Apple(AAPL)’s 1Q13 earnings

the report

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.

new guidance

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.

details

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.

Significance?

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.

my take

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.

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