Earnings Analysis: Apple (AAPL)
Apple announced revenues of $84.3B, which was below the adjusted consensus of $83.97B and earnings just beat expectations of $4.17 by coming in at $4.18. It's important to note that these estimates were adjusted down based upon the earnings miss notification that was provided at the beginning of the month. However, it's equally important to note that it's not as bad as analysts were expecting. When you get a preannouncement, the key certainly won't be the past numbers, as they've already set expectations there. The key information is going to be more about the deeper details as well as the forward guidance and readthrough on the current quarter performance to date. We'll get to all of that in this recap, but let's start with the deeper numbers on the Quarter.
To start with, the cause of the poor performance in the quarter was related to iPhone sales - particularly in China. As such, it's no surprise to hear that iPhone revenues were down 15% year over year to $51.98B. That seems to be the only real under performer, though, given Mac sales were up 9% to 7.42B and iPad sales were up 17% to $6.73B. Clearly those items are a much smaller portion of the revenues for the company, though. In addition to this, wearables and home accessories (iWatch, iHome, earPods, etc) rose 33% to $7.1B and Services grew 19%, growing to above $10.8B, as the company preannounced, to $10.9B. All of these numbers came in above analyst expectations, which shows how negative they were.
China was the clear factor as it's sales growth was down 27% compared to a year ago. The rest of the world held up well, overall, despite management's commentary calling out global economic slowdowns. The company spent about $8.2B in share buybacks, which was probably ill-advised, given how the stock got hit afterwards. That said, the rate of buybacks is slower than before and the company stated they want to be "more disciplined," which means they want to take better advantage of market conditions. Those buybacks are a strong reason for why earnings were up despite revenues down. They still have $245B in cash and only $115 in debt. The company has a goal to become net cash neutral, so don't be surprised to see more share buybacks, as they still have around $130B to go before they reach the neutral point. From a services perspective, the company has provided information, for the first time, stating that services margins are 62.8%, compared to iPhone which was 34.3%. Add to that a strong and all time high installed base and subscription growth at around 120M per year with the company looking to expand on offerings, and you start to hear more details around the impact of services, which is a reason to hold this stock.
Finally, looking more ahead, guidance was a little light with revenues expected to be around $55 - $59B, while analysts were expecting $58.9B. There will be a 2% forex hit anticipated as part of those reduced earnings and maybe the analysts are thinking the company is setting up for a number they can hit. Looking at risks going forward, it's hard to say we're out of the woods yet. The Fed has gotten softer, which should help keep the strength of the dollar and forex hits in check, but the trade war that is still wreaking havoc on the Chinese economy is still unresolved. Even if a deal is struck, there's no guarantee that their economy will take off again, either. Despite the fact that the stock took off today, I still feel a little cautious. You have to believe that the deal will be struck and everything will be fine and I'm just not there yet. I certainly don't want to be pessimistic either, because if a deal is struck, I do see the stock going higher still. I just don't feel the risk/reward for the price after the run is good. I would wait for a pullback - maybe into the mid to upper 150s before I think of buying anything more. For forward estimates, I expect 2019 earnings to be $12. I think a multiple of 15 is quite reasonable, despite the fact that revenues will be flat to slightly down on a year over year basis. The company still has a hoard of cash and 15 times is still below the S&P average multiple - probably fair for declining revenues and a company that's shifting from a sales to subscription model. That leaves me at a price target of $180. A China deal might put me to $200 again. Because of the Trade risks, I am leaving the stock as a 2 for now. If a deal is struck, I expect to upgrade the stock, but I anticipate a failure to strike a deal in this meeting to have a negative impact as we'll become uncertain and push into the final hours for a potential deal that prevents us from seeing further tariffs to 25%.
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
To start with, the cause of the poor performance in the quarter was related to iPhone sales - particularly in China. As such, it's no surprise to hear that iPhone revenues were down 15% year over year to $51.98B. That seems to be the only real under performer, though, given Mac sales were up 9% to 7.42B and iPad sales were up 17% to $6.73B. Clearly those items are a much smaller portion of the revenues for the company, though. In addition to this, wearables and home accessories (iWatch, iHome, earPods, etc) rose 33% to $7.1B and Services grew 19%, growing to above $10.8B, as the company preannounced, to $10.9B. All of these numbers came in above analyst expectations, which shows how negative they were.
China was the clear factor as it's sales growth was down 27% compared to a year ago. The rest of the world held up well, overall, despite management's commentary calling out global economic slowdowns. The company spent about $8.2B in share buybacks, which was probably ill-advised, given how the stock got hit afterwards. That said, the rate of buybacks is slower than before and the company stated they want to be "more disciplined," which means they want to take better advantage of market conditions. Those buybacks are a strong reason for why earnings were up despite revenues down. They still have $245B in cash and only $115 in debt. The company has a goal to become net cash neutral, so don't be surprised to see more share buybacks, as they still have around $130B to go before they reach the neutral point. From a services perspective, the company has provided information, for the first time, stating that services margins are 62.8%, compared to iPhone which was 34.3%. Add to that a strong and all time high installed base and subscription growth at around 120M per year with the company looking to expand on offerings, and you start to hear more details around the impact of services, which is a reason to hold this stock.
Finally, looking more ahead, guidance was a little light with revenues expected to be around $55 - $59B, while analysts were expecting $58.9B. There will be a 2% forex hit anticipated as part of those reduced earnings and maybe the analysts are thinking the company is setting up for a number they can hit. Looking at risks going forward, it's hard to say we're out of the woods yet. The Fed has gotten softer, which should help keep the strength of the dollar and forex hits in check, but the trade war that is still wreaking havoc on the Chinese economy is still unresolved. Even if a deal is struck, there's no guarantee that their economy will take off again, either. Despite the fact that the stock took off today, I still feel a little cautious. You have to believe that the deal will be struck and everything will be fine and I'm just not there yet. I certainly don't want to be pessimistic either, because if a deal is struck, I do see the stock going higher still. I just don't feel the risk/reward for the price after the run is good. I would wait for a pullback - maybe into the mid to upper 150s before I think of buying anything more. For forward estimates, I expect 2019 earnings to be $12. I think a multiple of 15 is quite reasonable, despite the fact that revenues will be flat to slightly down on a year over year basis. The company still has a hoard of cash and 15 times is still below the S&P average multiple - probably fair for declining revenues and a company that's shifting from a sales to subscription model. That leaves me at a price target of $180. A China deal might put me to $200 again. Because of the Trade risks, I am leaving the stock as a 2 for now. If a deal is struck, I expect to upgrade the stock, but I anticipate a failure to strike a deal in this meeting to have a negative impact as we'll become uncertain and push into the final hours for a potential deal that prevents us from seeing further tariffs to 25%.
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities. All views expressed are solely of my own and I am not a professional money manager. Please consult with your financial adviser before taking any action in your own portfolio.
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