Analysts' Choice: All Eyes On Apple's March Report

4/11/2016


  Recent Price
$111
  Dividend
$2.08
  Yield
1.9%
  P/E Ratio
12
  Shares (millions)
5,594
  Long-Term Debt As % Of Capital
29%
  52-Week Price Range
$134.54 - $92.00

Apple ($111; AAPL) shares plunged nearly 7% on the first day of trading after the company reported December-quarter results. Sales growth decelerated sharply, and management warned that revenue would decline 9% to 14% in the March quarter, marking the first quarterly decline since 2003 and prompting a fresh round of stories declaring that Apple's best days are behind it.

Concerns centered on the prospects of the iPhone (69% of revenue for the 12 months ended December), which dwarfs Apple's other offerings, such as Macintosh computers (11%), tablets (10%), watches (less than 2%), and services for mobile payments and music (about 9%).

Despite all the hand-wringing, Apple shares soon recovered and have bounced 11% since the report. With its stock gaining momentum, Apple now approaches its March-quarter report, likely to arrive in the last week of April.

The consensus targets earnings per share of $2.00, down 14%. Apple seems likely to top that target, given that it last missed a consensus profit estimate in the March 2013 quarter. Of greater importance, in our mind, are updates that Apple could provide on the following developments:

Insight into initial sales for the iPhone SE. Priced at $399, the iPhone SE gives consumers an entry point nearly 40% below the iPhone 6S, which could prove especially attractive in emerging markets, such as China and India, while limiting cannibalization of Apple's more expensive phones in wealthier markets.

Whether existing iPhone users remain compelled to upgrade to newer models, including the SE. Industry researcher Gartner ($89; IT) projects the global smartphone market will grow just 7% in 2016 and hold flat in North America and China — two markets that combine for more than half of Apple's sales. Apple says about 40% of iPhone users have upgraded to the iPhone 6 or 6S, and its ability to shorten the upgrade cycle will become increasingly important as the total market's growth slows.

Continuation of strong cash flow. Both cash from operations and free cash flow rose 6% in the 12 months ended December, the latter totaling $51.64 billion. Cash and marketable securities equalled $215.74 billion, versus $62.96 billion in debt. About 93% of that cash is held overseas.

A decent dividend hike, consistent with CEO Tim Cook's vow in February to grow Apple's distribution annually. Apple typically announces its dividend increases in late April, and the past three hikes have ranged from 8% to 15%. A 10% hike would push the quarterly dividend to $0.57 per share, for a yield of 2.1%. Annual dividend payments would rise to $12.8 billion at the current share count. Bumping up the dividend 20% would give Apple a 2.3% yield.

Despite the stock's recent bounce, Apple trades at just 12 times trailing earnings, a 15% discount to its five-year average and nearly 24% below the median for S&P 1500 technology hardware & equipment stocks. Excluding net cash and securities of $27 per share, Apple's P/E ratio dips below nine.

An annual report for Apple Inc. can be obtained at 1 Infinite Loop, Cupertino, CA 95014; (408) 996-1010; www.apple.com.

APPLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '15
3.28
vs.
3.06
1%
123.82
-
104.82
13 - 11
Sep '15
1.96
vs.
1.42
22%
132.97
-
92.00
15 - 11
Jun '15
1.85
vs.
1.28
33%
134.54
-
123.10
17 - 15
Mar '15
2.33
vs.
1.66
27%
133.60
-
104.63
18 - 14
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
233.72
9.20
1.98
134.54
-
92.00
15 - 10
2014
182.80
6.43
1.81
103.74
-
68.33
16 - 11
2013
170.91
5.66
1.63
96.68
-
55.01
17 - 10
2012
156.51
6.31
0.38
100.72
-
50.61
16 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
45
88
98
87
25
49

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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