Tuesday, October 20, 2009

Apple crushes estimates, nears all-time stock high(AAPL)

Last night, Apple(AAPL) reported earnings of $1.82, 40cents ahead of consensus expectations. Revenue beat estimates by $600million. Macintosh unit sales increased 17% in this horrendous economic environment, a true testament to this incredible brand. Shares hit an all time high last night above $204, and today are trading slightly lower, at $199.75

-Component costs increased less than expected, helping the company report gross margins of 36.6%, over 2.5% higher than Apple's own estimates.

-Total cash and short-term investments at quarter-end were $34billion, or $37per share. They could buy Dell (DELL) and still have $4billion in cash left (actually $16billion, b/c of Dell's ridiculous $12billion cash hoard.)

-Ipod sales down 8% to 10million units, as iphone cannibalizes sales.

-Iphone sales of 7.4milion showed a 7% unit growth year-over-year.

The most important part of the release is the following:

"In accordance with the subscription accounting treatment required by GAAP, the Company recognizes revenue and cost of goods sold for iPhone™ and Apple TV® over their estimated economic lives. Adjusting GAAP sales and product costs to eliminate the impact of subscription accounting, the corresponding non-GAAP measures* for the quarter are $12.25 billion of “Adjusted Sales” and $2.85 billion of “Adjusted Net Income."

Due to the soon-to-be reversed accounting treatment for certain Apple products, the company must recognize revenue and costs for iphone over an extended period, even though CASH FLOW comes immediately. The effect is that "true" net income is 71% higher than the $1.67billion reported.

Apple in typical fashion sandbagged forward guidance (guided too low).

Street Reactions:

-->> Deutsche Bank raises earnings estimates, and takes the stock target to $250 from $225.
-->> Oppenheimer takes their stock target to $235 from $210
-->> Kaufman target increased to $235 from $214.

Looking to 2010, earnings are estimated at $8.50 per share, pointing to net income of $7.8billion. I estimate Free Cash Flow for 2010 of $11.9billion. Apple could trade at a FCFY(Free Cash Flow Yield) of 7% in a better economic environment, and adding to that the $37 per share of cash they have, the stock would trade at $224, or about 12% higher than where it is today. To get to a higher number, you have to believe that Apple will continue to blow away earnings estimates, earning closer to $10 per share in 2010. I wouldn't bet against it.



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