AAPL In The DJIA: It's Inevitable

Apple's rising market cap and impressive continuing growth in revenue and earnings places the company in the thin air space among global enterprises. No matter the past few days of a falling share price (a pull back from the accelerated gains following the quarterly earnings report), the company is among the most highly valued companies when ranked by market cap and outranks all but a few of the current DJIA components.

It's not an issue of "if" Apple will be added as a component to the most closely watched stock market performance gauge in the world. It's a matter of "when" Apple will be added to the index of 30 select stocks. The only question is which current component it will replace.

AAPL 12-Month Price Target: $300 Per Share

I’ve mentioned several times in the Apple Finance Board my 12-month AAPL price target of $300 per share. In addition to the unit sales projections for Apple’s first fiscal quarter I’ve previously posted here at Eventide, I expect the Apple retail stores to report an impressive improvement over last year in both retail store traffic and sales per square foot during this holiday quarter.

At $200 per share (or less) I see AAPL as a bargain. The release of the new iMac, the popularity of Apple’s laptop line and the continuing global rollout of the iPhone 3GS suggest record GAAP sales and earnings for the quarter and a further buildup of the deferred revenue balances that will be extinguished by the end of the fiscal year through recognition of almost all iPhone revenue at time of sale and a restatement of prior fiscal periods to substantially eliminate the impact of deferred revenue accounting.

FQ1 '10 Early AAPL Unit Sales Estimates

My early FQ1 '10 Apple unit sales estimates include: Three million Macs, twenty million iPods (including the popular iPod touch) and over 6 million iPhone units. Although iPhones have been flooding into mainland China through Hong Kong and other gray market sources, the opening of the mainland through an authorized carrier will materially increase unit shipments for the quarter.

The newly refreshed iMac will be high demand and Apple may be challenged keeping the global channel stocked with adequate inventory. Apple's decision to refresh the iMac in October will positively impact unit sales in the December quarter due to elimination of concerns for a post-holiday January refresh of the company's desktop computer line. The annual anticipation of a January iMac refresh had skewed consumer buying patterns in years past.

The December quarter is traditionally the "iPod quarter" and although the product line may see a year-over-year unit sales decline as that product segment reaches a mature market phase, iPod touch sales will positively impact ASPs and extend the global penetration of iPhone OS-based devices.

I tend to ignore Apple's revenue and earning guidance. I view management guidance as Apple's estimates of virtually guaranteed results based on internal projections. But the conference call information that accompanies the guidance yields important information. Apple is anticipating a sequential drop in gross margins due to higher build costs on new products (the iMac) as well as in increase in transportation costs (specifically air freight expenses) in moving product from manufacturing to points of sale or in the case of Apple's Internet sales avenue from manufacturing to customer delivery. Again, I suspect much of the increase in shipping costs relates directly to the new iMac which will remain in high demand throughout the Christmas shopping season.

The consensus estimate for the quarter is currently $11.91 billion in GAAP revenue and $2.04 in GAAP earnings per share. I expect Apple to handily beat the current consensus estimates and expect the analyst estimates that comprise the consensus to rise on average during and immediately following the close of the December quarter.

The Case For T

I'm bullish on AT&T. It's one of the few mega caps that offers both a handsome dividend payment - currently over 6% at today's closing price - and the prospect of impressive equity value appreciation. Forget the relatively flat growth currently being experienced by this industrial giant. It's shedding wired customers at an astounding rate as households unplug their wired phone services in favor of cell phones as their primary voice communication device.

In the September quarter the company activated 3.2 million iPhones while adding 6.7 new wireless customers in the past year. Wireless services accounted for 44% of the September quarter's revenue. AT&T is quickly transitioning itself from dependence on wired revenue sources while it invests heavily in its wireless infrastructure for both voice and data services.

Depressing near-term earnings are the big subsidies being paid to Apple on subsidized iPhone purchases. But that investment has already provided some attractive results - the churn rate on post-paid cellular service accounts dropped to 1.17% in the September quarter.

While this isn't a stock that would excite anyone to watch its daily trading gyrations, for the long-term this company is positioning itself to deliver consistent results and continues to pay an attractive dividend. There's a total return value in AT&T that shouldn't be overlooked.

The Apple Success Continuum

Many of us live in a world of numbers, financial forecasts and results. Apple's quarterly results released this week are simply staggering from a financial perspective. There's a common thread weaved in each quarter of Apple's continuing success. The company's success is dependent far more on the company's relationship with its growing universe of product users than it is on the performance of any individual product or product model in the company's portfolio. There's an important lesson to be learned here: Each new product release is simply a "snapshot" in time of a product development continuum and is little more than an aside in an ongoing "conversation" between the company and its product users.

This week Apple reported September quarter results. The company's quarterly performance included the sales of 3.05 million Mac units and 7.4 million iPhones. The iPod, which just a few years ago was the revenue engine for the resurgent computer and electronic device maker, saw a year-over-year drop in unit sales to 10.2 million units.

For years the Mac was the mainstay of Apple's revenue and earnings performance. The return of Steve Jobs in 1997 and the release of the Bondi blue iMac in 1998 began new chapters in Apple's history. With the development of OS X, brilliant engineering of Mac hardware and a focus on customer satisfaction, Apple entered a renaissance era. Lucrative Mac margins financed the development of the iPod and its eco-system. The iPod returned the favor during the first several months of the awkward Intel transition and now the Mac and the iPhone are providing the financial fuel for the next major Apple product release, expected in early 2010 and the build out of the data delivery infrastructure needed to support the company's expanding portfolio of products and services.

While most analysts and AAPL watchers are fixated on quarterly unit sales numbers, the intricacies of deferred revenue accounting, gross margins and the prospects for iPhone sales in China and other new territories, there's a story here that being overlooked.

Apple's consumer products score impressively high marks in customer satisfaction surveys and the Apple retail stores serve not only as points of product purchases but also as locations for continuing Apple's "conversation" with the company's customers.

The focus on the customer satisfaction and a development of an on-going rapport between Apple and its customers is what drives sales. The purchase of a Mac or an iPhone by a consumer isn't the end of a transaction, it's the beginning of a new relationship that transcends the products being purchased.

It's why, for example, the Palm Pre can't compete with the iPhone and why AT&T is willing to pay high subsidies and invest billions of dollars in technology upgrades to support its Apple customer base.

It's why Microsoft will announce all kinds or superlative upgrade numbers about Windows 7 soon after launch but may resort to double-speak when journalists look under the proverbial hood and ask the hard questions about actual upgrade activations and the depth of the Windows 7 eco-system as the market continues its migration to handheld computing devices and decidedly away from Windows-based desktop systems costing $500 or more.

Apple's focus on customer satisfaction and the company's preoccupation with design excellence paves the way for new opportunities and new product releases. Apple isn't about the sale of an iMac or an iPhone. It's about enhancing the company's rapport with its product users. That relationship and continuing "conversation" between the company and its product users is what creates the Apple success continuum. The 90-day fiscal report cards are little more than snapshots in time.