Apple earnings night–what to look out for

<p>It’s Apple earnings night It’ll be a late night for millions of Apple fan boys and fan girls, traders and investors, media folk and the […]</p>

It’s Apple earnings night

It’ll be a late night for millions of Apple fan boys and fan girls, traders and investors, media folk and the just plain curious—a rare point of communion for Main Street and Wall Street.

Just like its giant techy US peers, Google, Amazon and Facebook, how much money Apple made during the quarter will be only half the story.

As ever, the back story will be highly dependent on where Apple is in its product release cycle, what ‘fires’ it recently had to put out, operationally (and on a PR level too) amongst other things.

The fourth quarter may not be the most important one for Cupertino, California’s most famous resident, but that doesn’t seem to matter.

Apple’s earnings tonight will reverberate on stock markets around the world tomorrow, for better or worse, regardless.

Here are the basics of what we expect.

 

Apple bottom line-plus

Apple Inc. is scheduled to release earnings for its fourth-quarter to the end of September at 10 PM, London Time tonight.

Volatility in Apple stock is a given in the immediate few minutes after the earnings are released.

Whichever direction the stock is heading in, it will get a second wind an hour afterwards when the live ‘Earnings Call’, starts, if recent history is anything to judge by.

(The earnings call is basically a conference call hosted by key executives, usually including CEO Tim Cook, during which analysts and institutional investors might ask questions.)

Apple shares will be traded in a specially extended ‘after-hours session’ following the close of Wall Street, just before the earnings will be released.

Naturally, the extended trading session will have a close bearing on the tone of Apple shares in tomorrow’s full session.

 

We have broken down results the market is expecting in the table below, according to consensus forecasts compiled by Thomson Reuters.

 

(Click for larger image)

APPLE ESTIMATES 4Q 2014
Source: Thomson Reuters (estimates in US dollars)

 

Strong ‘earnings beat’ looks unlikely

StarMine estimates offer a further refinement of expectations.

These are consensus forecasts with data errors excluded and with each of the remaining forecasts weighted according to the analyst’s track record.

The ‘surprise’ element kicks in if the SmartEstimate is predicted to diverge more than 2% from the consensus forecast.

In that case, StarMine says it can anticipate earnings surprises with an accuracy rate of over 70%.

So it looks likely Apple’s results this evening will be in-line with Wall Street’s broad expectations.

Under such circumstances, the stock typically does not get a tailwind.

That suggests any upside for the shares in this evening’s trading would have to come from some non-forecast related element of the earnings report.

But this is Apple.

It needs to be remembered the market is habituated to expect Apple to moderately or strongly beat ‘obvious’ expectations.

 

That brings us neatly to a summary of important focus points to watch out for beyond the earnings results.

 

What to watch for apart from earnings

If Apple undershoots or beats expectations on any of these points, there is the potential for a share price reaction, positive or negative as appropriate.

  • Investors have in recent years particularly focused on Apple’s gross margin guidance for the end of the next quarter. We see 38%-to-40% for the next few quarters.
  • iPhone sales: 10 million new iPhones were sold after just one weekend, excluding China, where regulatory approval delayed sales till 17th October.

We think Apple needs to have sold circa 40 million iPhones, up around 12% on the year, to satisfy the market (its quarterly iPhone sales run rate has been +10% lately).

  • The ‘problem child’ iPad. Sales of these very likely continued to fall. We’re calling for a 7%-8% fall.
  • Share buyback? Activist investor Carl Icahn has stepped up pressure on Apple to resume returning cash, as pledged in June. Tonight Apple might update Icahn on any buyback thoughts. Hardly anyone else expects one imminently.
  • Apple Pay—watch out for meaningful boasts about faster-than-expected roll-outs in the US, or the service’s debut outside the States.
  • Apple messed-up an update of iOS 8, its mobile operating system. Late in September, it had to recall iOS 8.0.1 about an hour after it first became available and re-publish it a day later. Apple may provide more details and perhaps reassurance.
  • Outside chance: Apple occasionally drops negative surprises about component shortages and other technical factors that can cause production delays, etc. It’s worth bearing these in mind
  • Outside chance II: Apple failed to announce a widely mooted, super-size 12.9 inch tablet at its iPad event last week, supposedly due to production delays. Could one be announced this evening?

The market would quite like Apple to release one, given Google Inc. recently upgraded its Nexus line to include ‘higher-end’ tablets which appear to venture on to Apple’s near-luxury tab turf.

 

$100/share barrier remains a big ask

Apple’s stock has trended below to its pre-autumn product update highs close to $100, since the new gizmos were released early in September.

(Remember, the stock price is adjusted retrospectively, to take into the account the ‘stock split’ that took place on 9th June 2014).

At the time of the product update, we said the product releases, including new iPhones, iPads, Apple Pay and Apple Watch were exciting, but not sufficient to boost the stock meaningfully above the $100 mark.

On balance I don’t expect this evening’s news to be compelling enough to get the stock above the psychological $100 level on a closing basis either.

Unless there is a material surprise not already factored in by the market.

A large iPad would be a start.

APPLE PRE 4Q 2014 RESULTS

 

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