Apple Inc. (NASDAQ:AAPL)’s latest 10-K regulatory filing provided some additional details on capital expenditures and margins. UBS analysts Steven Milunovich and Peter Christiansen provided their analysis of the information and remain Neutral on the stock because of cool-downs seen in Apple shares in past December quarters.
Apple provides more detail on CapEx, purchase commitments
In the filing, Apple Inc. (NASDAQ:AAPL) estimated that 2014 capital spending would be $11 billion, a 35% increase from 2013 spending, although $1.5 billion was pushed back after the third fiscal quarter of 2013. This makes the true comparison to flat year over year or otherwise 5.8% of revenue.
Gross margin compares are also expected to improve in fiscal 2014 because of slower fixed expense growth. UBS analysts calculate that two of the three-point year over year decline in gross margin during the September quarter was because of higher expenses for depreciation and amortization. They say the quarter would have been just one point loer because of the higher mix of iPhones at 52% rather than 46% of revenue.
They note that for the full year, Apple Inc. (NASDAQ:AAPL) increased its warranty accrual rate from 1.5% to 2.8% after adjusting for $224 million in catch-up accruals from the June quarter. On a full-year basis, they said the increased accrual rate subtracted 1.6 points from Apple’s gross margin, while depreciation and amortization subtracted 3.5 points. They said accelerating fixed costs will abate in the 2014 fiscal year, thus making it easier to compare gross margins.
Margin problems in Asia
Apple reported sequential operating margin improvements in the Americas and Europe, although in China, they were close to flat. Japan’s margins saw the biggest quarter over quarter decline in spite of the new deal with NTT DoCoMo. UBS analysts attribute this problem to weakness in the yen and also a weaker average selling price mix for the iPhone and iPad. They note that China is now Apple Inc. (NASDAQ:AAPL)’s lowest margin region at 34% and say Apple must be “price aggressive” in China because of competition from Android.
The UBS analysts have a $540 per share price target on Apple and note that since the original iPhone launched in 2007, the December quarter hasn’t been as kind to Apple Inc. (NASDAQ:AAPL) shares as other quarters. They note that average relative performance versus the S&P 500 is 3%, which is seasonally the lowest. Over the last six years, the December quarter has had the worst relative performance of the year for Apple half of the time and the best relative performance just 16% of the time.
