Conflicting Clues From Apple’s Supply Chain

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Apple shares slipped a bit today after analysts at Credit Suisse said they have detected weakness in the company’s supply chain. Their report follows another from Drexel Hamilton that suggests the supply chain is actually strong… or at least it was as recently as last month anyway.

Apple Monitor shows strength

In a report dated Nov. 9, Drexel Hamilton analyst Brian White said all the companies in their Apple Monitor, which is made up of Taiwanese suppliers, have reported their sales in October. The results were “stronger than typical seasonality,” says White. That places Apple in a solid position heading into the all-important holiday shopping season.

Sales in his Apple Monitor increased 9% month over month, beating the average of a 6% increase from the last nine years. White notes that this provides evidence of health in the company’s supply chain.

One weak area in October was iPhone manufacturer Pegatron. The company recorded a 6% month over month increase, compared to last year’s 13% month over month increase in October. However, this follows a “huge” uptick in sales for the month before, White reports. Pegatron recorded a massive 119% month over month increase in sales in September because of the ramp of production for the iPhone 6S. Also that 119% increase was almost double last year’s 63% month over month increase with the ramp of the iPhone 6 lineup.

Apple well-positioned this holiday season?

White noted that the holiday quarter is typically Apple’s strongest quarter because of the holiday shopping season. He thinks that with the addition of the Apple Watch, the iPad Pro, and the updated Apple TV set-top box, the company’s product portfolio is “positioned better than ever” this season.

The December quarter hasn’t just been good for Apple’s sales, however, as White notes that it has also been the strongest quarter of the year for the company’s stock. He said that this year the stock bucked the trend and has declined 3% since the end of the June quarter. If Apple stock had been following the “typical seasonal patterns,” he said, then it would end the year at almost $166 per share.

Apple shares affected by newer supply chain reports

Interestingly, White’s report runs counter to reports dated Nov. 10 from Credit Suisse analyst Kulbinder Garcha and team. While White focused on supply chain sales in October, it appears as if Credit Suisse’s data is fresher. They report that now Apple’s supply chain is weakening, particularly in terms of iPhone orders.

Shares of Apple fell by as much as 2.63% to $117.40 per share during regular trading hours, continuing to buck the historical trend White noted in his report. The Credit Suisse team expects this updated news from the supply chain to weigh on Apple shares in the near term, and so far, they’re right.

Apple cuts component orders

Garcha and team estimate that Apple cut its component orders by as much as 10%, with the driver of those cuts appearing to be weak demand for the iPhone 6S. They estimate overall builds of the device at fewer than 80 million for the December quarter. For the March quarter, they estimate builds at between 55 million and 60 million. As a result, they cut their iPhone units for the 2016 calendar year from 242 million to 222 million.

Despite the near term warnings from Apple’s supply chain, they say this isn’t the end of the company. They expect the iPhone installed base to reach 615 million over time as its share of the market has expanded 24% in the last year and will probably continue to expand.

They also mentioned the new upgrade plans, which should continue to drive increases in units in the long term. Further, the Credit Suisse team said Apple’s guidance for capital expenditures and purchase obligations suggest the potential for 25% upside to their iOS units. They also have found evidence that the company might be planning to launch a refreshed 4-inch iPhone at some point in the next year.

A better low-end iPhone?

The iPhone 5C, Apple’s last attempt at a low-end iPhone, didn’t really go over too well with consumers because it was basically an iPhone 5 in a plastic casing. However, Garcha and team think this time will be different. They suggest that a 4-inch iPhone without the Force Touch technology that’s in the iPhone 6S lineup “would be a noticeably different form factor” compared to the other products.

As a result, they expect it to be incremental to Apple’s revenue and earnings per share. In fact, they estimate that a 4-inch iPhone could add as much as 62 cents per share in earnings for Apple’s 2017 calendar year if it is launched in 2016. In the long term, they see the possibility of the device pushing iPhone units toward 265 million, even if allowing for a cannibalization rate of 4%.

Credit Suisse has an Outperform rating and $140 per share price target on Apple, while Drexel Hamilton rates the stock as a Buy with a $200 per share price target.


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