The eyes of the world will be on Apple (NASDAQ:AAPL) this week as the company with more cash than some countries releases its earnings report. All the numbers will matter to some investors, but there's at least one that Foolish investors should disregard completely.
While Fools should overlook one number on the Apple report, there are three other items that long term shareholders should pay close attention to.
In the weekly tech edition of Industry Focus Fool analyst Nathan Hamilton previews Apple's earnings report to help investors weed through the barrage of numbers being discussed.
Sean O'Reilly: It's Sweater Day on Industry Focus. Find out why on this tech edition!
Howdy everybody, I am Sean O'Reilly, with the one and only Nathan Hamilton. For those of you that are listening on the podcast, it is in fact Sweater Day. We're both wearing sweaters and the reason is, of course, it's 20°!
Nathan Hamilton: Yes. I guess the people listening in that are seeing this by video know that we are wearing some pretty closely matching -- though dapperly -- navy blue sweaters.
O'Reilly: Yes, you walked into the studio here and you were like, "Ah, we dressed the same!"
Hamilton: What everyone can't see is we're pretty much wearing the same color pants.
O'Reilly: We've got the khakis on and everything. It's very embarrassing. Moving on from, obviously, our awesome fashion sense ...
Hamilton: More important stuff.
O'Reilly: More important stuff. Apple, the world's largest publicly traded corporation, is reporting earnings next week. They are the largest, right?
Hamilton: Some could say they are a fashion item as well.
O'Reilly: They are. Yes, actually, this is so stylish!
They are reporting earnings next week. We want to talk about one number you should ignore, and three that you shouldn't.
O'Reilly: What is the thing that I should just not even pay attention to, not even care about, whatever?
Hamilton: There are a lot of numbers out there, and of course being, like you said, the biggest company in the world...
O'Reilly: iPhone sales, blah, blah blah ...
Hamilton: So many numbers thrown out.
O'Reilly: Their balance sheet is bigger than some countries.
Hamilton: Yes, exactly. But here's the one number which I think investors should ignore when Apple reports earning, and it's $2.59.
O'Reilly: What is that? Is that the price I paid for my Starbucks (NASDAQ: SBUX)?
Hamilton: Some can probably guess, but it's the EPS number. That's a consensus forecast for what Apple's earnings per share are going to be when they report.
O'Reilly: Now a lot of people, when a company misses by even a couple pennies in earnings per share, the stock goes crazy. Why do you not care about that?
Hamilton: I think part of it comes down to the timeframe that I'm looking at investing in Apple, versus maybe the short-termism of either the sell-side, trading; anything which is catalyst driven investing in Apple stock.
I'm looking several-year, beyond that. Because Apple, if you look at it over the last four quarters, they've beaten earnings per share by about 7.71%, and that's the consensus earnings per share surprise.
O'Reilly: So, being a Foolish investor, long term, you don't care if it goes crazy next week.
Hamilton: Yes. It doesn't really matter in the long term or the long time in our investing timeframe. Who cares what the earnings per share number is? Does the earnings report of $2.59 tell me anything about five years from now, with Apple? I would argue absolutely not.
You have to look at where this number is coming from. In reality, it's a very complex way of putting an Excel spreadsheet together to pull numbers out of the air.
O'Reilly: Right, and that $2.59 number is a gap number. As we know, any serious analyst gives a nod and a wink to any gap number.
Hamilton: Yes. It's not cash flow, it doesn't show actual cash coming into the business. You have to look at it this way, on what it means for the Wall Street analysts, or any sell-side analyst making a call on the earnings per share.
There's one really telling survey that I came across recently, and it's from Inside the Black Box. What they did is they asked 365 sell-side analysts what determines their compensation. Guess what was ranked dead last?
O'Reilly: Earnings per share.
Hamilton: Accuracy and timeliness of their forecast.
O'Reilly: Oh, yeah.
Hamilton: It absolutely means nothing.
O'Reilly: So they just throw this number out there for the fun of it.
Hamilton: It's not throwing out a number absolutely ...
O'Reilly: They think about it.
Hamilton: If you look at what is ranked number one, it's industry knowledge for the sell-side analysts, but really it's just looking beyond that $2.59 number. It's really not a huge driver, and I think investors for the long term shouldn't pay too much attention to it.
Hey, if you're a trader, sure. Go ahead, pay attention to it. It's worthwhile. It could move the stock if they surprise upside, downside and other numbers. But for my purposes, I think investors should ignore it.
O'Reilly: Wise advice.
Hamilton: Hopefully wise advice!
O'Reilly: Hopefully. Crossing my fingers.
A couple of the numbers that people should be paying attention to; the first one is half their revenue has come from the iPhone. They're looking to sell about 51.03 million units -- here's one of them, ooh, ahh! -- I'm really proud of this. I got this a week ago!
What can you tell me about the iPhone? What should we be looking for?
Hamilton: Correction -- and I should have clarified this before -- but 51.03 million is what they sold in the year-ago quarter, in the December quarter.
O'Reilly: Aha, OK, so we're looking for the year-over-year change.
Hamilton: Yes. The number to pay attention to, 51.03 million, what Wall Street -- and I know I had a little spiel of Wall Street and what they make with consensus targets -- but the consensus estimate is right around 66.5 million.
O'Reilly: That's a lot of phones.
Hamilton: It is, and here's the thing to really pay attention to. Sure, 66.5. Definitely keep it in mind, but you want to see the trend. We know, or we can guess at this point, that iPhone sales are doing very well this past quarter.
We want to see that trend moving up over time, and it's not just this quarter. We want to see in next quarter that, compared to the year prior, the number is trending positively. You have to look at it.
You mentioned it's a huge driver of revenue. In recent quarters it's been approximately 56% of Apple's revenue; completely dominates it.
O'Reilly: Does that scare you at all? At what point do they change the name of the company from Apple to iPhone?
Hamilton: Some areas yes, some areas no. If you look at the ubiquity of smartphones globally and what Apple is doing, there are some positives.
O'Reilly: They get us to buy the watches, and then you're even more invested in the phone.
Hamilton: Yes, but you also have to look at it as well; it will dominate Apple's revenues, but Apple has rolled out the phone to more countries than it ever has, and that's been a huge driver. If we look back to October of 2014, they rolled it out to 30-plus additional markets. I haven't seen anything recently, but their target was north of 100 markets at the end of 2014.
Hamilton: Yes, sorry. Countries.
O'Reilly: That's like half the planet, and probably even a bigger portion of the population.
Hamilton: Yes, and that's what you want to see. If you look at the trend of the numbers increasing over time that's what you want to see, and are they going to more markets? Keeping the premium price point and still gaining traction? That's really the key driver.
O'Reilly: Yes. I want to see how many iPhones they sell in Croatia.
Hamilton: A million? I don't know.
O'Reilly: A million. I don't know, yes.
Hamilton: Maybe even that's a lot. I don't know what the population of Croatia is.
O'Reilly: The next big number that we wanted to actually pay attention to is 37.93%. Explain that for everybody.
Hamilton: For those that might be paying a little bit closer attention, you can assume that's a gross margin number and that is similar to the iPhone estimate we just discussed. That's the year-ago quarter, and that's what they hit.
Why I think it's important to focus on 37.93 exactly is Apple is guiding for some fairly good gross margins going forward, and 2012 was a peak. You had the iPhone 4S roll out. It was the same form factor as the iPhone 4 from previous timeframes, so really they got an upgrade in prices, they saw the gross margins move up pretty significantly ...
O'Reilly: But it didn't cost them much more to make the phone.
Hamilton: Exactly. You look at it, what does it mean for Apple now? You've got the iPhone 6 and the 6S.
O'Reilly: Do we have any indication because, correct me if I'm wrong, the Plus costs $50 or $100 more?
Hamilton: Yes. The actual phones range from $649 to $949, all the way up to the highest ...
O'Reilly: Depending on the hard drive.
Hamilton: Yes, I think it's 128 GB.
O'Reilly: How much more does the Plus cost them to make?
Hamilton: I don't know so much on the Plus, but if you look at the iPhone 6 ...
O'Reilly: I'm very curious to see that.
Hamilton: Yes, it would be interesting to see.
If you look at the iPhone 6, compared to say the 5S, the base model is 16 GB, comparing the two. IHS estimates that the bill of materials is only 3% higher for the iPhone 6, but the actual selling price is 18% higher, so that's a gross margin contribution.
O'Reilly: That bodes well for their gross margin because, correct me if I'm wrong, the Plus is selling really well.
Hamilton: Yes, their indications point to the Plus selling pretty well. You've also got the fact that the 6 goes from 16 GB to 64 GB.
O'Reilly: All the way up.
Hamilton: It skips that 32 GB level that they had previously, so really there again you get a $100 increase on the price, a little bit of increase ...
O'Reilly: For just a little bigger hard drive. Everything else is the same.
Hamilton: Yes, and it's the same with the 6 Plus. They have the same layout.
O'Reilly: Really? Interesting.
Hamilton: I think that's a key point to focus on. Like I said, margins peaked around 47% in 2012. We won't see that for Apple, but look for some gross margin trends increasing over time, hopefully.
O'Reilly: Very cool. Last but not least, and perhaps the biggest number on our list, is $130 billion.
Hamilton: Yes. Apple followers will know what that means, but it is the size of their total capital return program; share buybacks, dividends, and so forth.
O'Reilly: I hope you're happy, Carl Icahn!
Hamilton: Let's put it in perspective. That's the GDP of Ecuador.
O'Reilly: Huge numbers.
Hamilton: Huge numbers.
O'Reilly: Nine zeroes.
Hamilton: They're going to return that to shareholders. I am a shareholder -- are you?
O'Reilly: No, not yet.
Hamilton: Okay, so they won't return the money to you unless you are. But all the shareholders, $130 billion ...
O'Reilly: I gave them money. You're welcome.
Hamilton: Exactly! Now it's going to me.
O'Reilly: Yes, now it's going to you.
Hamilton: In a very roundabout way.
You really have to put that in perspective. It's bigger than the social media industry as a whole. That's just the money that Apple is returning to shareholders. As we see, up until this point Apple has returned approximately, I believe it's just north of $90 billion. You have to look at it, their cash hoard over that same timeframe has increased.
O'Reilly: And you've got Carl Icahn out there calling for $200 a share, a $1 trillion corporation at that point. Can you imagine going back in time and just showing the balance sheet 15 years ago, to an Apple shareholder? It would blow people away.
Hamilton: But they were near bankrupt.
O'Reilly: Yes. That's crazy.
Hamilton: It's funny you mention that, actually. In one of my classes in school, it was an accounting class and our professor did that same exact thing. He blanked out the name of the company at the top of the 10-K.
O'Reilly: Balance sheet, yes.
Hamilton: He's like, "What company is this?" I think it was the late '90s. I can't remember the exact year, but nobody guessed it.
They were like, "It's Apple."
O'Reilly: It's Apple, yes. Benjamin Graham used to do that at his class at Columbia. He did it with General Motors (NYSE: GM) or whatever. It's like, "Surprise!"
Hamilton: Yes. We're looking at the quarter, so they're not going to return $130 billion this quarter.
O'Reilly: Not in three months.
Hamilton: But again, in the broad scheme or the big picture, we want to see ... I think Apple could certainly bump up that number. Some believe that they will. We know the dividend's going to increase annually, but that's not going to make a dent in the cash pile, at all.
O'Reilly: Wow. Very cool. All right, there you have it folks, one number to not care about and three numbers that are actually really, really important for long-term Apple shareholders. Thanks for listening, thank you Nathan, and Fool on, everybody!
Nathan Hamilton owns shares of Apple. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Apple, General Motors, and Starbucks. The Motley Fool owns shares of Apple and Starbucks. 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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