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October 29, 2007

Another Blowout Quarter For Apple

Apple reported another great with upside to Mac unit volumes and operating margins producing much better than expected EPS of $1.01. Numbers had been rising recently such that analysts were looking for mid to upper 80 cents. Even more impressive than the September quarter results was the fact that Apple provided December quarter guidance which slightly exceeded Wall Street forecasts. Heading into the report, the consensus estimate for the December quarter was $1.39. Apple guided to $1.42. If memory serves, this is only the second time in the last three years where Apple provided guidance at or above Wall Street forecasts. Given the company guides conservatively, the forecast implies another very strong quarter.

The shares now trade on 2008 and 2009 prospects. For 2008, the current consensus is $5.00 with many estimates in the $5.15-$5.20 range. For 2009, the forecast is for over $6.00. Even taking into account over $15 per share in cash on Apple's balance sheet, the stock carries a high valuation with a P-E ratio of 36 times 2008 estimated earnings. Apple's recent huge upside surprises probably mean that 2008 estimates are way too low. This is almost certainly the case if iPhone sales meet company targets of 10 million units in 2008. The iPhone is very profitable thanks to revenue sharing on monthly bills of cell phone subscribers. Thus, despite the momentum in Mac sales, the refreshed iPod lineup, and likely continued significant share gains in Macs, the iPhone has become more important as a driver of Apple shares now that they have moved up to new highs in the $180s.....

....I suspect Apple shares can move significantly higher as long as earnings momentum continues and the stock market cooperates. I reduced positions in the $160s with an eye on $180-200 as another point to trim. The strength in the September quarter earnings and clear momentum in product sales should allow the shares a little more upside. As a result, my strategy now is to trim again as the shares firmly cross $200. Nothing wrong with taking a profit, especially in a high multiple stock where risk is significant if an earnings or growth hiccup occurs.

Posted by Steve Birenberg at October 29, 2007 09:11 AM in AAPL