Exactly Where Did Apple Miss?

10/19/2011 1:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Serves Apple (AAPL) right for selling 4 million of its new iPhone 4S handsets over this past weekend.

Yesterday after the market closed, Apple announced that anticipation for the new phone cut into iPhone sales for the company’s fiscal fourth quarter that ended in September, and held the company to a 54% gain in earnings.

That kept earnings per share to just $7.05, well below the $7.38 a share that Wall Street had been expecting. (But up from the $4.64 a share reported in the fiscal fourth quarter of 2010.) Revenue climbed to $28.3 billion, a 39% increase. Wall Street projections had called for revenue of $29.7 billion.

The iPhone problem started with Apple’s developer conference in June, when the company introduced a new iPhone operating system and set off rampant speculation that a new iPhone was in the works for…

Well, that was the trouble. The longer the company put off actually selling a new iPhone, the longer it would cannibalize current iPhone sales, and the less time the company would have for sales of a new phone to make up some of the difference.

From an earnings-timing perspective, putting the iPhone 4S on sale at the beginning of October was a good way to maximize the damage to sales in the fiscal fourth quarter.

Apple wound up selling 17.07 million iPhones in the quarter, versus Wall Street expectations for sales of 20 million iPhones.

Other parts of Apple’s business did extraordinarily well. Sales of Mac computers, for example, were up 26% year-to-year. Not bad when the personal-computer industry is forecast to grow by 4%.

And those iPhone sales lost to the fiscal fourth quarter aren’t exactly lost forever. Apple raised its guidance for the first quarter of fiscal 2012—otherwise known as the last three months of 2011.

The company projects earnings of $9.30 a share for the fiscal first quarter, significantly above the Wall Street consensus of $8.97. Revenue will come to $37 billion, above the Wall Street consensus of $36.64 billion. Gross margins in the quarter will climb to 40.3% against the Wall Street consensus projection of 39.7%, the company projected.

We all know Apple can’t possibly show this kind of growth in revenue and earnings forever. But that eventual return to earth is built into today’s stock price.

Apple sells for just 15.3 times trailing 12-month earnings per share. Not pricey at all, considering the 54% earnings growth rate in the just completed quarter or that the computer sector as a whole, where growth rates are more like 5% than 50%—trades at a multiple of 14.1 times earnings.

On projected 2012 earnings, Apple trades at a multiple of just 12.7. That’s ridiculously cheap—unless you think there’s no market for an iPhone 5 (with 4G capability) or an iPad 3.

I’d use yesterday’s disappointment as a buying opportunity—especially if it leads to something more than today’s 3.4% drop. In fact, if the disappointment drives down the price further, I’d probably add Apple to my Jubak’s Picks portfolio.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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