Apple earnings preview: another home run?

The company is trading near record highs in front of earnings. Can it deliver, or will it come up short?

By TheStreet Staff Jul 18, 2012 12:17PM

By Robert Weinstein

 

The countdown begins. On July 24, virtually all of Wall Street will zero in on Apple's (AAPL) earnings after the closing bell.

 

Apple is expected to report another fantastic quarter for shareholders. The consensus estimate for the third-quarter earnings is currently $10.37 a share, an improvement of $2.58 (24.9%) from $7.79 during the same period last year.

 

Last quarter, Apple crushed the estimates with $12.30 a share, a surprise beat of $2.27 each -- 22% above Wall Street's estimates. (Read my latest bullish Apple article: Apple, Builders to Have Opposite Impacts in Second Half)

 

Analysts are in love with this company. Apple is sporting 39 buy or strong buys from a total of 40 analysts covering the company, only 1 hold. No analysts recommend selling. 36 out of 39 analysts rate Apple a strong buy; an increase from 34 analysts a month ago.

 

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Shares have appreciated 69.1% from last year, and the average analyst target price is $747.94. Its 52-week range: $353.21 to $636.23; book value: $109.63; price-to-book: 5.5.

 

The trailing 12-month price-to-earnings ratio is 14.8, the mean fiscal-year price-to-earnings ratio is 12.89, based on earnings of $46.93 per share this year. It's as if everyone is waiting for the "big miss" that never comes.

 

For a company that produces products people love, investors have not demonstrated much of a risk appetite for Apple. Perhaps it's a function of the high share price (that is what I believe), but the most important takeaway is, Apple was a buy on every major dip in the last few years.

 

The company had rising year-over-year revenue of $65.23 billion last fiscal year compared to $42.91 billion in the previous year. The bottom line showed rising year-over-year earnings of $14.01 billion last fiscal year compared to $8.24 billion in the previous year.

 

Apple's previous earnings release was on April 24, and the closing price before was $560.28. Apple's share price has increased more than 8.3%. In the last month alone, shares have climbed 5.37%.

 

Apple trades an average of 14.1 million shares per day with a marketcap of $565.7 billion. Microsoft (MSFT), Research In Motion (RIMM), Nokia (NOK), Hewlett Packard (HPQ), Dell (DELL), Google (GOOG) and Amazon (AMZN) are its biggest competitors. (Microsoft owns and publishes TechBiz, an MSN Money site.)

 

On July 19, Nokia and Microsoft report earnings. The amount of color provided by Nokia in relation to market share from Apple may not help much. We already know Nokia is circling the same drain RIM is. (Read my RIM and NOK article: RIM Earnings Preview: It's Going to Hurt)

 

I previously wrote that Nokia's reported strong Lumia sales appeared artificial. For one thing, the phone was only offered through AT&T (T), and secondly, it was competing at $100 against the iPhone 4S. Needless to say, I was unsurprised to read Nokia recently dropped its price $100, from $499 to $399, and AT&T is now selling Lumias for $49.99.

 

AT&T at one time was the only wireless carrier to offer the iPhone, but the top three carriers offer it and the iPhone is currently available even without a contract.

 

After the Nokia price drop, shares in the Finish Company lost another 10% from Friday's close. Microsoft has backstopped Nokia, with free windows mobile software and other help. Microsoft and Nokia have failed to capture market share away from Apple and Google's Android platforms.

 

Nokia is more or less a penny stock trading near $1.70 per share. Perhaps a "never expiring option" is a better term, but unless Nokia is able to find a market for phones, the prospects are out of service. RIM was once the king of smartphones and invented many of the features we take for granted now.

 

The subscriber base around the world continues to grow for RIM; however, sales in North America have taken the same trajectory as Nokia. RIM isn't dead on the mat, but the company is more than dizzy from receiving the ol' one-two punch. First Android showed up and ripped RIM's face off, and then Apple introduced the iPhone 4 and 4S, effectively stomping on what was left of RIM's head. (Technology earnings -- Will Big Technology Perform or Crash on Earnings?) RIM has delayed OS 10 so many times that many investors are hoping their grandkids will live long enough to see it someday. Even with a fantastic OS 10 release, Apple can't expect to surrender much market share. RIM's ability to produce significant numbers of phones is hobbled from delays and declining production.

 

Microsoft is providing mobile software to other phone producers in Asia and Windows 8 is on its way. The release of Windows 8 may push some customers from Apple back to Microsoft, but don't expect a material impact with guidance and forward estimates.

 

Founded in 1976 and headquartered in Cupertino, Ca., Apple is trading above $600 a share; most investors have gains they would like to protect. One way to approach the upcoming earnings release is to do nothing and let the chips fall where they may. That's a fine approach, if you're comfortable with any outcome.

 

For those who are concerned with an earnings miss, and or a selloff regardless of the reason, options are able to mitigate your risk exposure. There are two ways to use options, one is to buy protection with puts, and the second is to sell calls. Each method has advantages and disadvantages depending on your goals. (RealMoney's Scott Redler provides a technical look at Apple.)

 

Selling calls, also known as selling volatility, is my favorite way to mitigate risk into earnings. Premium generally is elevated and provides an opportunity to gain in a flat market while offering downside protection most of the time. Buying put options mitigates risk when a stock really falls hard and fast.

 

The most active options for Apple's earnings are not even trading yet. The Apple weekly options, which begin on Thursday July 19, will be the expiration to watch. They will expire on Friday, July 27, but most of the volume will happen in the four trading days before and after earnings. (Here's what I think about Amazon: Amazon Isn't Worth Half Its Current Price)

 

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1Comment
Jul 19, 2012 9:27AM
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Brand new day starts with not so good news, more unemployed people...Nothing new with this administration, oh well, lets worry about the markets....Of course futures dropped, not that they are too reliable anyway, but scumbags got another piece of ammo to do their thing today. We will open up but will not be easy to maintain. We can see it already; plenty of manipulators filing in and as usual plenty off the floor...We will probably need some help today...We will see...More later.
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