Apple Earnings: What the Media Got Wrong

Following a six-day winning streak, U.S. stocks closed lower on Wednesday, as the benchmark S&P 500 lost 0.2%, while the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 0.1%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) , which has been somewhat volatile recently, was down 0.8%, but there is good reason to believe it will reverse those losses tomorrow as two tech heavyweights, Apple (NASDAQ: AAPL  ) and Facebook (NASDAQ: FB  ) reported quarterly results that are finding favor with investors in today's after-hours session. With regard to Apple, however, some of this enthusiasm may be misplaced.

The 7-for-1 stock split doesn't matter in the least
Let's get something out of the way right at the outset: The financial media may be reporting Apple's announced 7-for-1 stock split this as if it were important news (I saw it referred to as a "big" stock split in at least two headlines -- whatever that means), but it is has no positive implications whatsoever. If anything, I would say it's a slight negative, as it suggests an excessive preoccupation with the stock's liquidity (CEO Tim Cook said the stock is intended to make the shares more accessible to small investors.)

On to things that do matter.

It's a beat!
Sure, it's hardly unusual for Apple to beat Wall Street's estimates on revenue and earnings per share -- the company is very skillful at providing earnings guidance and managing analysts' expectations -- however, the size of the "beat" in the March quarter is greater than that which we have seen over the prior four quarters:

 Metric

% Beat, March Quarter

Average % Beat, Prior 4 Quarters

Revenue

4.8%

1.4%

EPS

14.3%

2.6%

Source: Author's calculations, S&P Capital IQ.

One of the drivers behind this result were iPhone sales of 43.7 million units, easily surpassing analysts' forecast for 38.2 million (the iPhone is by far Apple's largest contributor to company's revenues and profits). Drilling down, strong iPhone sales were partially the product of Apple's new distribution agreement with China Mobile. As new Chief Financial Officer Luca Maestri said on a call with analysts and investors: "The addition of China Mobile coupled with great response to our more affordably priced iPhone 4S led to an all-time quarterly record for iPhone sales in greater China."

The guidance Apple provided for its fiscal third quarter (ending in June) is roughly in line with analyst estimates, with a range of $36 billion to $38 billion for revenue against a consensus estimate of 37.8 billion and a range for gross margin of 37% to 38%, where analysts were looking for 37.3%.

Buybacks that matter
Granted, stock buybacks don't have the same cool quotient as a new product, but it certainly helps to soothe investors' impatience. Apple has authorized an additional $30 billion in share repurchases to be executed before the end of 2015 -- a significant increase in its $100 billion capital return program. Better yet, the buybacks are not a perfunctory "throw money at the stock" action -- Tim Cook said he believes the current stock price still doesn't reflect the value of the company. Incidentally, legendary investor Carl Icahn, who is one of the company's largest shareholders, said the same thing this afternoon. After tomorrow's pop in the share price, the gap with fair value will have narrowed a little bit.

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Read/Post Comments (7) | Recommend This Article (6)

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  • Report this Comment On April 23, 2014, at 7:52 PM, MBfool wrote:

    The big "got wrong" thing is about the split? Big whoopee. The real deal is the magnitude of beat which you nicely document. But, why the negative headline bait?!

  • Report this Comment On April 23, 2014, at 7:52 PM, PolicyGuy wrote:

    I believe that the stock split may have positive implications. If you've been watching the open interest in weekly options for the last few years, you have probably noticed that the stock has consistently pinned to the maximum pain level almost every week. Since option buyers have generally been bullish on the stock, this has effectively been putting the brakes on any consistent upward movement in the stock.

    The stock split should help reduce this phenomenon of the tail wagging the dog. I for one think it will be a good thing if the stock price is less affected by the market makers selling all those options contracts, even though I have had some success with selling weekly covered calls at levels just above the maximum pain points.

  • Report this Comment On April 23, 2014, at 8:32 PM, dbtuner wrote:

    The split now allows Apple to be added to the Dow 30 Index. That is billions of shares that will be gobbled up by funds that track that index along with the prestige

  • Report this Comment On April 23, 2014, at 8:39 PM, drsesibley wrote:

    While stock splits do not change anything in terms fundamentals, as someone with 100 shares valued at $560 now will have 700 shares valued at $80 after the split, and $11.62 EPS becomes $1.66, the price matters in terms of investor psychology. It is easier for a stock to go up $20 from $80 per share to $100 than it is for a stock to go up from $560 to $700. To go from $560 to $700, Apple shares would encounter the questions, "Is a share of Apple worth $600?" and "Is a share of Apple worth $625?" and $650 and $675.

    Also, the 7-for-1 split is strange. According to Howard Silverblatt, senior index analyst at S&P Down Jones Indices, there have been three splits since 1980 that had a split ratio larger than Apple's. All three were 10-for-1 splits. I don't think that the strange 7-to-1 ratio is arbitrary. Because stock splits have zero impact on fundamentals, why would Apple not use a nice round number (like 10) for the stock split ratio? All I can come up with is that $700 divided by 7 is a nice even number. Apple is trying to telegraph that it is worth $700 per share at the current share price.

  • Report this Comment On April 23, 2014, at 9:36 PM, gjacer wrote:

    The split is ad??? Really!!!

    This guy probably likes DDD and TCS

  • Report this Comment On April 24, 2014, at 1:06 AM, Jjkiam wrote:

    To Dbtuner thanks I hadn't really appreciated how the split would make Apple's potential inclusion in the Dow 30 more likely! Wow that is a lot of addtl fund buyers entering the Apple game

  • Report this Comment On April 24, 2014, at 3:33 AM, Interventizio wrote:

    the stock split "...suggests an excessive preoccupation with the stock's liquidity (CEO Tim Cook said the stock is intended to make the shares more accessible to small investors.)" This is a good point, but there is nothing wrong with this.

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