Apple: A Buy Before Earnings?

Apple's revenue and earnings might surprise to the upside as the company's deal with China Mobile goes into effect amid very conservative guidance for the quarter.

Apr 14, 2014 at 10:45AM

Apple's (NASDAQ:AAPL) stock price has been hovering in the low $500s for a while now, and the company gave very conservative guidance for the current quarter. Apple's products are still delighting consumers in the U.S. and abroad, and the company's revenue and earnings should reflect that going forward.

Low expectations
Apple's senior management kept the company's expectations very low for the second quarter of fiscal 2014. Management's revenue guidance stood at $42 billion-$44 billion, with the gross margin expected to be at 37%-38%. This lackluster guidance points to flat to low-single-digit revenue growth on a year-over-year basis, which led to a sell-off in the company's stock. 

However, Apple's megadeal with the largest carrier in the world, China Mobile (NYSE:CHL), will start appearing in the company's fundamentals. This should be provide a substantial tailwind for the company's revenue growth. China Mobile said it sold 1 million iPhones in the month of February, and this run rate should pick up as iPhones are sold in more cities in China and the penetration rate picks up.

Apple's stock sold off after the company released record revenue in the last quarter. And the company was very opportunistic in buying back $14 billion of stock within two weeks of the earnings. That should aid Apple's earnings-per-share growth in the near term. In the last quarter, Apple's EPS grew 5%, year over year, to $14.50, and this large buyback in the current quarter should ensure that earnings growth continues. 

The company still has a cash war chest of $159 billion, and only has $17 billion of long-term debt. Apple can easily increase its cash dividend by another 10%-20% and also hike its buyback plan substantially after the current one is fully executed. However, large institutional investors want to see more product innovation from the company, not just capital returns.  

Product releases
Apple hasn't unveiled any new products in 2014 yet, but CEO Tim Cook has repeatedly stated that the company would be making a number of big announcements during the year. An iPhone 6 is widely anticipated from Apple sometime in 2014, and speculation has surrounded on some form of wearable technology. 

Apple continued to lose market share to Google Android OS in the smartphone space. In the holiday quarter, the market share of iOS stood at 17.6% against Android's market share of 78.1%, according to IDC. The combined market share of Google and Apple stood at a staggering 95.7% -- pretty much cornering the market. 

Investors, analysts, and Apple's large customer base are all eagerly awaiting Apple's rumored wearable devices, and that can potentially be a big driver for the company's revenue and earnings in the near term.

The bottom line
The company's huge share-repurchase program should aid its EPS growth in the near term.  Deutsche Bank recently rated Apple a "buy" with $650 price target, and stated that its valuation models don't factor in new products. So any major product release can push the stock price above the target price. Therefore, I think it's a buy.

Apple has many options to put its cash to use. The company can potentially step out of its historical strategy and make a few multi-billion-dollar acquisitions to ensure growth is in place, while getting more carrier deals into the fold will ensure that Apple's iPhone sales remain robust as well.

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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