Apple (AAPL) Rare Earnings Miss, But Strong iPad Sales Should Keep Bullish Trend Intact

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12:49:23 pm on July 26, 2012

Apple (AAPL) shocked investors on Tuesday with a rare earnings miss. The huge technology company has now seen its shares fall 5% in the two days following its earnings report. It’s time to take a look at the earnings report and see where Apple shares may be headed going forward.

For its third quarter, Apple reported revenue of $35.0 billion. The company’s net profit was $8.8 billion, translating to earnings per share of $9.32. Analysts had been calling for earnings per share of $10.32 in the third quarter. While Apple did fall short on estimates, it did see huge growth from last year’s third quarter. Revenue increased 22%, net profit grew 21%, and earnings per share increased 20%.

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For the quarter, Apple recognized the following sales amongst its key products (growth from 2011 third quarter):

  • 26.0 million iPhones (+28%)
  • 17.0 million iPads (+84%)
  • 4.0 million Mac computers (+2%)
  • 6.8 million iPods (-10%)

Two big positive signs for Apple during the third quarter were gross margin and international sales. In the third quarter, gross margin increased to 42.8% from 41.7%. International sales made up 62% of total revenue. Apple continues to expand its high in demand products to new international markets.

Apple is calling for guidance of $34.0 billion in revenue for its fourth quarter. The company also predicts it will earn $7.65 per share during the quarter. Analysts expect revenue of $35.32 billion and earnings per share of $8.62. With Apple’s new guidance, the company is setting up for an earnings miss of 4% on revenue and 11% on earnings per share. It is these updated guidance numbers that have punished shares.

For the full year, analysts call for revenue of $156.43 billion. Apple has now reported $120.5 billion in the nine months to date. Apple will therefore need to report $35.93 in fourth quarter revenue to hit these previous year targets. With both analysts and Apple calling for lower numbers then what is needed, it now seems Apple will miss full year targets.

Analysts call for full year earnings per share of $44.42. With nine months reported, Apple has earned $35.89. Apple’s guidance for the fourth quarter would put full year earnings at $43.54. If Apple could meet analysts targeted $44.42 by $0.09.

Apple has added a dividend to its already much loved stock. The company will pay out $2.65 to shareholders on August 16th. The move to add a dividend to its stock, has led to a new set of investors and mutual funds picking up shares of Apple.

Despite its earnings miss and full year lowered targets, Apple shares are still extremely discounted. Apple shares trade at 13 times the $43.54 that Apple would hit with earnings per share of $7.65 in the fourth quarter. However when cash position ($29.51 per share) is backed out Apple trades at 12.5 times its earnings per share. All these assume Apple will report what they have now guided for the fourth quarter. Apple does have a history of beating earnings guidance when it has been lowered. If you were looking for a time to buy Apple shares, there may be a good entry once this correction plays out.

Technically, shares of AAPL remain considerably bullish on longer term charts.  In the shorter term there is some weakness with the stock pushing below the 50 day moving average today.  That may set up a move to the next major level of support around the $500 level in the coming weeks.  Basically, if you’re still in Apple, there are no indications that the ride is over.  If you’re looking for a new entry point, it’s a bit too soon as the recent minor technical deterioration needs to repair itself.

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