The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

23 October 2007

Only William Tell could do better

(The collated comments below are from Seeking Alpha...)
Shares of Apple/AAPL jumped 7% in extended trading Monday after the company posted FQ4 earnings per share and revenue that were ahead of analyst consensus estimates and the company's forecasts, boosted by unprecedented demand for Macintosh computers, a new line of iPods, and strong iPhone sales.

Net earnings were $904 million ($1.01/share) on revenue of $6.22 billion, up 67% from $546 million ($0.62/share) on revenue of $4.84 billion a year ago. Analysts polled by Reuters were looking for earnings of $0.85/share on revenue of $6.06 billion. The company, notorious for its soft guidance, gave stronger-than-expected FQ1 guidance of revenue of about $9.2 billion and earnings per share of about $1.42; consensus estimates for next quarter had been $1.39/share on $8.6 billion in revenue. It said it ended its fiscal year with $15.4 billion in cash and no debt. "The guidance was extremely strong, well north of consensus. It appears that they are expecting an extremely solid holiday shopping season and, I would guess, strength from the launch of the iPhone in Europe," said Cross Research analyst Shannon Cross.

Apple said it shipped 2.16 million Macs in the quarter, a 34% jump over the year-ago quarter, and smashing a previous quarterly record by 400,000. It sold 10.2 million iPods (+17%), and 1.12 million iPhones, putting much-watched cumulative iPhone sales at 1,389,000. Analysts had expected Mac sales of 1.9-2.1 million, iPhone sales of 900,000 to 1.2 million, and iPod sales of 10.5-11 million, according to Reuters.

Apple CFO Peter Oppenheimer said Monday the company plans to open 40 new stores over the coming year, including its first China outlet. During Apple's earnings conference call, Oppenheimer noted the company opened 12 stores during the current quarter, and now operates 197 stores, which were responsible for $1.25 billion of Apple's $6.22 billion in quarterly revenue, representing 42% year-over-year growth. The stores sold 473,000 Macs, he said, and over 50% of customers buying Macs in Apple stores were new to the Mac. Oppenheimer cautioned that FQ1 may see sequentially lower sales, given the success of the company's back-to-school promotion which intensified sales in FQ4. COO Tim Cook said during the call Apple expects continued low memory prices over the coming quarter, a factor Cook noted was in part responsible for Apple's improving gross margins: "As you know, DRAM and NAND flash were favorable last quarter, and we believe that will continue in our Q1," he said. Cook also said Apple is confident it will ship 10 million iPhones in calendar year 2008. Bear Stearns analyst Andrew Neff asked Oppenheimer about the company's unusually strong guidance. "Andy, I give you guidance each quarter that we believe we have a reasonable chance of achieving," he replied.

(The following buy side comments collated by

BMO Capital Markets notes for the first time in many years, AAPL's rev guidance is significantly higher than they anticipated. Firm projects modest sequential CPU and iPhone impact, and therefore believes that AAPL will have significant iPod rev growth at close to 140% sequentially, helped by healthy ASPs and 135% q/q unit growth...
Broadpoint Capital says due partly to the price cut AAPL shipped a cumulative 1.4 mln iPhones by the end of 4Q07, 400K more than prior guidance. Desktop rev growth accelerated to 30.9% from 19.8% in the prior quarter, driven by the new iMacs. Firm increased tgt to $210 from $170...
Cross Research notes Apple/AAPL report strong 4Q7 results, which beat their close to high on the Street EPS ests, driven by strong Mac and iPod sales. EPS was $1.01 vs their est of $0.97 (consensus was $0.86). Rev was $6.2 bln vs consensus of $6.1 bln but below their est of $6.4 bln, as they had forecasted slightly higher iPod sales. Firm is raising their tgt to $225 (from $200) driven by upside to their earnings and cash flow ests. Firm notes Mac sales were very strong with Mac product sales and services representing 62% of total rev. AAPL said that it had sold about 1.1 mln iPhones and 95% of its iPhone customers were very satisfied and would recommend the product to others...

ThinkEquity notes AAPL's new product rollout powered a solid F4Q. Even excluding the co's one-time tax benefit, EPS grew a robust 50% y/y. With a refresh of its Mac and iPod lineups, and three new carriers set to debut iPhone in Europe in Nov, firm believes AAPL will continue to outpace the industry in growth heading into the holiday season. If firm carries forward AAPL's current CY'07 P/E of 40x, implying a 1.3x PEG to their 31% CAGR for EPS, to their CY'08 EPS of $5.69, firm arrives at a fair value of $227, or 30% upside, making shares a Buy. Firm upgrades AAPL to Buy from Accumulate and raises their tgt to $227 from $164 following earnings and saying with a refresh of its Mac and iPod lineups, and three new carriers set to debut iPhone in Europe in November, they believe Apple will continue to outpace the industry in growth heading into the holiday season.

(end quotes, begin dmg)

Have no doubt about it -- this is a crowning moment for Apple/AAPL. But when the story becomes obvious to all, then the need presses to watch for signs of a reversal. (I have shared those techniques on this blog.) And to determine the depth of that reversal when it occurs. (Do not mislead yourself: a reversal will occur.)

1) Will the potential decline be sufficiently deep as to cause you to prefer to have sold?
2) Will the length of time the shares require to build a new base -- IF it proves a new base rather than a shelf prefatory to lower lows -- interfere with your portfolio's plans?

Of course, if you are an investor, these questions are mostly an academic exercise; and, of course, we know not how high high will prove to be for AAPL shares. (Although I have a guess, and thus no worries. Yet.)

The important takeaway should be always to consider the unthinkable, especially when the obvious is manifest for as far as the eye can see.

Full Disclosure: Happily long the shares of Apple/AAPL.
-- David M Gordon / The Deipnosophist


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