Apple's (NASDAQ:AAPL) third-quarter earnings report is just around the corner. With the stock up about 25% in the past three months, the pressure is certainly on. Can Apple deliver? I think so.
Mark your calendar. The results for Apple's important third fiscal quarter will be released on July 22.
Here are two important areas I'll be watching, and two related predictions.
1. iPhone sales will be huge
Obviously, iPhones will be a key focus when Apple shares third-quarter results. The segment accounts for more than half of Apple's revenue, and likely an even larger portion of its operating profits.
The consensus analyst estimate for Apple's iPhone sales during the quarter is for about 35 million iPhones, or 12% year-over-year growth in unit sales. This would mark record Q3 iPhone sales for Apple.
But I'm betting on Morgan Stanley analyst Katy Huberty's projection for 39 million iPhones sold during the quarter. Not only has Huberty's AlphaWise survey proven to be more accurate than the consensus analyst estimate, but 25% year-over-year growth in unit sales for the segment seems more realistic; the continued rollout of China Moble's LTE network, the benefit of having China's and Japan's largest carriers now selling the iPhone (compared to the year-ago quarter when they weren't), and increasingly favorable upgrade terms for wireless subscribers in the U.S. should all serve as catalysts for the important segment during the quarter.
2. Earnings growth will accelerate
As Apple's largest and most lucrative segment, 25% growth in iPhone unit sales should have a meaningful impact on Apple's bottom line. Further, given Apple's share repurchases in the past three quarters, combined with a likely large number of shares purchased during Q3, share repurchases alone could help boost EPS 10%.
Further, Apple's improving gross profit margins should help Apple in its EPS growth. Apple is expecting a gross profit margin between 37 and 38 percent, while in the year-ago quarter, gross profit margin came in at 36.9%. Given that Apple has been coming in at the high-end, or above, its gross profit margin guidance in recent quarters, Q3 2014 gross profit margin is likely to be about 100 basis points greater than the gross profit margin reported Q3 2012.
With these assumptions, Apple's earnings-per-share growth during the quarter should exceed last quarter's 15% growth. Q3 EPS growth in excess of 15% would beat the current consensus analyst estimate for 14% growth.
While none of these outcomes are guaranteed, investors can use these predictions as a basis for expectations going into the quarter. If Apple does pull off such meaningful growth in both iPhones and EPS, the stock would continue to look cheap at these levels. Trading at a price-to-earnings ratio of just 15.9, there is very little EPS growth priced into the stock.