Apple’s Q1 has fair chance of turning out sweet

<p>Apple’s quarterly report coming out shortly, will, as always, be among the highlights of the financial market year, but tonight may be one of the […]</p>

Apple’s quarterly report coming out shortly, will, as always, be among the highlights of the financial market year, but tonight may be one of the rare occasions when investors focus less on the earnings and more on outlook.

That’s because after the $582.6bn group in January released one of its worst-received quarterly updates for at least a decade—including forecasting a first quarterly sales drop in 13 years—investors have had time to secure the worst possible outcome in their minds.

There are also clear signs that some are betting on positive surprises.

Even so, Wall St. consensus for Q2 has been anchored close to guidance emitted from the Cupertino, California spaceship since January, with forecasts drifting just 0.9% lower over the last 30 days, according to Thomson Reuters.

 

 

RENDERING OF APPLE CAMPUS 2 UNDER CONSTRUCTION IN CUPERTINO

ARTIST’S IMPRESSION OF APPLE CAMPUS II, UNDER CONSTRUCTION IN CUPERTINO CALIFORNIA, COURTESY CUPERTINO CITY COUNCIL

 

 

Furthermore, the data provider’s best ‘weighted average’ calls (weighted in terms of reliability) have barely budged within an even narrower range.

A complete set of those forecasts:

  • Revenue: $51.55bn, down 11% year-on-year (Y/Y) / Guidance: £$50bn-$53bn
  • GAAP Earnings Per Share (EPS): $1.98, down 15% Y/Y/ non-GAAP: $1.99
  • GAAP Net Income: $10.977bn, up 21% Y/Y / non-GAAP: $10.983bn
  • Gross Profit margin: 39.6% vs. 40.8% in Q2 2015
  • Cost of goods sold: $31.094bn, down 9.5% Y/Y

 

Expectation for the group’s biggest revenue generator, the iPhone, are as always just as important, and the first-ever year-on-year decline in quarterly handset sales is still widely expected.

(The newest iPhone SE was released only in the closing days of March, Apple’s quarter end.)

Consensus for Q2 handset sales has settled at 50 million compared to 74 million in Q1 and 61 million in Q2 2015.

Given unmistakeably declining handset sales, a beat now looks less probable, despite the group’s recent history of numerous positive surprises.

 

Persistent, albeit uncorroborated, reports over the last few weeks that key parts suppliers were notified by their client that it planned to reduce iPhone production in April-June, back the view that this really will be a fallow quarter for iPhones.

Japan’s Nikkei News, also reported earlier this month that Apple had lowered production for the January-March quarter by about 30% from a year earlier, and that it was not planning to make enough of iPhone SEs to offset a slump in the flagship series.

 

However, despite these unpromising signals, Apple shares have retained a good 12.5% of gains following the 21% rise off almost two-year lows of January. (The stock remained 20% lower over a year.)

 

Late on Tuesday, options trading patterns suggested weak demand for bearish punts, judging by prices for such options trading more cheaply than in 85% of sessions over the last year.

Data reported by Reuters this evening also puts the stock’s 30-day at-the-money implied volatility, a gauge of risk of large stock moves at 28.4%, the lowest pre-earnings for six quarters.

 

Options positioning together with relatively a contained pullback in the underlying stock were among signs reflecting optimism in the market that even if the group fails to pull a handset or revenue rabbit out of its hat tonight, it might at least provide better than expected revenue guidance for later 2016 quarters.

To do so, it would need to raise expectations for Q3 up from the $49.95bn Wall St. expects.

Traders and investors are also eyeing pay-outs.

Dividend forecasts were already suggesting a payment a few cents above Apple’s planned quarterly 47 cents a share dividend.

Some investors also see scope for an increase of Apple’s stock buyback plan, despite recent high-profile criticisms of the total cost of around $87bn between September 2013 and end 2015, averaging $115 a share.

 

 

Should the additional hopes outlined above turn to have been forlorn, Apple shares, which have already been in bad shape for coming up to a year,  would have scope for further nasty moves.

 

DAILY CHART: APPLE INC.

APPLE PRE Q2 2016

Please click image to enlarge 

 

 

Trade below the widely watched 200-day moving average (blue line) is a pivotal weakness for any stock, and Apple’s has not sustainably surpassed the threshold since August.

As well, the beginnings of a descending trend can be seen, following three failures since AAPL’s record highs reached a year ago almost to the day.

Whilst shorter-term trends in confluence beneath the current price may assist, attempts to trace a clear line of support from former resistance in March doesn’t look favoured due to the well-known volatility of this stock.

Apple tends to slice through barriers that are typically strong, rather too easily (e.g., see 38.2% of decline from all time high).

If the stock remains true to that pattern in the near term, that would probably raise the prospect of a return to lows mentioned earlier, at least.

If these lows are seen, Apple’s highly significant and important 200-week moving average, last crossed about seven years ago could again come into play.

A well-received set of figures would need to fuel sufficient momentum to propel AAPL back over the 38.2% Fibonacci mentioned earlier, and definitely negate the potential downtrend before surpassing $113 highs for the year so far, in order to signal stronger gains in the reasonably near term.

 

This post will be updated after Apple’s earnings have been released.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.