Apple Inc. (AAPL) 10-Q Review: Good Margins, Moderate Demand

0
Apple Inc. (AAPL) 10-Q Review: Good Margins, Moderate Demand
ElisaRiva / Pixabay

UBS Global Research analysts Steven Milunovich and Peter Christiansen maintain a Buy rating for Apple Inc. (NASDAQ:AAPL) as margins still look attractive and the introduction of new products are a second-half catalyst.

Play Quizzes 4

Underlying profitability starting to see “S-year” benefits

We estimate that fixed cost under-absorption and increased warranty accruals negatively impacted the gross margin by 20 and 60bps, respectively, in F1Q. Fixed cost under-absorption was the primary reason for a lower gross margin in F2013, representing more than half of the decline. This quarter’s negligible impact marks a notable improvement. We expect under-absorption effects to ease during the “S” year. As expected, the step up in the deferred revenue rate lowered the gross margin by 1.5 points YoY. Excluding these items, the gross margin would have been 1.6 points higher with an improving mix shift providing almost all of the gain.

Morningstar Investment Conference: What To Do During Fed Hiking Cycles

Invest Trend FollowingValue investors have been enjoying a recovery of value strategies, but one fund manager says that won't last long. At the Morningstar Investment Conference on Monday, Michael Grant, co-CIO and head of long/ short strategies at Calamos, said growth outperforms value during Fed hiking cycles. What To Do When You're Not Fighting The Fed He Read More

Apple’s regional profitability mixed

Most regions saw a decline in operating margin year-over-year. Japan remained the highest margin country at 48% and China the lowest at 35%. Americas profitability was negatively impacted by fewer Apple Inc. (NASDAQ:AAPL)’s iPhone sales in the US while Japan’s margin decline primarily was attributable to Yen weakness. Offsetting China and a 2.8 point decline in Japan, the rest of Asia improved 3.5 points. Greater China margin at one point was near 50%; faster growth in China will weigh on margins over time.

Decline in Apple’s purchase commitments

Purchase commitments declined 15% from a year ago, perhaps indicating mediocre demand. “Other obligations,” which includes advertising, R&D, and telecom services, typically ramp a few quarters before major product introductions. The current rate is relatively low historically. There was no change in Apple Inc. (NASDAQ:AAPL)’s F14 capital spending outlook of $11bn, up 35% from $8.2bn in F13.

Valuation

We maintain our Buy with new products a second-half catalyst. Potential Apple iPhone maturity is a legitimate concern, but growth should improve as China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) ramps and new products are introduced. Our price target of $625 per share for Apple Inc. (NASDAQ:AAPL) is based on a NTM EV/FCF multiple of 9.5x, more in line with other large cap tech names.

Updated on

Sheeraz is our COO (Chief - Operations), his primary duty is curating and editing of ValueWalk. He is main reason behind the rapid growth of the business. Sheeraz previously ran a taxation firm. He is an expert in technology, he has over 5.5 years of design, development and roll-out experience for SEO and SEM. - Email: sraza(at)valuewalk.com
Previous article Yahoo Earnings Report Highlights Importance Of Alibaba: Susquehanna
Next article Zynga Inc (ZNGA): Consensus Estimates For 4Q Are Too High [REPORT]

No posts to display