrained during the quarter. The average unit price might have even been lower if AAPL had been able to satisfy all its potential mini customers.
The tablet numbers are the only disturbing thing I found in the APPL quarterly information. From what I’ve read, I’m not sure anyone else has noticed, however. But both in tablets and Macs, AAPL has given the first hints that even it can be subject to business cycle forces. That’s another way of saying that the company’s peak earnings acceleration phase may be behind it.
From a stock market point of view, however, investors have been discounting the arrival of this day (incorrectly, until now) for a half-decade. AAPL has $137 billion in cash, about a third of its market capitalization, and no debt. If we assume the company can earn $50 a share this year, it’s trading a 9x earnings, while growing at a bit less than 15% in weak economic times. Better economic times should move that growth rate north. Ex cash, AAPL shares are trading at 6x. That’s crazy low.
where will the buyers come from?
I’ve read somewhere recently that over 3/4 of all equity mutual funds in the US have AAPL as one of their top few positions. Equity oriented hedge funds have been up to their ears in the stock for a long time.
Two reasons why:
–it’s been a great stock to own for almost ten years, and
–at its peak, AAPL represented 10% of the IT sector’s market cap and 5% of the S&P 500′s. Therefore, any professional concerned with outperforming an index would be forced to establish at least a market weighting in the stock in his portfolio, if for no other reason than to protect himself from losing ground to a surging AAPL stock price.
So, who’s left to buy? No one.
What I’ve just written sounds pretty stupid, but it’s a situation that occurs often in smaller markets where one or two stocks dominate the index. We just haven’t seen it in the US during my lifetime.
A common strategy in these markets is to neutralize the whales (have a market weighting) and try to achieve outperformance elsewhere. So virtually everyone already owns all the stock he ever intends to own. The result is that surprisingly small amounts of buying and selling can move the giants a long way.
This may be happening with AAPL. Certainly, in my opinion, the fundamentals don’t warrant the current low price. But it’s anyone’s guess how long the current malaise may last.
I think so. Insiders appear to be unwilling to sell at the current market price and Wall Street seems to have forgiven FB for what I regard as the less than ethical behavior of the company’s main underwriter during the IPO.
Yesterday marked the end of the third–and final–period over which FB employees and early investors had agreed not to sell shares. Just north or three-quarters of a billion shares were thereby released from lockup. Wall Street was bracing for the worst.
But only about 50 million shares appeared for sale at 9:30. Total volume for the full day yesterday was just under 230 million shares, or about 5x normal. More important, the stock went up 12.6% in a flat market.
As I’m writing this just after midday Friday, FB is up about 6% while the S&P 500 is flattish. Volume is high again, but I read this as professional investors reacting positively to the small percentage of insider shares that were put out for sale and to the strong price action that soon developed.
the IPO, in hindsight
Not Morgan Stanley’s finest hour.
The main underwriter threw gasoline on speculative flames instead of tamping them down. And NASDAQ’s computers broke down just as it was dawning on individuals dreaming of instant riches that they’d been had.
That was bad enough. But the really damaging part of the IPO, to my mind, was the way I think the underwriters “spun” the mandated company disclosure in a way that made FB look better than it is.
Any professional investor would take it for granted that Morgan Stanley knew exactly what it was doing. The real question is whether company management was complicit in this shady process–in which case they couldn’t be trusted and buying the stock could be hazardous to your career. On the other hand, maybe FB executives were just too inexperienced or naive to understand what was going on.
The price action of the past two days seems to me to be saying portfolio managers and buy-side analysts have decided the latter is the case.
So, two plusses for FB.
After the close of equity trading in New York yesterday, INTC reported its 3Q12 earnings results.
Revenues were flat, quarter on quarter, at $13.5 billion, during the typically seasonally stronger 3Q. The same with operating expenses.
EPS came in at $.60 vs. $.57 for 2Q12, based largely on a lower than expected tax rate (implying to me that business was stronger than expected in emerging markets, weaker in the US and EU).
The numbers were considerably better than the downward revision to guidance that INTC announced in early September. At that time INTC expected revenue of $13.2 billion and EPS (my estimate) of $.52-$.54 (see my post on the pre-announcement).
Year on year, results were down. 3Q11 revenues were $14.2 billion, EPS $.65.
The stock fell about 3% in the aftermarket Tuesday. In the Wednesday premarket, it’s about the same, while S&P futures are flat.
Demand for PCs in the US, EU and China continues to be lackluster. As a result, INTC’s customers, the machine manufacturers, continue to pare chip inventories. This is typical behavior: the buyer gets the sniffles, the component manufacturer gets pneumonia. But INTC customers appear to be shrinking inventories to even lower levels than the company anticipated a month ago, implying their ability to read end-user buying intentions is especially low.
Business did pick up a bit in September in anticipation of Windows 8.
Demand for servers from corporations has also begun to slow down, as company cash flows flatten out due to the current deceleration in global economic growth. This is a new element in the INTC story, although not a huge surprise. No matter what anyone says–including the companies–corporations usually don’t borrow to fund capital expenditures. Spending is a function of the cash flows that operations generate.
Cloud computing remains very strong.
Visibility is very low.
INTC appears to expect that 4Q12 will more or less mirror 3Q12. The company normally keeps inventories of just over a month’s sales. It now has 5%-10% too much. It will slow down manufacturing a bit during 4Q12, as a result. This won’t affect revenues. But the company will shut some production lines and shift the machinery to new leading-edge uses. This will mean lower capex during the quarter, as well as an unspecified amount of equipment writedowns.
During 1Q13, INTC will begin another of its bi-annual production upgrades–which will mean lower gross margins by a few percentage points for a quarter or two as the company gets the new lines up to speed.
I’m pencilling in $.60 (excluding writedowns) for 4Q12, which would mean full-year EPS of $2.33. I’m thinking that 2013 will bring a minimum of $2 a share, with $2.50+ likely if the global economy begins to reaccelerate.
Since the bottom for the S&P in June, the index is up about 14%. Over the same time span, INTC is down by 14%. Most of the damage has happened since mid-August, when the global slowdown became more apparent.
At $22 a share, INTC is trading at 9x trailing earnings and at, I think, at most 10x what it can earn in 2013. INTC shares now yield 4%, a full percentage point above the 30-year Treasury.
I’m surprised that the stock has performed as poorly as it has. I’d thought INTC might give up some of its run to $29+, but I’d expected it to settle in around $25 or so.
That’s clearly been wrong. And it’s always a danger signal when a stock doesn’t do what you expect.
As far as I can see, the current earnings weakness has revived all the old fears that INTC products have no place in a post-PC world dominated by tablets and smartphones. And this, rather than business-cycle softness, is what’s causing the sharp underperformance of INTC shares.
It’s possible that the negative scenario will turn out to be true. I continue to think, however, that INTC shares are now being priced as if that outcome were a certainty–that ultrabooks and INTC’s forays into tablets and smartphones won’t be successful. So I’m continuing to take the contrary bet–noting, though, that there are risks in saying that everyone’s out of step but me.
On Friday September 7th at 8:30 EDT, the Bureau of Labor Statistics, part of the Labor Department, released its monthly Employment Situation report for August 2012. The headline figure is that the US economy gained 96,000 jobs last month.
That’s disappointing in several respects:
–it’s below the economists’ consensus of +120,000-140,000 new positions
–it’s considerably less than the +201,000 job additions reported by ADT earlier in the week
–it’s under the 150,000 or so new jobs needed each month to absorb new entrants into the labor force–meaning it’s not enough to eat into the number of long-term unemployed
–it suggests that the more favorable report for July (+163,000 jobs) is as much an outlier as the much weaker numbers from May and June.
The 96,000 jobs consist of 103,000 new hires in the private sector, offset by -7,000 layoffs by state and local governments. The service sector continues to be a strong generator of new jobs. Construction seems to be bottoming. But for the first time in a while, the manufacturing sector is beginning to shed jobs.
As regular PSI readers know, the ES report is revised in each of the two months following its initial release.
The initial figures for July were +163,000 jobs (+172,000 in the private sector, -9,000 state and local government layoffs). That has been revised down in the August report to +141,000 (+162,000, -21,000).
The figures initially reported for June were +80,000 (+84,000, -4,000). They were revised down in the July report to +64,000 (+73,000, -9,000). In the August report, the numbers were revised down again to +45,000 (+63,000, -18,000).
the surprising thing about this report is that the S&P went up on the news.
After all, it seems to dash hopes that the US economy is going to accelerate from the current lackluster pace. To the contrary, it suggests that what we are seeing now is as good as things are going to get for employment–and chronic high unemployment is going to be a fact of life.
At the same time, the US stock market is holding above the 1420 line that has represented a very substantial barrier to advance.
What could this mean?
On the most elementary level, investors appear to have returned from the Hamptons with their buying shoes on.
I don’t think anyone can possibly believe that additional Fed action will make any substantial positive difference for the US economy. Nor do I think that current economic conditions domestically or in the EU or China or Latin America are a cause for joy.
It could be that investors have suddenly awakened to the fact that bonds are very expensive and stocks very cheap. But that’s been the situation for a very long while.
What I think is going on is that sentiment is changing. Investors appear to be starting to believe that the worst is over in world economies. Two implications of this belief: stocks aren’t going to get much cheaper, and it’s okay to buy at today’s prices anticipated earnings improvement in 2013-14.
The big imponderable is how long the current bullish mood will last.
my bottom line:
We should enjoy the ride–which might represent a crucial, positive, turning point for stocks–but be very wary for signs that the curent mood change is just a passing fancy.