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Here it is folks, your ultimate guide to how Wall Street is reacting to last night’s Apple earnings catastrophe.As a refresher, Apple offered tepid guidance last night, and missed estimates for iPhone sales.
The stock is off 11%.
Here’s what analysts are saying.
Capitulation Process Seems Well Underway: “It seems the reaction to this EPS report is universally negative – especially since AAPL gave subdued guidance and changed the way it does it (they really mean it). We believe a capitulation process is underway – and while painful – it is healthy since the loftiest expectations should be reined in quite a bit. This spring, Apple should be readying a bevy of new products and services – and when the builds for these products become known – shares may act a lot better. We have seen sentiment turn quickly before with other leaders like Facebook (in 2012) and Google (in 2011). While this recent sell-off and Apple’s execution of late has tested our patience, we will evaluate Apple from here based on whether these products and services create the kind of excitement we are used to. Maintain OW rating.”
Two key (interrelated) questions related to Apple are 1) whether the company has lost its competitive edge and 2) what the right margin profile is longer term. We believe Apple maintains its premium brand image (e.g. iPhone ASP) but needs to adapt to marketplace demands and abandon misperceptions about “one-handed ease of use” (yes many like it, but many don’t) by broadening its iPhone lineup – the same way it abandoned its 7″ tablet stance and delivered a best-in-class product. We believe margins with multiple phone form factors and a lower-end offering for emerging markets could be structurally lower, but this is very much discounted in the share price as discussed below. We lower F13/F14 EPS from $48.95/58.38 to $44.79/51.71 reflecting lower iPhone share, mini cannibalization, and lower gross margin. We cut our price target from $680 to $575 reflecting lower estimates and risk associated with its product transition. BUY maintained.
Three steps to a recovery: none coming imminently, patience required. First, a new product cycle (we expect a high-end iPhone refresh and lower end iPhone later in 2013). Second, increased carrier expansion: while this is clearly happening slower than we thought, we still believe it’s likely over 12 months. Third, increased cash distribution: Apple ended the quarter with $137bn of net cash some ~30% of market cap and 31% onshore so the capacity to distribute exits. While all these catalysts are plausible, none are imminent in our view, meaning patience is required.
We are buyers of AAPL on the pull back following the company’s December quarter earnings report based on our belief that Street numbers will be adequately reset and investors will return to the stock once the potential of new products comes into focus over the next 3-6 months. While we are adjusting our price target to $767, we remain optimistic about shares of AAPL.
The weak Q2 dynamics seem to support our view that Apple is moving into an ex-growth phase in which unit growth is likely to come increasingly at the expense of gross margin declines. The net effect is limited earnings growth, EPS that likely tops-out at $50, which is likely to attract a multiple little better than comparable ex-growth peers such as Microsoft and Cisco. An 8x ex-cash multiple on our EPS forecast of $50 plus $89 in excess cash drives our fair value of $490.
We stand by our recent downgrade and continue to rate the shares Neutral. On lower estimates, our price target falls to $500 from $575.
AAPL reported revs of $54.5B and EPS of $13.81 which beat EPS expectations (vs. Street at $54.5B/$13.33; DB at $53.4B/$12.55). Upside was led by iPhone (48M vs. DB at 45M) and iPad (22.9M vs. DB at 22.0M) which offset light Mac results (4.1M vs. DB at 5.4M). Despite the EPS beat, AAPL revised its guidance format and the combination of margin pressure and decelerating iPhone growth implicit in guidance raises growth concerns. We reset estimates and cut our price target to $575. Trading at $460 in the aftermarket (~7x PE ex cash) we view AAPL as undervalued; maintain Buy.
A tough setback, but the story is not broken
Apple reported 1QFY2013 revenues of $54.51 billion, above our estimate of $53.56 billion and just below consensus of $54.73 billion. EPS of $13.81 was above our estimate of $12.58 and consensus of $13.44. Gross margins of 38.6% and operating margins of 31.6% were above our forecast of 37.0% and 29.4%. iPhone, iPad, and Mac units all fell slightly short of our expectations, although more resilient margins led to the slight EPS beat. Apple’s guidance was essentially what we expected from the typically conservative management team. The problem, and the key disappointment in the call, was that management made it pretty clear that it was moving towards providing more realistic guidance. In this case, the guidance was a definitive disappointment.
Apples and Oranges: Fundamentals and Investor Expectations Continue to Diverge
We reiterate our Overweight rating and Dec-13 price target of $725 on Apple. We are surprised by the sharp correction in shares of Apple in last night’s after-hours trading. At one point, the stock declined 10%, as the company tried to explain its new guidance approach. Without splitting hairs too much, we think the new guidance commentary is not much of a change and could restore beat-and-raise potential to the model.
Downgrade to Hold: Demand Slowdown and Margin Pressure
We are downgrading Apple from Buy to Hold due to: 1) slowdown in iPhone sales is real and material; 2) we believe margins are likely to continue to fall; 3) new guidance methodology implies less potential upside to the model. We cut our estimates and PT from $800 to $500.
Moving into the Value Territory? F1Q13 Results
While we expect growth investors to continue losing interest in the story as earnings growth is unlikely to materialise this year, the stock offers plenty of reasons for value investors to step in at these levels. We reiterate our Buy rating while lowering our PT to $575 from $600.
Reiterate OW. The medium-term risk-reward is attractive with our Base case EPS now close to the Bear case and positive catalysts in F2H13. But near-term catalysts are limited as Apple faces tougher comps in C1Q13; as a result, Apple is being removed from the Best Ideas list.
After disappointing quarter, new products are needed to drive future growth
The results for Apple’s two key products suggest that iPhones and iPads are now growing broadly in line with the overall market for smartphones and tablets, i.e., much slower than growth rates seen in the last few years. Additionally, the margins have shrunk considerably, with the overall gross margin down by more than 600bp YoY. With slower growth and greater competition, a rapid recovery looks unlikely to us, at least based on the current product line-up. We have therefore cut back dramatically on growth rates for the iPhone, with revised growth of 12% for FY13 (previously 20%). We have also taken down our assumed margins, looking for a 45% margin on iPhones (over 50% previously) and 30% on iPads (35% previously). The net impact of these changes is to cut our EPS forecasts by over 25% for FY13 and FY14.
Given the decline in the share price, we are lowering our 12-month price target to $888.00 from $1,111.00 for Buy-rated Apple, which is based on over 13x (S&P 500 multiple) our interest expense/income adjusted CY14 pro forma EPS estimate plus net cash per share of $144.75. This equates to a straight P/E of just over 15x our CY13 EPS estimate, and is well below the mid-20x’s multiple of 2006-2010.
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