Apple Earnings: What the Media Got Wrong

Solid beats and increased buybacks were the key. (Don't mind the stock split!)

Apr 23, 2014 at 7:00PM
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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.

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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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Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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