I have followed BMO’s Apple analyst, Keith Bachman, for over a decade and overall he has a good handle on what to expect from Apple. He decreased his share count expectation for the March quarter, which raised his EPS estimate from $10.16 to $10.23. However he points out that the Street’s June quarter revenue expectations could be too high. (Note that my family and I own Apple shares and I have sold put options which is a bullish strategy).
Analyst’s share count projections could be a bit high
Apple had 901.45 million diluted shares in the December 2013 quarter. On February 7 Tim Cook, Apple’s CEO, announced that the company had spent $14 billion in the 10 days post its earnings announcement to buyback shares. The shares low after its earnings announcement was $493.55, its high was $515.28 and it closed between $499.78 and $512.59 over those days. Using a $505 average price for what it paid Apple decreased its share count by about 27.7 million shares.
Since these did occur in late January and early February if these were the only share buybacks done during the quarter Apple’s share count would decrease by 18.5 million (two thirds of the 27.7 million). There may be some impact from additional Restricted Stock Units (RSUs) being awarded but I think that should be minimal since the company awarded 6.2 million RSUs in the December quarter vs. 7.8 and 5.6 million in all of fiscal 2012 and 2013, respectively. Also I suspect management could have spent more than the $14 billion in the quarter to buy back shares.
It appears that the March quarter share count should come down to at least 883 million shares and 874 million if you assume a 27.7 million decrease. Just the difference between the 18.5 and 27.7 million is an $0.11 impact to EPS.
Bachman’s share count is now at 880 million and of the other five analysts I’m currently tracking Steve Milunovich from UBS has the lowest share count at 874 million (looks like he subtracted the 27.7 million) while Katy Huberty from Morgan Stanley, Brian Marshall from ISI, Gene Munster from Piper Jaffray and Brian White from Cantor Fitzgerald are between 891.1 and 896.5 million shares. Since every 10 million shares impacts EPS by about $0.12 the analysts with higher share counts EPS estimates could be a bit low.
June revenue and potentially EPS estimates are too high
The Street’s (meaning sell-side analysts) average revenue estimates for the March quarter is $43.75 billion compared to Apple’s guidance of $42 to $44 billion. This seems reasonable since for the previous four quarters Apple has beaten the mid-point of its revenue guidance by $1.6, $0.8, $2.0 and $1.1 billion, respectively and the worst it has performed vs. the top-end was a shortfall of $400 million in the December quarter.
However the Street’s revenue projection for the June quarter is $38.65 billion, a decrease of 11% from its $43.75 billion in the March quarter. Bachman believes that this year’s seasonality will be more like fiscal 2013 when revenue declined 19% quarter over quarter vs. fiscal 2012 when it decreased 11%. This is because in fiscal 2012 the iPad 3 was launched on March 16, which led to a $2.5 billion sequential increase in iPad revenue in the June quarter. In fiscal 2013 when there wasn’t a new iPad announced in the same timeframe iPad revenue dropped $2.4 billion sequentially.
If you were to apply the same 19% revenue decline to the Street’s $43.75 billion Apple’s revenue for the June quarter would be $35.4 billion (vs. Street’s $38.65 billion). Bachman is at $36.6 billion with EPS of $7.87 (Street is at $8.59).
I overall agree with Bachman that expectations for the June quarter need to ratchet down especially since the buzz for the iPhone 6 is increasing. Besides the seasonality of iPads negatively impacting results if there is a more pronounced slowdown in iPhone sales due to people waiting the June quarter could be worse than expected.
Stock has been trading in a tight range
Since the decline and bounce back post earnings Apple’s shares have been trading in a fairly tight range of $520 to $545 since early February. It has been hovering around its 50 day moving average and technical indicators such as its Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) have been in neutral territory.
It does appear that with Apple’s strong buyback of shares earlier this year and with forming a base the stock shouldn’t have too much downside unless the above mentioned product revenue seasonality is much worse than expected. It is possible that results and especially the June quarter guidance could hit the shares similar to January but I expect analysts have and will continue to lower expectations going into the results being announced.