Apple Inc. (AAPL) Barometer Companies Auger Q2 Sales Weakness: White

Apple Inc. (AAPL) Barometer Companies Auger Q2 Sales Weakness: White
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Cantor Fitzgerald analyst Brian J. White takes a close look at preliminary February sales in their basket of companies that have a direct effect on Apple Inc. (NASDAQ:AAPL).

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As of this morning, preliminary February sales for the companies in our Apple Barometer have been reported, and February is coming in well below historical seasonality. Our Apple Barometer consists of leading Taiwan-based suppliers that generate a high percentage of sales from Apple Inc. (NASDAQ:AAPL).

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Preliminary February Apple Barometer Misses Seasonality

Preliminary February sales for the companies (98% of sales) in our Apple Barometer have been reported, and the results thus far are much weaker than typical seasonality. Preliminary sales in February are down by 28% MoM and much weaker than the February average of down 10% over the past nine years. In our view, the early Chinese New Year this year (which began on January 31) caused a weaker-than-seasonal January, and although we believe this should have driven a less-than-seasonal February, we didn’t expect sales to be as weak as they were.

With an Average March Performance, Weaker than Average 1Q:14

If we assume average seasonality for our Apple Barometer during the month of March, we estimate March quarter sales could fall by 32-34% QoQ, which is much weaker than the average QoQ decline of 17% between 2006-2012 (we excluded 1Q:13 due to a change in revenue reporting). That said, we are modeling 2Q:FY14 sales for Apple to fall by more than seasonal averages (i.e., down 24% QoQ vs. an eight-year average of down 19%).

Further Cash Distribution on the Horizon

Yesterday, Apple Inc. (NASDAQ:AAPL) announced that Peter Oppenheimer (CFO, SVP) will retire from the company at the end of September and Luca Maestri (VP of Finance and corporate controller) will take over the CFO role in June. Mr. Maestri joined Apple in March 2013 and has a reputation for being shareholder friendly. During Peter Oppenheimer’s reign as CFO, Apple’s stock rose by approximately 3,660%, sales grew by 40% per annum to $171 billion in FY:13, and EPS increased by 68% per year. Although it took Apple a bit of time to start returning cash to shareholders, we believe the company will increasingly be more generous with its buyback program. As such, we would not be surprised if a larger buyback and higher cash dividend are announced around the company’s 2Q:FY14 earnings report in April. With Apple’s stock trading at less than 8x (ex-cash) our CY:15 EPS projection, we believe Apple should remain aggressive on its buyback program.

Apple’s Valuation

Our $777 price target is based on nearly 13x our CY:15 pro forma EPS estimate (adjusted for interest income/expense), plus Apple Inc. (NASDAQ:AAPL)’s net cash per share of $157.39.

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