I think tomorrow the market will see Apple's earnings as a disappointment

04/23/2013 6:20 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The question is will anything that Apple (APPL) announced today make investors happy?

My first take is No. With a big part of that answer resting on the company’s cut in projections for the fiscal third quarter that ends in June. So far after-hours trading isn’t providing much of a hint, so we’ll have to wait for tomorrow. The stock showed a quick bounce to $429  before settling back near $403.

But you judge. (Apple is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ )

Apple announced earnings for the second fiscal quarter that ended in March of $10.09 a share. That beat Wall Street estimates by 9 cents a share, but before you get too excited by that, the $10.09 a share represents an 18% drop in earnings from the year ago quarter. This is Apple’s first drop in earnings since 2003.

Revenue climbed by 11.3% year to year to $43.6 billion versus the $42.4 billion Wall Street consensus, but that was a significant slowdown from the 17.6% year over year growth recorded last quarter.

Gross margins at 37.5% fell short of Wall Street estimates of 38.5% and barely made the low end of the company’s guidance of  37.5% to 38.5% for the quarter.

Product sales didn’t offer any big surprises or disappointments. Apple sold 37.4 million iPhones in the quarter, slightly above Wall Street estimates of 35 million, and 19.5 million iPads versus Wall Street’s forecast of 18 million. At just under 4 million units, Mac sales trailed analyst estimates of 4 million.

The big news today came on guidance and cash returned to investors—and the news in those two areas will push the stock in very different directions tomorrow.

For the fiscal third quarter that ends in June Apple lowered revenue guidance to $33.5 billion to $35.5 billion against the Wall Street projection of $38.44 billion. Apple also said—and I think this will turn out to be a bigger deal than the revenue numbers—that gross margins would fall to 36% to 37% from the Wall Street estimate of 38.8%. This plays right into Wall Street fears that competition is eating away at Apple’s profit margin.

The company also announced that the board of directors had authorized a huge increase in the size of the company’s share buyback program to $60 billion by the end of calendar 2015. That’s a $50 billion increase from the $10 program announced last year. (We should also note that Apple will be able to buy back a lot more shares now that they’re trading at $400 rather than $700 a piece.)

In addition the company announced a 15% increase in its quarterly dividend to $3.05 a share (from $2.65). The annual payout of $12.20 would give Apple a yield of 3% at today’s closing price of $406.13. The dividend is payable to shareholders of record on May 13.

My guess at investor reactions says that the lowered guidance will outweigh the increase in buybacks and dividends. The big worry about Apple, the worry that has been driving the stock down so relentlessly, is that the company’s history of innovation is over. Turning that around will take product launches with some whiz-bang and not dividends or stock buybacks.

At $400 Apple is a reasonable buy, but I sure wouldn’t mind picking up shares even cheaper on disappointment.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own positions in Apple as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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