Apple Inc. (NASDAQ:AAPL) reported fiscal Q1 (December) results that were in-line or better than expectations and issued conservative guidance that reflects ongoing revenue growth and strong customer demand. However, AAPL’s share price weakness has continued, with the stock now down 36% since closing at a record high of $700 on 9/21/12. There are dozens of reports out on analyzing the earnings, but James D. Ragan, CFA an analyst at Crowell, Weedon & Co. just put out a fantastic one on Apple Inc. (NASDAQ:AAPL). James believes that the investor focus on near-term negative factors has created a compelling opportunity for long-term investors, based upon the firm's strong long-term outlook for AAPL’s business. He reiterates a buy rating and set a new 12-month price target of $725 (from $840).
The report details everything important regarding the tech giant; we summarize the points below:
In FY13 Ragan sees Apple Inc. (NASDAQ:AAPL)’s gross margin settling into a more normal 38% range from an unsustainable 43.9% level in FY12. That will cause relatively flat EPS for the year (Ragan estimates $45.38 vs. $44.14 last year) and down EPS in the March quarter (fiscal Q2, he estimates $10.61 vs. $12.30 last year, which included the peak gross margin at 47.4%). However, he looks for EPS growth to resume in the June quarter (fiscal Q3) and for gross margins to stabilize in the mid-to high 30%s. Positives include AAPL’s strong new product lineup, world class innovation, leadership position in growth markets, and unparalleled cash generation that supports a material dividend increase and share repurchase activity. At current prices AAPL trades at multi-year low valuation ranges, including a P/E of 9.7x this year’s EPS estimate, and Enterprise Value of $284B, which is 4.7x trailing year adjusted EBITDA of $61B and 1.7x trailing revenue of $165B. Apple Inc. (NASDAQ:AAPL) has no debt and $137B of cash and liquid investments ($145 per share).
Growth Story In-tact.
Fiscal Q1 revenue increased 18% to $54.5B, in-line with expectations. In addition last year’s Q1 included an extra week for a 14-week quarter rather than the usual 13 weeks. After adjusting for the extra week, AAPL’s weekly revenue increased 27%. iPhone revenue of $30.7B (56% of total) increased 28% and iPad (20% of total) revenue of $10.7B increased 22%. Mac revenue of $5.5B (10% of revenue) decreased 16%. For the year ending 9/30/13 he estimates total revenue of $185.5B +19%, iPhone revenue of $99B +26%, and iPad revenue of $38.3B +24%.
Global Growth Opportunity.
Apple Inc. (NASDAQ:AAPL)'s largest product segments, smartphones and tablets address large growing markets. According to market research firm IDC, global smartphone growth in 2012 increased more than 40% to over 700mm units. For the five-year period through 2016 IDC estimates the market for smartphone shipments will increase 18% compounded annually. The tablet market is expected to generate even higher growth as IDC estimates that tablet shipments in 2012 of 122mm units will grow 41% to 172mm in 2013. IDC estimates a 5-year CAGR for tablets (2012-2016) of 23.3%.
Apple Inc. (NASDAQ:AAPL) reported fiscal Q1 gross margin was 38.6%, well above management’s 36% guidance and 38% consensus. In addition March quarter gross margin guidance of 37.5%-38.5% was better than expected. However, the year/year margin comparisons were against record levels of 44.7% (FYQ1’12) and 47.4% (FYQ2’12) that benefitted from a high mix of iPhone sales (the highest margin product) to total revenue, and high margins from the iPhone 4S (the lead product at the time) because it’s manufacturing process utilized the same equipment as the prior generation. As we fast forward one year to the current product, AAPL’s gross margins are lower due to 1) a lower mix of iPhone revenue as other segments have grown, 2) higher costs related to new product launches for iPhone 5, iPad mini, iMac, and others, and 3) the introduction of the iPad mini (a successful launch of a lower revenue, lower margin product).
James believes that Apple Inc. (NASDAQ:AAPL) has broadened its product offerings to include a larger number of key products. In general this should reduce some quarterly variability (lumpiness) caused during transitions to major product upgrades. However, that lumpiness has impacted the last few quarters and will likely continue in the current fiscal year. With the introduction of new products like the iPad mini and ongoing success of the iPhone 4S (along with the iPhone 5), new products, while remaining highly important will represent a lower percentage of Q-Q results. Q1 iPhone average selling price (ASP) was $642, down less than 1% year/year. ASP for the iPad was $467, down from $568 last year (-18%) and reflected the introduction of the iPad mini. Hes believe that gross margins can range between 36%-39% going forward. As the adjustment is addressed this fiscal year, double digit EPS growth can resume.
Apple Inc. (NASDAQ:AAPL) remains well-diversified geographically. On a trailing four quarter basis, total revenue was $165B. Revenue from the Americas increased 28% to $60.1B, Europe increased 18% to $37.5B, China increased 77% to $25.3B, and Japan and the rest of Asia increased 14% to $22.6B. In addition, revenue from AAPL retail stores was $19.1B, up 16%. The Company has high hopes for the China market and believes that ultimately that market can challenge the Americas as AAPL’s largest segment. He thinks that the China TTM revenue of $25.3B is already highly impressive.
The research firm's price target for Apple Inc. (NASDAQ:AAPL) is $725, and would represent a new high in the shares. They arrive at the target as it represents a P/E of 16.0x their $45.38 FY’13 EPS estimate. In addition $725 derives an enterprise value of $549B reflecting 8.6x theor FY’13 adjusted EBITDA estimate of $64B, and 3.0x estimated revenue of $185.5B. In addition AAPL’s annual dividend of $10.60 is now a 2.4% current yield. James believes that Apple Inc. (NASDAQ:AAPL) is under increasing pressure to utilize its $137B ($145/share) cash position for the benefit of shareholders. Because of that,they expect a dividend increase sometime in the next few months, and would not be surprised with a large percentage increase of 20%-25% ($12.70-$13.25).
Q1 iPhone revenue increased 28% to $30.7B and units of 47.8mm increased 29% from 37.0mm last year. However, when adjusting for last year’s extra week, iPhone units were 3.7mm/week, up 39% year/year from 2.6mm/week last year. Weekly revenue was up 38%. The firm estimates 39.2mm iPhone in the March quarter, an increase of 12%. Last year’s Q2 included over 2.5mm units of increased channel inventory, making the year/year comparison difficult. For the fiscal year the firm estimates iPhone shipments of 157mm, an increase of 26%.
Q1 iPad revenue increased 22% to $10.7B and units of 22.9mm increased 49% from 15.4mm last year. Revenue per unit was down due to the introduction of the iPad mini, a transition that will continue through this year. However, demand remains strong. After adjusting for last year’s extra week, iPad units were 1.7mm/week, up 60% year/year from 1.1mm/week last year. Weekly revenue was up 31%. The analyst estimates 20.6mm iPads in the March quarter, an increase of 75%. For the fiscal year the firm estimates iPad shipments of 85mm, an increase of 46%. Their revenue increase estimate is 24% to $38.3B, reflecting lower ASPs.
Q1 Mac revenue decreased 16% to $5.5B and units of 4.1mm declined 21% from 5.2mm last year. When adjusting for the extra week Mac revenue decreased 10%. The unit shipments were 1mm below their estimate, a large discrepancy. This was attributed to overall tablet strength (taking from Mac sales), but also component shipments that delayed sale of the new iMac until December. The firm continues to believe that Mac revenue can outpace the overall PC sector and look for an improvement in this segment going forward. They also view this segment a source of potential upside surprises over the next few quarters.