Apple Inc. (AAPL): Analysis By WFC Shows Numerous One Time Expenses

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Wells Fargo Securities says Apple Inc. (NASDAQ:AAPL)’s latest 10-K shows that the iPhone maker’s gross margin guidance was conservative and September gross margins were affected by one-time items. Wells Fargo & Company (NYSE:WFC) estimates Apple Inc. (NASDAQ:AAPL) share prices to be in the range of $710-$730, based on the P/E multiple of 14x FY2013 EPS estimate of $50.30.

Here are the key highlights from the company’s 10-K/Q filings.

1- Gross Margin In September Negatively Impacted By One-Time Items

The deferred margin on component sale, selling expenses on the balance sheet, and accrued marketing increased during the September quarter, thus negatively impacting the September quarter by $0.43 in earnings per share. Though Q-o-Q fluctuations aren’t unusual, a particular quarter may be affected by heavy swings in these items. Wells Fargo & Company (NYSE:WFC) expects a portion of deferred margins on component sales to reverse during the December quarter. The accrued marketing and selling expenses were caused by iPhone 4/4S price protection (Remember Apple Inc. (NASDAQ:AAPL) reduced the prices of iPhone 4 after releasing iPhone 5?). So, Apple’s 36 percent gross margin guidance for the December quarter seems conservative.

Apple Inc. (AAPL): Analysis By WFC Shows Numerous One Time Expenses



2- Apple Is Still In The State of Warranty Over-accrual, That Will Provide Future Gross Margin Tailwinds

During the September quarter, the tech giant accrued $73 million more than it spent. And, with the new product release, accruals are likely to be higher than expenses. Wells Fargo estimates that Apple Inc. (NASDAQ:AAPL) has a general over-accrual of over $1 billion. If these are reversed out, they would benefit gross margin by approximately $0.82 in EPS.

3- Capital Expenditure Guidance of $10B in FY13

Of the $10 billion capital expenditure, the company will spend $850 million on opening 30-35 new retail stores, and $9.15 billion for other capex, like product tooling and manufacturing process equipment, corporate facilities, and infrastructure, etc. It is higher than the cash capex of $8.3 billion in FY12.

4- Allowances for Doubtful Accounts Still Higher Than Last Year

During the past few quarters, Apple Inc. (NASDAQ:AAPL) has slightly increased its allowance for doubtful accounts, but it still remains below 2010 levels. Wells Fargo & Company (NYSE:WFC) estimates that if allowances remain the same on percentage of sales basis, rather than prior six quarter average, it will result into $0.01-0.02 in EPS benefits.

5- Number of Full-time Retail Employees Increased To 42,400

 Apple Inc. (NASDAQ:AAPL) opened 33 retail stores in 2012, and expects to open another 30-35 stores in 2013. The number of retail employees decreased for the first time in the June quarter, since March 2010, but increased to the “normal” figure of 42,400 employees. Despite the recent change at the top management of the retail business, Wells Fargo & Company (NYSE:WFC) analysts expect the general trend of opening new stores will continue.

Apple Inc. (AAPL): Analysis By WFC Shows Numerous One Time Expenses

Additionally, the company’s cash reserves and investments have reached as high as 35 percent of Apple’s total market capitalization.

Wells Fargo & Company (NYSE:WFC) senior analyst Maynard Um believes that Apple Inc. (NASDAQ:AAPL) shares are still underappreciated. With the launch of iPhone 5, the company has entered the largest product cycle in the history of consumer electronics. The company is well-positioned to beat expectations in tablet, smartphone, and PC markets.

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