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January 20, 2011

Apple Reports "Beat and Raise" in an Unusual Occurence

Following the disclosure that Steve Jobs would take a medical leave of absence, Apple reported another in a string of incredibly strong quarterly earnings reports. The reported numbers easily beat expectations. Revenue upside came mostly from higher than expected selling prices with unit volumes in line with the high end of expectations. iPad volumes were a bit stronger than expected, while iPhones missed some whisper numbers.

iPad expectations had come in a bit on supply constraint concerns and worries that the new MacBook Air would cannibalize. Those issues did not appear. iPads look set to accelerate further as U.S. demand is robust and many new countries are being added. iPad 2 is also due and will have a few missing features likely to stoke demand further (camera, Facetime, bigger viewing area, even better display).

iPhone unit shipments would have been higher had the company been able to produce enough phones. Management admitted it is struggling to meet massive global demand for iPhones. The iPhone supply constraint was the only real negative in the quarter or the conference call. The issue would be that consumers would opt for an Android phone instead, losing a potential sale for several years at least and improving the Android ecosystem via more users. I do not consider this a big problem but when dealing with a high flying stock like Apple any minor issue deserves examination.

The bigger story for the stock coming out of the quarter was guidance for the March quarter. Management guided revenues and EPS above street estimates. This is a very rare occurrence for Apple, which usually guides conservatively and below analyst estimates (although ends up easily beating both). I only remember one other recent quarter when Apple produced what Wall Street likes to call a "beat and raise" quarter. The stock acted very well in response.

This time, however, Apple shares have retreated since reporting, something that seems to generally be the case. Apple shares often rally into the quarterly number, already building in the upside. That seems to be what happened this quarter, exacerbated by general selling pressure in the stock market, led by technology stocks. I also think the rally in the shares off the lows on Tuesday following the Jobs health news set up a second chance for investors who wanted to lighten positions on the health concerns.

I feel extremely strongly that Apple shares will move to significant new highs, $400 or higher, later this year. Earnings in fiscal year 2011 now look like they will be at least $23. Yearend cash on the balance sheet should be around $70. A P-E of 15 times just the earnings (cash is earning minimal amounts) gives the underlying business value of $345. Add in $70 in projected cash and $425 is a good target.

Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. Apple is a net long position in the Entermedia Funds. Steve is co-portfolio manager of the Entermedia, owns a stake in the Funds' investment management company, and ahs personal monies invested in the Funds.

Posted by Steve Birenberg at January 20, 2011 01:24 PM in AAPL