Why Apple Will Beat The Street

Apple ended November trading at $585.28 per share. At the closing price on November 30th, the shares traded at 13.28 times trailing12-month earnings and off 17% from the all-time high of $705.07 set on September 21, 2012. In the ten weeks since the all-time high, analysts have reduced their expectations for the company's December quarter and the fiscal year ending in late September. The changes in analyst expectations have contributed to the recent downward pressure on the share price. 

Apple will beat the Street's revenue and earnings consensus estimates for the December quarter and the Street's consensus estimates for the current fiscal year. In today's article I will explore the factors that will deliver an earnings surprise when Apple's quarterly results are released in late January. I expect the share price to retrace to the all-time high by the first trading day of February 2013 through a gradual recovery of lost ground over the next sixty days. Management's eps guidance and the Street's consensus eps estimate are not supported by the company's earnings to revenue ratios measured over the most recent eight fiscal quarters. 

Apple's Guidance and Analyst Expectations

For the December quarter, management offered revenue guidance of $52 billion and earnings per share guidance of $11.75. Management's guidance suggests revenue growth of 12.23% over the prior-year period and a decline in eps for the quarter of $2.12 or 15.28% from the $13.87 in earnings per share achieved last year. Management is quick to remind analysts the prior-year period contained 14 weeks versus Apple's usual 13-week fiscal quarters. In contrast to Apple's very low guidance numbers, Wall Street analysts are currently expecting revenue of $54.52 billion, representing expected revenue growth of 17.68% and earnings per share of $13.30, representing an expected decline in eps of 4.10%.

Net Income Per Revenue Dollar

Using an estimated 950 million fully diluted shares outstanding as a constant, management's December quarter guidance suggests about 21.5% of revenue will flow to net income. The Street consensus is a bit more positive, suggesting 23.17% of revenue will reach the bottom line. In an article published in early November, I illustrated the percentages of Apple's quarterly revenue that reached the net income line over the most recent twelve fiscal quarters. There's a direct correlation between the percentage of net income per revenue dollar on a quarterly basis and the iPhone product cycle. The graph below illustrates the percentage of revenue that flowed to net income over the most recent eight quarters as a reference for the performance comparisons in today's article. 

Net income per revenue dollar tends to fall during the quarters in which Apple's flagship iPhone handset reaches the end of its annual cycle. Net income per revenue dollar tends to rise during the first two quarters following the annual iPhone refresh. This is because the iPhone has the highest gross margin among Apple's device lines and the quarters in which the iPhone represents the highest percentage of revenue also yield the highest net income per revenue dollar.

Apple's Rates Of Revenue And Earnings Growth
The graph below illustrates Apple highest rates of revenue growth occur in quarters following the annual iPhone refresh and in these quarters Apple delivers the highest net income per revenue dollar.

The iPhone 4 introduced a new handset form factor while the iPhone 4S maintained the same form factor for a second model year. Although the iPhone 4S generated higher gross margin than its predecessor, it had an abbreviated period of peak demand. The iPhone 4 maintained strong global demand into the June quarter of FY2011. The iPhone 4S peaked as a product early in the March quarter of FY2012. The falloff in iPhone 4S demand through the June and September quarters of the fiscal year reduced the company's rates of year-over-year revenue growth and diminished the percentage of revenue that flowed to the net income line. 

Apple: Follow The Road Paved With Gold

On Friday, November 2, 2012, Apple closed down on the day 3.31% at $576.80. This was the lowest closing price for the shares since July 27, 2012 and the shares ended the day and the trading week off more than 18% from the all-time high of $705.07 set on September 21, 2012.

For long-term investors, Friday's closing price represents an excellent entry opportunity to realize very strong share price gains in the months ahead while capturing a more than 1.8% annual dividend yield. Apple is currently trading with more than 22% of the share price backed by cash and a price-earnings multiple at the low-end of a nearly three-year trend. 


Apple: Follow The Road Paved With Gold
The graph below illustrates at Friday's closing price the company's cash and marketable securities per share represented 22.17% of the share price. Meanwhile, the company's price-earnings multiple has fallen to just over 13x trailing 12-month earnings. This is despite 59.5% earnings per share growth in the fiscal year ended September 29, 2012. The high cash per share and very low price-earnings multiple is occurring at the beginning of a six-month period that will deliver record revenue and earnings for the company.

Using the first trading day of the month following the release of quarterly earnings since February 1, 2010, Apple's cash per share has continued to rise while the company's price-earnings multiple has continued in a steady decline. From a price-earnings multiple of 20.08 times trailing 12-month earnings on November 1, 2010 to a multiple of 13.06 times trailing twelve-month earnings on November 2, 2012, Apple's multiple has fallen about 35% while cash per share has risen about 133% percent.

Since February 1, 2010, Apple's trailing 12-month earnings per share has risen over 331% while the share price has advanced by only 196% over this thirty-three month period. Not only will Apple's share price retrace to new highs over the next six months, investors will be rewarded with a quarterly dividend of $2.65 per share and the prospect of significant additional appreciation while the shares maintain a conservative earnings multiple. 

View Apple By Seasons, Not By Quarters

On October 25th, Apple announced earnings for the 13-week period ended September 29, 2012. For the quarter, Apple reported revenue growth of 27.22% to $35.966 billion and earnings per share growth of 22.98% to $8.67 per share. The earnings per share outcome in the quarter was negatively impacted by accelerated recognition of foreign exchange-related losses. 

In contrast to the September quarterly results, for the fiscal year ended the same date, Apple reported revenue growth of 44.58% to $156.508 billion and earnings per share growth of 59.54% to $44.16. 

View Apple By Seasons, Not By Quarters

The charts below illustrate the quarterly changes in year-over-year and sequential rates of revenue and earnings growth for the most recent twelve fiscal quarters. Apple's high annual growth rates are now concentrated in a six-month season comprised of the company's December and March quarters. The June and September quarters have comparatively slower rates of revenue and earnings growth and represent their own six-month revenue and earnings season. 

Apple's quarterly results are essentially static snapshots of a fast-moving enterprise. Results are best viewed based on annual growth rates and the year-over-year growth rates of the company's two and distinctly different revenue growth seasons.  

Apple's quarterly revenue growth rates FQ1 2010 - FQ4 2012:

Apple's quarterly earnings per share growth rates FQ1 2010 - FQ4 2012:

Apple's Annual Revenue and Earnings Growth Rates

The charts below illustrate Apple's dramatic rates of revenue and earnings growth over the most recent seven fiscal years. The annual rates of revenue and earnings growth will continue to be far more uniform than the rates of quarterly growth depicted in the graphs at the top of the article. The highly seasonal nature of Apple's revenue activity will continue not only because of the refresh cycle for the Apple iPhone, which comprised over 50% of the company's FY2012 revenue, but the influence of changes in the company's regional revenue mix as well.

Apple's annual revenue FY2005 - FY2012:

Apple's annual EPS FY2005 - FY2012:

Apple, iOS Devices and the Precipice of Success

On August 11th, I published my updated AAPL 12-month price target of $950 per share. Since that date, AAPL has moved from $620.73 to $700.09 per share. On Friday the shares set an all-time intraday high of $705.07 as the rollout of the iPhone 5 began in the US and select markets around the globe. Apple's newest iPhone handset is an early and unqualified success. 

I've mentioned several times in prior articles I expect the iPhone 5 to sell on a scale not seen before even by iPhone standards. Apple's early September announcement of a September 12th iPhone event essentially froze the domestic smartphone market while competitors scrambled to ship product to carriers before the iPhone 5's release on September 21st. Through at least the holiday quarter, there isn't a competing handset on the market that will generate anywhere near the iPhone 5's global appeal. 

In addition to the release of the iPhone 5, the iPhone 4 is now available on AT&T, Sprint and Verizon at a post-subsidy price of $0. This is the first time all three major domestic carriers have an iPhone available at that pre-tax price. The iPhone 4 at its new price will deliver a boost to unit sales over the next four fiscal quarters. 

Just prior to the iPhone 5's retail availability, Apple released iOS 6, the company's latest iteration of its operating system for the iPhone, iPad and iPod touch. No matter the early complaints about Apple's first major effort at mapping services, iOS 6 downloads and installations can be counted by the tens of millions. With all of the attention lavished on the iPhone 5, it's the iPhone and iPad combined that is driving the company's share price and market cap significantly higher.

iOS Devices As A Global Franchise

At my Posts At Eventide web presence I provide graphs and table data illustrating and detailing unit sales by quarter for each of Apple's major product lines. Today I am publishing a chart-based overview of iPhone and iPad sales to illustrate Apple's high rates of revenue and earnings growth depend on more than the iPhone alone. iOS devices have become a global franchise. Because Apple does not break out the unit sales of the iOS-based iPod touch, I am including only the iPhone and iPad product lines in today's analysis. 

The graph below illustrates the growth in iPhone and iPad sales over an eleven-quarter period beginning with the first quarter of FY2010 (fourth calendar quarter of 2009):

From a low of 8.737 million iPhone units sold in FQ1 2010 prior to the original iPad's release, to a high of 52.478 million iPhone and iPad units sold two years later in FQ1 2012, in seven of the eleven quarters covered, year-over-year unit sales growth reached or exceeded 100%. The accompanying table data is available at Posts At Eventide through the link posted above.

Apple Price Target: $950 Per Share

Today I am updating my 12-month Apple price target to $950 per share. This price target represents an expected share price appreciation of 52.8% from Apple's closing price of $621.70 on August 10th, 2012. I expect share price appreciation, on average, to trail behind the rate of earnings per share growth over the next 12 months as Apple's massive market cap influences the share price performance and as the company's price-earnings multiple continues to contract.

Over the next twelve months I anticipate reported revenue growth of roughly 50%, corresponding earnings per share growth of about 60% and the aforementioned 52.8% rise in the share price value. I anticipate 12 months from today a price-earnings multiple of 14 times trailing 12-month earnings, suggesting a slight compression in the multiple from today's valuation of 14.61 times trailing 12-month earnings of $42.55 per share. For the four fiscal quarters ending June 29, 2013, I expect trailing 12-month earnings of about $68 per share. 

Apple's P/E Multiple and Cash Per Share

The graph below illustrates Apple's rising cash per share and falling price-earnings multiple over a 10-fiscal quarter period. The dates selected for all of the graphs in today's article are the first trading day of the month following the release of the company's quarterly results. The dates were selected to provide a uniform reference and to eliminate the impact of rising earnings multiples immediately preceding the release of quarterly results. 

No matter the rising cash per share, Apple's price-earnings multiple has been on a steady and indisputable decline over this 10-quarter period. I expect this trend to continue over the next 12 months. 

Apple will continue to trade at a modest multiple to earnings relative to the company's rates of revenue and earnings growth. All of the wishful thinking in the world and spirited comparisons of Apple's valuation to other large enterprises with more lofty earnings multiples will not change the outcome. 

As of Friday's closing price, Apple's market cap stands at nearly $583 billion. I expect over the next twelve months for the market cap to reach $900 billion. Already Apple's market cap is greater than the combined market caps of IBM, Microsoft, HPQ and Dell with about $40 billion in market cap to spare. Apple is among the most widely held equities on the planet and the company's massive market cap will influence the share price valuation no matter the modest price-earnings multiple relative to current rates of growth.

June Quarter Results: Apple's Melancholy Moment

On Tuesday, Apple reported underwhelming results for the three-month period ended June 30, 2012. For the quarter, Apple reported revenue of $35.023 billion and earnings of $9.32 per share, representing 22.58% revenue growth and eps growth of 19.57%. The fiscal quarter's outcome, against expectations of much stronger growth, represents Apple's melancholy moment and a slow-growth period in a six-quarter era of exceptional growth that began with the first quarter of the current fiscal year. 

Guidance and The Economy

For the current quarter, management offered conservative guidance of $34 billion in revenue and $7.65 in earnings per share. In the June quarter, all of Apple's major product lines, including the iPhone and the iPad, had unit sales results that were impacted by a challenging global economy, particularly in Europe. The iPhone's uninspiring 28% unit sales growth was also influenced by consumer expectations of a pending refresh of the product line. 

Apple's quarterly results represent a static snapshot of a fast-moving company. As much as the June quarter results were a disappointment, the outcome reveals both challenges and opportunities in the fiscal quarters ahead. 

Gross Margin

In the first six months of the current fiscal year, revenue growth zoomed forward at a 66% pace and earnings per share rose 104%. Apple's average gross margin during the six-month period was 45.9%. In the June quarter, gross margin dropped to 42.8% due to the impact of currency fluctuations, the lower price on the iPad 2 and a change in model mix on iPhone sales. Apple's gross margin moving forward may remain closer to the June quarter's outcome rather than return to the very high gross margin reported in the first two quarters of this fiscal year. Moderation in gross margin will move the rate of earnings per share growth closer to the rate of revenue growth in future quarters. 

In the first six months of the current fiscal year, the iPhone represented 55% of Apple's revenue total and the popular iPhone 4S delivered very attractive gross margin. In the June quarter the iPhone represented just over 46% of revenue.  The iPhone's smaller percentage contribution to the quarter's revenue total and the lower price on the iPad 2 lead to a sequential drop in gross margin from 47.37% to 42.8%. Although the successor to the iPhone 4S will generate industry leading gross margin, the change in the company's overall revenue mix and anticipated higher costs for the new flagship handset will influence gross margin throughout Apple's next fiscal year. 

Operating Expenses

Operating expenses, inclusive of stock-based compensation, remained under 10% of revenue in the June quarter. Operating expense discipline continues to positively impact the percentage of revenue that flows to the company's net income line. In the June quarter, about one-third of revenue flowed to the operating income line and about one-quarter of every revenue dollar landed on the net income line.

The iPhone Product Cycle

Throughout the conference call with analysts, management repeatedly mentioned the impact of consumer expectations of an imminent iPhone product line refresh on unit sales in the quarter. Consumers will, by the millions, postpone or delay iPhone purchases and iPhone handset upgrades in favor of waiting on the release of new models.

There are a number of factors that determine or influence the release dates for new iPhone handsets. These factors include production capacity, component supplies, planned releases of iOS updates and contracts with iPhone carriers. None of these factors are changed by consumer expectations for the release of a new iPhone.

At this time, all points lead to a fiscal first quarter (fourth calendar quarter) release of the successor to the iPhone 4S. The iPhone 4S will remain the company's flagship iPhone handset for about 12 full months. Very high rates of revenue growth will be realized in the first two quarters of next fiscal year due to the release of a new flagship iPhone and the expected lower prices on the iPhone 4 and iPhone 4S models. Between now and the release of a new iPhone handset, overall revenue growth will be held in moderation even with a strong September quarter for the Mac and iPad product lines. 

Apple's Competent June Quarter

In the first six months of Apple's current fiscal year, the device maker realized revenue growth of 66.35% and earnings per share growth of 104.03%. The successful release of the iPhone 4S and the addition of new carriers such as Sprint pushed recognized revenue from iPhone sales up nearly 107% in the six-month period and represented 55% of the company's revenue total.

On July 24th, Apple will release results for the fiscal quarter ended June 30th. While I don't expect the pace of revenue and earnings growth in the June quarter to match the rates of growth realized in the first six months of the fiscal year, I do expect Apple to report strong growth in what I am calling "Apple's Competent June Quarter."

For the quarter, I expect revenue growth of 41.37% to $40.391 billion and eps growth of 53.40% to $11.95 per share. In the June quarter I expect the Apple iPad line to have delivered the largest percentage of year-over-year revenue growth among Apple's major device lines while the iPhone will deliver the biggest revenue growth numbers. Combined, I expect the iPhone and iPad to deliver 75% of the quarter's recognized revenue total. 

The chart below illustrates my anticipated revenue mix by product line:

Apple's Net Income Thrill Ride

Last week in an article titled, Apple's Revenue Growth: A Dual-Track Bullet Train, I analyzed Apple's rates of revenue growth and the company's relentless geographic expansion that supports the fast rates of growth. In today's article, I am providing an overview of Apple's net income growth and the influences on the company's rising profitability.

Apple's Net Income Thrill Ride
Apple is not only a fast-growing mega-cap, the company has defied conventional wisdom by increasing the percentage of revenue that flows to the net income line while revenue and in many cases market share, continue to rise across the company's major product lines. 

The graph below illustrates the rising percentage of each revenue dollar that flows to the company's net income line:

Over the most recent ten fiscal quarters, the percent of revenue that has reached the net income line has leaped from 21.54% of revenue in FQ1 2010 to 29.66% of revenue in FQ2 2012. Rising gross margin due to superb supply chain management, economies of scale, operating expense discipline and moderating tax rates have all factored into Apple's impressive percentages of revenue that have flowed to the net income line. 

Apple's Gross Margins

The graph below illustrates Apple's gross margins over the most recent ten fiscal quarters.

There's no disputing the fact the iPhone 4S has delivered very high gross margins. However, the high gross margins delivered by the iPhone 4S over the two most recent quarters were due primarily to economies of scale and not increases in average revenue per unit sold. In FQ1 2010, average revenue per iPhone unit was $638 versus $647 per unit in FQ2 2012. In FQ4 2011, average revenue per iPhone handset sold was $643.  Revenue per handset includes the revenue generated by Apple through the sales of Apple-branded and third party iPhone accessories. My Apple Unit Sales page chronicles the unit sales growth of each of Apple's major device lines over the most recent fourteen fiscal quarters. 

The iPhone's high gross margins exemplify Apple's extraordinary supply chain management and the benefits of economies of scale. This is not an issue of rising revenue per handset. It's primarily an issue of unit sales growth. 

Apple's Revenue Growth: A Dual-Track Bullet Train

Apple is unique among the world's mega caps due in part to the company's extraordinary rates of revenue growth and extraordinary rates of revenue growth matched with consistently high gross margin. Over the most recent six fiscal years, Apple's recognized revenue rose nearly sixfold and earnings per share rose more than twelvefold. In the first six months of the current fiscal year alone, Apple's revenue rose 66.35% to $85.52 billion and eps rose 104% to $26.17 per share. 

At Friday's closing price of $574.13, the shares are trading at a conservative 14 times trailing 12-month earnings of $41.04 with more than $115 in cash standing behind each outstanding share. For investors, understanding Apple's potential for continuing strong growth is at least as important as an appreciation for the company's growth performance over the past six and one-half years. At Friday's closing price and lowly earnings valuation, the market is discounting Apple's continuing growth potential. 

Apple: A Dual-Track Bullet Train

There's no disputing the fact Apple designs and markets some of the world's most sought after consumer products. But Apple's success is driven by more than smart product designs and technological innovation. Relentless geographic expansion is an important catalyst for the company's fast rates of growth. If Apple were a bullet train, it would be a bullet train powered by two parallel tracks. The first track is exceptional product design and the consequential product popularity. The second track is expansion of product sales into new and emerging markets. 

On December 4, 2011, I published an article titled Where Apple Makes Its Money. In that article I looked at Apple's revenue by region for the fiscal year that ended last September. In this article I'm presenting Apple's revenue growth by region for the first six months of the company's current fiscal year. 

Apple's Expanding Global Presence

Apple is now the world's largest distributor of music, a global bricks and mortar retailer and has more than 400 million iTunes customers around the world with online accounts backed by credit cards. By the end of the month iTunes-based app stores will be available to consumers in 155 countries and Apple's fastest rates of revenue growth are occurring in regions outside the United States. 

The chart below illustrates the percentage of revenue contributed by each of Apple's geographic revenue segments during the first six months of the fiscal year that ends on September 29, 2012: 

The Apple June Quarter Halftime Report

On Friday, May 18th, AAPL ended the week's trading at $530.38 per share, down 17.5% from the all-time high of $644 per share set on April 10th in intra-day trading. Although at Friday's closing price the shares are up 31% on the calendar year, the current price-earnings multiple of less than 13 times trailing 12-month earnings of $41.04 is at the low end of the trading range established over the most recent six calendar quarters.

The current low valuation is remarkable considering Apple's 63% revenue growth over the most recent four fiscal quarters and corresponding eps growth of 95.5%. Additionally, there is over $116 in cash and marketable securities standing behind each outstanding share.

For long-term investors, Friday's closing price represents an unreal acquisition opportunity ahead of the pending Mac line refresh, the release of the successor to the iPhone 4S and the eventual addition of China Mobile as an authorized iPhone carrier. Each of these events will have a stimulative effect on the share price as Apple journeys through the next twelve months.

The Apple June Quarter Halftime Report

This past week we passed the halfway point in Apple's June quarter that ends on Saturday, June 30th. Today, I'd like to share my early expectations for each of Apple's major product lines in the quarter.

The Apple iPhone

In the March quarter Apple reported an impressive 88% iPhone units growth rate for the period. But the 35.064 million iPhones reported sold included an increase of about 2.6 million units in channel supply to 8.6 million. Management reported residual demand for the iPhone 4S in the Asia-Pacific region during the March quarter conference call with analysts, but the channel supply number will need to be reduced as Apple prepares for the launch of the successor handset.

The iPhone 4S is the most popular iPhone handset Apple has ever produced. But the product may have peaked during its introductory quarter and I have doubts the product can hold the world stage for a full 12 months as Apple's flagship handset. I expect a dramatic decline from the March quarter's iPhone unit sales growth rate of 88% in the June quarter as the drawdown of channel supply will impact reported unit sales and as public attention begins to turn to expectations for the next iPhone handset. 

In the first two quarters of FY2012, Apple sold more than 72 million iPhones. Apple successfully met global demand over this period while realizing an almost 107% increase in unit sales. Apple's next challenges are acquiring component supplies and ramping manufacturing capacity for the successor to the iPhone 4S. The new model will most likely sport a new form with other major hardware advancements making the manufacturing transition more challenging than the transition to the iPhone 4S.

Although the pace of global smartphone adoption has reportedly slowed, the addition of new carriers and Apple's increasing product presence in developing markets will support continuing strong growth for the iPhone line through the release of the successor flagship handset. The next flagship handset will sell on a scale not seen before even by iPhone standards. But the next quarter for "blow out" iPhone sales numbers may be the holiday quarter or first fiscal quarter of FY2013.

Apple's March Quarter Results: The Good, The Bad and The Irrelevant

On April 24th, Apple announced results for the company's 2nd fiscal quarter ended March 31, 2012. For the quarter Apple reported revenue of $39.186 billion and earnings of $12.30 per fully diluted share. These results represent year-over-year revenue growth of 58.9% and eps growth of 92.2%. 

Apple's results for the March quarter exceeded Wall Street estimates by a country mile and in after hours trading the shares retraced recently lost ground and closed the session above $600.

Apple has transformed from being the maker of individual product lines to a purveyor of an integrated device and services eco-system. The March quarter results demonstrate the company's growing global dominance of the both the smartphone and emerging tablet device markets while extending Apple's leadership in offering a broadening array of content for these devices. 

I've titled this article Apple's March Quarter Results: The Good, The Bad and The Irrelevant. I'd like to take each of these qualifiers in turn.

The Good

In the March quarter Apple sold 35.064 million iPhones, representing an 88% year-over-year increase in units sold. The iPhone gained market share among subscribers at  Verizon and AT&T despite the sequential decline in domestic iPhone sales. 

In the March quarter, Apple shipped 11.798 million iPads, representing 151% year-over-year unit sales growth. 

Apple's Asia-Pacific Region delivered 114% revenue growth based on strong demand for the popular iPhone 4S handset with ongoing product demand.

The revenue segment inclusive of iTunes delivered 32% revenue growth to $2.151 billion and the revenue total exceeded revenue from iPod sales by 78%, signaling while the iPod line continues its decline, Apple's revenue generated from content sales and services for iOS-based devices continues to rise. 

Apple's Monster Quarter - The Sequel

Last fall I dubbed Apple's December quarter "The Monster Quarter". The company's December quarter performance lived up to the name. In the 14-week period ended December 31, 2011, Apple reported recognized revenue growth of 73.27% to $46.333 billion and eps growth of 115.71% to $13.87. 

Apple's Monster Quarter - The Sequel
Today I am calling the company's March quarter "Apple's Monster Quarter - The Sequel." For the 13-week period ended March 31, 2012, I am estimating reported revenue of $44.028 billion and earnings per share of $13.15, representing anticipated revenue growth of 78.49% and eps growth of 105.47%. 

The chart below illustrates my estimated revenue mix for the March quarter. I expect the Apple iPad and iPhone to represent 77% of the reported revenue in the quarter and for the iPhone to be the primary product in determining the quarter's revenue growth, gross margin and eps outcome for the period.

The Braeburn Group AAPL March Quarter Estimates

On April 24th Apple will announce results for the company's 2nd fiscal quarter ended March 31st. To gauge expectations for the March quarter, we asked members of the Braeburn Group, formerly known as the AAPL Independent Analysts, to submit estimates for the company's March quarter performance. The group takes its new name from the braeburn apple, a hybrid cultivar of the popular fruit.

Among the fifteen Braeburn Group members who submitted estimates for the March quarter are Dennis Hildebrand, Navin Nagrani, Patrick Smellie and newcomers Scott Millar and Christian Peel. Collectively these fifteen individuals represent a cross section of the Group's members and come from a variety of professional backgrounds and career interests. Membership in this private group is open to those willing to register and actively participate in the group's lively discussions. 

On average Braeburn Group Index participants anticipate the following March quarter unit sales results:

		Macs	4,617,307	22.80%	YOY Growth
		iPhones	38,232,733	105.03%	YOY Growth
		iPads	13,301,667	183.38%	YOY Growth
		iPods	6,844,933	-24.09%	YOY Growth

Notes on the Unit Sales Estimates:

Mac Sales: In Apple's 14-week December quarter, Mac unit sales rose 25.74% to 5.198 million units. The average unit sales growth estimate from the Braeburn Group Index participants suggests unit sales growth of 22.80%, on track with the 22.19% unit sales growth Apple reported in in the fiscal year ended last September. 

iPhone Unit Sales: On average, the Braeburn Group Index participants expect iPhone unit sales growth of 105% to 38.232 million units. This is below the December quarter unit sales growth pace of 128% and slightly above the FY2011 unit sales growth rate of 99%.

iPad Unit Sales: The introduction of the new iPad in the final month of the March quarter has produced a wide range of unit sales estimate from the Braeburn Group Index analysts. For the quarter, the fifteen participants anticipate on average unit sales of sales of 13.301 million iPads and associated unit sales growth of over 183%.

iPod Unit Sales: On average, the index participants anticipate a nearly 25% decline in year-over-year iPod sales to about 6.845 million units. 

Apple: Focus On Earnings Growth, Not The Earnings Multiple

On February 11, 2012, I issued a revised 12-month price target for Apple of $790 per share. Since that date the share price has risen about 10% to Friday's closing price of $545.18. Over the next twelve months I expect the share price to rise at least 45% from Friday's closing price to reach above my published target.

Posts At Eventide Axiom #1: Focus on Earnings Growth, Not The Earnings Multiple

In FY2012, I forecast Apple's earnings per share to rise at least 100% from FY2011's $27.68 to over $56. Apple began this fiscal year with an eps gain of over 115% to $13.87 in the December quarter. The March and June quarters will deliver eps growth rates at or near 100% due to strong unit sales of the iPhone 4S and strong unit sales of the new iPad models that will be released later this month. This fiscal year will end with an extraordinary high eps growth rate in the September quarter due to the company's languid performance in the prior-year period. The release of the iPhone 4S in the December quarter creates a soft prior-year comparison in the quarter that closes the current fiscal year. 

Even at a modest multiple of 12.5 times trailing 12-month earnings, at $56 in FY2012 earnings per share, Apple's share price will reach $700 by early November. While it's not practical to forecast the earnings multiple the market will award Apple, it's also not necessary for the multiple to expand to reach my stated 12-month price target. At Friday's closing price the shares are currently trading at 15.52 times trailing 12-month earnings. Even if the multiple contracts, the share price advance will remain on track. 

Earnings growth will deliver strong share price appreciation for Apple whether or not the earnings multiple expands or contracts. 

Posts At Eventide Axiom #2: Applying The "Law of Large Numbers" to Apple is Bunk!

In the December quarter, nearly 75% of Apple's reported revenue was sourced from products that did not exist in the market as recently as five years ago today. With the forthcoming refresh of the Apple iPad product line, the percentage of reported revenue generated by the iPhone and iPad will continue to rise well into next fiscal year. At this time, the market for the Apple iPad can not be accurately determined nor defined and the product line remains in a nascent phase of global market development. 


The chart below illustrates the sources of Apple's $46.33 billion in revenue in FQ1 2012. 

Apple Price Target: $790 Per Share

Today, I am publishing an updated price target for Apple of $790 per share. This target forecasts a 60% gain in the share price from the closing price of $493.42 on Friday, February 10, 2012. I consider this price target to be moderate based on the expectations of strong revenue and earnings growth over the next 12 months and the low valuation range in which the shares currently trade, despite the recent run-up in price. 

Over the past 10 trading days, the shares have risen about 10% from the closing price of $447.28 on January 27th to Friday's closing price of $493.42. However, this recent gain is a market response to Apple's strong December quarter outcome and does not represent a new valuation range for the shares. The shares continue to trade at a significant discount to near-term growth. 

Apple's Current Valuation

The graph below illustrates, despite the near 100% growth in earnings per share over the most recent four fiscal quarters, at Friday's closing price the shares have risen only 43% in value since February 1, 2011. 

Over the past 12 months the company's cash and marketable securities per share has continued to rise as a percentage of the share price. At Friday's closing price, cash and marketable securities per share represented 21% of the share price.  

Apple: Rising Revenue, Falling Costs Per Revenue Dollar

For the 14-week period ended December 31, 2011, Apple reported record revenue in the fiscal quarter of $46.333 billion representing a 73% year-over-year gain. The company also reported a 115.7% rise in earnings per share to $13.87. No one can dispute the success of the company's popular products. But Apple's extraordinary eps growth in the December quarter and eps growth over the past two fiscal years was influenced by more than revenue growth alone. The company's focus on cost discipline is generating earnings growth at a much faster pace than the underlying rate of growth in revenue. 

Apple's Net Income Per Revenue Dollar

The graph below illustrates the rising percentage of reported revenue that has flowed to the net income line over the most recent nine fiscal quarters. In the December quarter 27.90% of reported revenue flowed to the net income line. This does not include the beneficial impact on net income from interest and other returns on the company's holdings in cash and marketable securities. The value of those assets totaled $97.6 billion at the end of the December quarter. 

Apple's Expenses Per Revenue Dollar

Over the most recent nine fiscal quarters, the percentage of reported revenue consumed by expenses has fallen from a high of 79.60% in the 3rd quarter of FY2010 to a low of 72.10% in the recent 1st quarter of FY2012. The graph below illustrates the percentage of revenue consumed by cost of sales (the inverse of gross margin), operating expenses and taxes.

Apple: March Quarter Expectations After Record FQ1 Results

On Tuesday Apple announced record quarterly revenue of $46.333 billion and record eps of $13.87 in the December quarter. The 73.2% rise in revenue and 115.7% rise in earnings per share were fueled by strong domestic demand for iPhones, iPads and Macintosh personal computers and by gross margin in the quarter of 44.7%.

In announcing the company's FQ1 results for the 14-week period, Apple offered revenue guidance of $32.5 billion for the 13-week quarter ending March 31, 2012 and earnings guidance of $8.50 per share. Management's guidance suggests revenue growth of 31.75% and eps growth of 32.8%. Once again, Apple's guidance will be proven decidedly conservative. 

December Quarter Revenue Growth Recap

Apple's 73.2% revenue growth in the December quarter was aided by a 14-week fiscal period encompassing the immediate post-Christmas shopping week and extraordinary revenue growth in Apple's Americas region, exclusive of the company's retail stores. The Americas delivered 92% revenue growth to $17.714 billion, representing 38.2% of total reported revenue on strong sales of the Apple iPhone 4S. 

Despite the well publicized economic problems in Europe, the region turned in a strong revenue growth rate of 55% for the quarter. Apple's Asia-Pacific region, absent the release of the iPhone 4S through an authorized carrier on China's mainland, turned in a respectable 54% revenue growth rate. The Asia-Pacific region will be the catalyst for robust revenue and earnings growth in the March quarter.

On To The March Quarter

In a recent article titled Where Apple Makes Its Money, I suggested the Asia-Pacific region will surpass Europe as Apple's second biggest revenue region this fiscal year. In FY2011, China was the only country outside the US to deliver more than 10% of Apple's reported revenue total. The release of the iPhone 4S on China's mainland in the March quarter will generate greater than 100% revenue growth in the Asia-Pacific region in this three-month period. 

The Apple iPhone

In the December quarter Apple defied skeptics who questioned the company's ability to ramp iPhone supply to meet demand. In the holiday quarter iPhone unit sales rose 128% to 37.044 million units and handset sales revenue, inclusive of accessories and related products, rose 133% to $24.417 billion or 52.7% of the company's total reported revenue. In the March quarter, the rate of iPhone unit sales growth may again reach triple digits due to the China iPhone 4S rollout and the company's proven ability to meet demand for product. At the end of the December quarter, the iPhone's global channel supply of about 6 million units represented less than three weeks of December quarter sales and was well below the targeted range of 4 to 6 weeks of supply. 

In addition to the expected strong iPhone sell-through in the March quarter, Apple can add millions of units to channel supply before the end of the period and in support of the continuing global roll out of the iPhone 4S handset. For the March quarter, I'm targeting iPhone unit sales of 36 million units. 

The Apple iPad

In FQ1, Apple sold 15.434 million iPad units and sell-through was slightly higher than reported sales. This represented 111% unit sales growth even as consumer expectations for a product line refresh to occur in the March quarter continue to grow. During the conference call with analysts following Tuesday's earnings release, management mentioned the iPad's fast adoption in the education market. With the prospect of the iPad 3's release in the March quarter and the chance the iPad 2 will remain a shipping product, Apple could deliver in the area of 200% iPad unit sales growth in this fiscal period. Education channel sales will be an iPad unit sales growth catalyst in the upcoming June quarter.

The Macintosh

The Mac's unit sales performance exemplifies the "Apple product mutual halo effect." Record Apple retail store traffic following the release of the iPhone 4S in October assisted in boosting December quarter Mac unit sales 26% to 5.198 million units. In the Asia-Pacific region Mac unit sales rose 58%. I expect March quarter Mac unit sales of about 4.7 million. Both the Asia-Pacific region and the Apple retail segment will be unit sales growth leaders in this three-month period. 

For The March Quarter

My preliminary March quarter revenue estimate stands at $41 billion, representing anticipated revenue growth of 66% and an earnings per share growth rate of about 80% to $11.50. Apple's guidance for the quarter of $32.5 billion in revenue and eps of $8.50 is consistently conservative. I currently expect Apple to beat guidance by $3 per share.

On The Fiscal Year

For the fiscal year ending in late September, I now expect revenue exceeding $175 billion and earnings per exceeding $50. FY2013 is on track to be a more than one-quarter trillion dollar revenue year. Over the next two weeks I will be updating my current 12-month price target of $640. I expect the updated price target to land in the vicinity of $700 per share. 

Apple's Earnings Quality

Apple's gross margin in the December quarter reached 44.7% and net income reached nearly 28.2% of revenue.  I expect gross margin and the percentage of revenue that flows to the net income line to remain high through the March and June fiscal quarters due to the continuing global roll out of the iPhone 4S handset. For as long as revenue growth rates remain greater than 50%, the percentage of revenue consumed by operating expenses will continue to decline. In the December quarter operating expenses came in at $3.363 billion or just above 7.25% of reported revenue. The declining percentage of revenue consumed by operating expenses contributed to the very strong net income growth in the quarter and will contribute to extraordinarily high net income growth rates this fiscal year. 

Robert Paul Leitao

Disclosure: The author is long Apple shares

Apple's "Monster Quarter" Will Deliver Monster-Sized Results

Apple stands at the threshold of becoming the nation's largest technology company. Apple will soon surpass Hewlett-Packard in quarterly revenue while delivering more than $.25 of each revenue dollar to the net income line. By the end of this month and in response to the company's December quarter results, Apple will again surpass Exxon-Mobil in market cap to become the nation's most highly valued enterprise.

To put Apple's recent rates of growth in perspective, in FY2011 that ended in late September, the company's $108.249 billion in revenue represented a 677% rise in revenue in the six years since FY2005 and the $27.68 in earnings per share represented 1,686% growth over this same six-year period. Apple is the undisputed enterprise success story of the new millennium.

It's product innovation that drives Apple's accelerated rates of growth and it's innovation that will deliver monster-sized results in what I have dubbed "Apple's Monster Quarter."

Today I am publishing my revenue and earnings estimates for Apple's first quarter of FY2012 ended December 31st. For the quarter I estimate revenue of about $44 billion and earnings per share of $12.20. In this one quarter Apple's revenue and eps results will most likely exceed the company's total revenue and earnings per share for all four quarters of FY2009 that ended just over two years ago. These estimates represent an expectation of 64.54% year-over-year revenue growth in the quarter and 89.75% growth in earnings per share.

The Sources of Apple's Frenetic Rates of Growth

Apple's accelerated rates of growth are fueled by the popularity of the company's iOS-based products including the iPhone and iPad and the company's relentless geographic expansion. Currently, the only practical limits on Apple's rates of growth are device production capacity and the pace at which the company can create sales and support infrastructure in underserved global markets. At this time Apple is addressing only a fraction of the global market for the company's digital lifestyle products. 

Although domestic revenue as a percent of total revenue will rise in the December quarter due to the initial release of the iPhone 4S in the United States and the addition of Sprint as an authorized iPhone carrier, by next fiscal year revenue sourced from outside the United States may represent two-thirds of the company's revenue total.

The graph below illustrates the influence of the iPhone and iPad on my anticipated December quarter revenue outcome. Collectively the two products represent about 71.5% of estimated revenue in the quarter and both products have been brought to market within the past five years.