Apple Inc. (AAPL) is expected to release its
second quarter 2011 results after the market closes on April 20,
2011. We believe that Apple will continue to record above-market
gains, exceeding the Zacks Consensus Estimate.
At its first quarter conference call, Apple forecasted second
quarter earnings of $4.90 per share compared with $3.33 in the
year-ago quarter. We should, however, take into account the
company’s history of conservatism while looking at their current
guidance.
The Zacks Consensus Estimate for the second quarter of 2011 is
pegged at $5.34 per share, representing a year-over-year growth of
60.4%.
Apple posted an average earnings surprise of 21.27% in the
trailing four quarters, implying that it has outpaced the Zacks
Consensus Estimate by the same magnitude in the last four
quarters.
Apple reported earnings per share of $6.43 per share in the
first quarter of 2011, beating the Zacks Consensus Estimate of
$5.38 as well as its own guidance of $4.80 per share.
Apple posted a positive earnings surprise of 19.5% in the
reported quarter. Revenue increased 70.5% year over year to $26.74
billion, beating the Zacks Consensus Estimate of $24.30 billion and
its own forecast of $23.00 billion. For further details please see
Record 1Q for Apple.
We are positive on Apple’s earnings outlook and remain
encouraged by the fact that second quarter estimates are clearly
going up, implying that analysts see positive catalysts. The
estimate revision trends and the magnitude of such revisions
justify the strength of the stock.
Estimate Revision Trends
Specifically, 12 out of the 42 analysts raised their projections
in the last 30 days, while only one analyst moved in the opposite
direction. Over the last week, seven analysts upgraded their
estimates, whereas none made downward revisions.
Overall, estimates for the second quarter have gone up 3 cents
from $5.31 per share, in the last seven days, to $5.34 per share.
There has been an increase of 6 cents over the past 30 days and 8
cents over the past 60 days.
We believe Apple will post strong results in the second quarter,
based on solid sales of the iPad, iPhone and Macintosh.
Key Drivers
Strong Macintosh Sales – Resurgent demand for
Macintosh has been a boon for Apple in the last few quarters. Apple
shipped roughly 4.13 million Macintosh computers in the first
quarter (ended December, 2010), reflecting a 23.0% year-over-year
increase, attributable to strong demand for the product in each of
its geographic segments. Both Asia-Pacific and Japan grew over 50%,
which resulted in a double-digit growth in both desktop and
portable platforms.
According to research group IDC, Macintosh sales increased 9.6%
year over year in the quarter ended March 31, 2011. Apple grabbed
an 8.5% share of the U.S. personal computer market, selling an
estimated 1.375 million units in the first quarter.
However, Apple continues to face strong competition in the PC
segment from Hewlett Packard Co. (HPQ), which
leads the U.S market with 27.0% market share, followed by
Dell Inc.’s (DELL) 12.8% and Toshiba’s 10.3%.
iPad 2 launch -- In March 2011, Apple launched
its much hyped tablet computer iPad2, and according to the analysts
sales could have exceeded 500,000 units over its debut weekend.
Although Apple will not be able to report iPad 2 sales for the full
quarter, we believe that the launch of iPad 2 will significantly
boost its top-line numbers.
IDC expects Apple to maintain 70%–80% market share through 2011,
primarily due to the launch of iPad2. Based on IDC estimates, Apple
will ship a minimum of 35 million tablets in 2011.
iPhone – Although Apple did not provide any
specific details about the launch of iPhone 5 in the near term, we
believe continued strong sales from iPhone 4 will drive top-line
growth for the second quarter. We believe the availability of
iPhone through Verizon Wireless will drive revenue growth in the
upcoming quarter (before February, AT&T Inc.
(T) was the sole iPhone carrier).
We believe the company is facing supply chain problems both for
both its iPhone and iPad and the natural disaster in Japan has
aggravated the situation.
Apple imports a number of manufacturing components from Japan
for its iPad 2. Global supplies of NAND and DRAM, essential for
smartphones such as iPhone, have also been affected by production
shutdowns in Japan, which is a significant supplier of these memory
chips. We believe the supply chain problem will hurt the company’s
profitability in the near term.
Absence of Steve Jobs -- Apple’s founder Steve
Jobs took a medical leave in early January for an indefinite period
of time. This is the third time that he has taken a medical leave
since 2004.
Although his absence is not expected to have any significant
impact in the near term, it will be interesting to see how the
make-shift management responds to the growing demands of the
industry. We believe it will be challenging for Apple to maintain
its dominant position in the industry once its founder steps
down.
Recommendation
We maintain our Outperform rating over the long term (6-12
months). We believe Apple is well positioned to achieve strong
top-line growth over the long term based on product innovation,
strong sales from iPad and iPhone and higher Macintosh sales.
Apple remains embroiled in legal battles over its mobile
products. Besides Nokia Inc.
(NOK), Samsung and Eastman
Kodak (EK), Apple is engaged in legal battle with
Taiwanese handset maker HTC, regarding the violation of numerous
patents in March 2010. HTC manufactures several phones powered by
Google Inc.’s (GOOG) Android mobile operating
system.
Moreover, Apple’s share price has declined 2.6% since the
release of first quarter 2011 results. We believe persistent supply
chain problems led to such a scenario.
Currently, Apple has a Zacks #3 Rank, which implies a Hold
rating in the short term (1-3 months).
APPLE INC (AAPL): Free Stock Analysis Report
DELL INC (DELL): Free Stock Analysis Report
EASTMAN KODAK (EK): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
HEWLETT PACKARD (HPQ): Free Stock Analysis Report
NOKIA CP-ADR A (NOK): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
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