Apple Inc. (NASDAQ:AAPL) announced a relatively positive set of results Tuesday night. Sales were $43.6bn (consensus $42.3bn), with iPhone unit sales of 37.4m (cs 36.4m) and iPad sales of 19.5m (cs 18.3). Apple Inc. (NASDAQ:AAPL)’s Gross margins dropped to 37.5% (cs 38.5%) mainly due to negative leverage on slower revenues but also lower iPhone sales.
Guidance was disappointing: Apple Inc. (NASDAQ:AAPL) stated that Q3 sales will be between $33.5bn and $35.5bn (cs $38.6bn) and mid-range EPS of $7.0 (cs $9.0). Analysts at SocGen believe the main problem is slowing iPhone sales and adverse mix (more older handsets in the mix). The biggest news was a huge acceleration in returns to shareholders. The company will increase its dividend to $3.05 per quarter for a yield of over 3.0%. Additionally, Apple Inc. (NASDAQ:AAPL) plans to buy back some $60bn in sharesover the next three years, borrowing where necessary, reducing share capital by over 5% per year.
SocGen notes that Management implied that there would be no new products until fall, which probably means significantly lower results for both Q3 and Q4. The CEO flagged that the “potential for growth” was in new product categories but did not give any further details.
However, the key here is new products. Apple customers are hugely loyal, at least for now. This means they have proved to be willing buyers of the next Apple product at high prices as long as the product is sufficiently innovative. At 7.0x 2013 ex-cash PE, Apple’s price doesn’t look demanding, but upcoming new products need to impress or earnings estimates may have further to fall.
SocGen has cut their forecasts due to the lower iPhone mix (reduces gross margins) and the replacement for the current iPhone not arriving until Q4. This reduces SocGen’s Apple Inc. (NASDAQ:AAPL) EPS forecasts by 7% for the next couple of years. Further out, they have reduced long term assumed operating margin to 18% from 20% previously.
How they value the stock Inputting the new forecasts, DCF-based target price falls to $500 from $560 (WACC 10%, LT growth 1%, LT margin 18%). SocGen sticks to their Buy recommendation with 26% projected 12m TSR ($12.2 DPS as guided).
Events, catalysts & risks Apple Inc. (NASDAQ:AAPL) will report its Q3 FY13 in July 2013. The main risk to the target price is if demand for iPhones falls faster than assumed which would depress both revenues but more particularly gross margins.