Analysts: Expectations May Be Too High For Apple Earnings

Posted by: Arik Hesseldahl on October 19

Kaufman Brothers analyst Shaw Wu has a research note out this morning previewing Apple’s quarterly earnings, which will be announced after the close of market today.

Wu raised his estimates on Apple about two weeks ago, and says estimates of other analysts are now catching up to his. He’s expecting revenue to come in at $9.1 billion, and per-share earnings of $1.41. He thinks “there is still room for potential upside on higher consensus numbers,” but says his main concern “high expectations where the upside may not be enough to satisfy near-term bullish sentiment.”

On place to watch for some of that upside, he says, will be on gross margin. Apple has guided for 35% gross margins this quarter. Wu is expecting 35.2%. A recent refresh to Apple’s iPod line, combined with the release of Snow Leopard and the iPhone 3GS will offset higher component costs and and recent price cuts on the Mac.

Wu is expecting what he calls “vintage conservative” guidance from Apple for the holiday quarter. He’s expecting revenue to his $12.1 billion, and EPS of $2.02, higher than the consensus view of $11.5 billion and $1.91.

So what’s it all mean for the stock? Expect some volatility in the near term, Wu says. He suggests buying on any weakness. The stock is trading just shy of $189 as of 12:30 today. Wu sees the stock going to $214 based on a valuation estimate of 18x Apple’s 2010 estimated free cash flow, plus the $34 billion in net cash.

Finally, Wu seeks to puncture concerns about iPhone component supply problems that have been raised in recent days by Gene Munster of Piper Jaffray and Yair Renner of Oppenheimer, calling these concerns “noise.”

Wu writes: “In our industry and supply chain checks, availability of key components …. is tighter but still good and not impacting production from what we can tell. We would argue the only valid constraints are demand and/or carrier relationships. Should there be constraints, we believe they are artificial.”

Another analyst sounding the “high expectations” warning is Bill Fearnley of FTN Equity Markets, who released his monthly survey of Apple consumer resellers today. More on that after the jump.

Fearnley says Mac sales appear to be above plan, helped by the recent price cuts on MacBook and MacBook Pro. The relatively low inventory of Windows PC has helped too. Some 56% of contacts surveyed said they saw higher demand for Macs than they expected in September. "Our research suggests that Mac sales were very strong in September at the leading CE [consumer electronics] chain," he writes, probably referring to Best Buy. Survey participants said the 13-inch MacBook Pro was the most popular model, Fearnley writes, and was popular with students and first-time Mac buyers.

IPod sales are above plan too, given the new iPod nano, and some pent-up demand heading into the September refresh. He remains concerned about a the rumored iPhone component shortages.

Fearnley raised his EPS estimate by four cents to $1.54 per share and boosted his revenue estimate to $9.45 billion, up slightly from $9.41 billion. He also raised is EPS estimate for Apple's fiscal 2010 to $7.26.

He says Apple will have a more competitive October as Windows 7 hits the streets, and Microsoft goes on the advertising offensive heading into the holidays. Additionally more PC companies will be pushing thin-and-light notebooks that will be seen as more competitive with Macs.

Finally, Fearnley looks at the iPhone component supply question and makes a few points. First, that Apple's carrier partners like AT&T had no issue keeping iPhones in stock in September. However contacts at "Apple's largest CE retail partner," again a not-so-veiled reference to Best Buy, reported "difficulty keeping iPhones in stock," during August and early September, but that inventory improved in early October.

He then turns his attention to the inventory of MacBook Pros, saying 8% of his survey contacts reported shortages in September. "Our research suggests there were few inventory shortages from Apple direct, both through the stores and at Apple.com. However, multiple contacts at regional, independent and leading CE chain locations reported spot shortages of both the 15-inch and 17-inch MacBook Pro models in September." IMacs were going in short supply too, during that period. In both cases, he writes, Apple may be trimming its channel inventory ahead of a product refresh.

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