Apple 2.0

Covering the business that Steve Jobs built

AAPL: The Street never says it's sorry

April 21, 2011: 12:15 PM ET

Most professional analysts blew it in Q2, but you wouldn't know it from their post-mortems

The distribution of pro (blue) vs. amateur (green) EPS estimates. Source: Alexis Cabot. Click to enlarge.

Horace Dediu, who writes a blog called Asymco and was featured in this space last fall for the uncanny accuracy of his Apple (AAPL) earnings estimates, was beating himself up Thursday morning for missing the company's Q2 2011 iPad unit sales number so badly. Even though his iPhone estimate was the best of the 48 analysts we polled and he missed Apple's EPS by only 3 cents, he gave himself  a B- for the quarter.

By Dediu's exacting standards, few of the professional analysts who cover Apple for banks and brokerage houses got passing grades. Most, judging by the chart above, should be required to retake the course next semester.

But you would never know it from the reports they sent to clients overnight. We scanned nearly two dozen and couldn't find a single apology.

Below: Excerpts from their morning-after notes.

Gleacher's Brian Marshall: Sometimes we have to step back from our AAPL financial model and simply shake our heads in awe…it is amazing how it developed over the years. For example, in CY08, AAPL generated ~$38.9bil of revenue with ~$9.2bil in operating profits with the iPhone representing ~23% of total sales. Today, we are introducing our CY12 estimates of ~$132.5bil in revenue and ~$40.9bil in operating profits with the iPhone generating ~46% of total sales. To put this into perspective, over this 5-year timeframe, AAPL will have grown its revenue base more than three-fold while simultaneously more than quadrupling its operating profits.

JMP's Alex Gauna: We are reiterating our Market Perform rating on Apple despite another blowout report from the company that was driven by upside iPhone sales. ...Shares were understandably up 2-3% in reaction to the print; however, we continue to caution that slowing supply chain dynamics that accurately presaged lackluster iPod performance and an iPad shortfall could still play out further in a June quarter that will not benefit from a new iPhone refresh.

Deutsche Bank's Chris Whitmore: Apple continues to show impressive growth despite its size and is well positioned to benefit from the confluence of three major product cycles, namely: iPhone, iPad and Macs. These product cycles coupled with greater geographic expansion (Verizon iPhone, iPad 2, iPhone 5, China expansion, carrier deals) increases our confidence in AAPL's ability to continue to outperform.

J.P. Morgan's Mark Moskowitz: We expect shares to retrace recent weakness and to be upward biased in a meaningful way. The numbers have gotten too big to ignore as Apple defies the law of gravity with 83% YoY revenue growth. In our view, Apple is the magical growth story in large-cap tech. The iPhone and Mac momentum should keep investors interested, particularly as light iPad units in the March quarter related to launch timing and not demand.

Needham's Charlie Wolf: The iPhone saved the quarter with sales of 18.6 million units and single handedly drove the upside in earnings because of its lofty 50% gross margin... While Apple does not talk about new products, it appears increasingly likely that the iPhone 5 will not launch until September. The launch delayed from June could dampen revenues in June and September. But it's likely to translate into a blowout December quarter.

Morgan Stanley's Katy Huberty: Several bullish data points in the Mar Q: 1) iPad 2 was described as the "mother of all backlogs" exiting March and global demand / supply should increase meaningfully in the June quarter and C2H11. 2) Given Apple's success in China (revenue +250% Y/Y in March), the company looks to replicate its strategy in other emerging markets... 3) Despite slowing consumer PC sales and competitive Android smartphone offerings, Mac and iPhone unit growth actually accelerated in March. 4) Even with the shift to lower margin iPads in June, Apple guided to a 38% gross margin, well above expectations... 5) Japan is not the concern many investors believed it might be.

Piper Jaffray's Gene Munster: We believe investors have grown tired of the valuation argument (shares of AAPL trade at 9x CY12 EPS ex-cash or 12x with cash, vs. our CY12 EPS growth of ~20%), given the monster numbers Apple reports only creates a higher bar for the out year growth rates. Even if the multiple remains depressed, we expect shares of AAPL to move higher driven by earnings growth.

RBC's Mike Abramsky: The Q2 beat and Q3 outlook to us show still-underestimated strength of iPhone, iPad, Mac product cycles ahead, as well as strong management execution (sans CEO Jobs). We foresee higher valuation on rising visibility to accelerating growth (59% F11, vs. 52% F10), sustained margins, and catalysts (iPhone5, PC share gains, iPad3, financial outperformance) and view valuation (9.5x ex cash) as compelling.

Ticonderoga's Brian White: With the stock now trading at 10x our CY11 EPS estimate (ex-cash), we believe there is plenty of upside left in the stock price as we look forward to continued momentum from the iPad 2, a new iPhone 5 in September, growing adoption of Mac products and a bigger push in the TV market as the year progresses. Given our increased estimates and expectations for continued portfolio momentum, we believe the stock is poised for the next leg higher and can reach $612 over the next year.

Canaccord's T. Michael Walkley: Despite the introduction of competitive 10-inch Android 3.0 (Honeycomb) tablets at CES, MWC, and CTIA from OEMs such as Motorola, LG, Samsung and others, we expect Apple to hold dominant market share of the tablet market in C2011. In fact, our checks indicate strong sales of iPads despite the stock outs and slowing sales of the XOOM following the iPad2 launch.

Oppenheimer's Ittai Kidron: We're surprised by the sizable QoQ drop in overall iPad shipments. iPad 2 manufacturing constraints combined with a pause in purchases related to the iPad / iPad 2 transition appears to be the cause. Despite the hiccup we remain positive on the iPad/tablet form factor and expect a sharp ramp through the end of 2011.

Merrill Lynch's Scott Craig: The main reason for our consistently above consensus EPS has been gross margin. F2Q11 was 41.4% (up 290bps Q/Q), above our 40.2% estimate, and ahead of guidance by 290bps – mix (iPhone), leverage, and better commodity costs. F3Q11 guidance for gross margin down 340bps Q/Q (mix shift to iPads, less leverage) seems typically conservative. We model gross margin of 40.4% (- 100bps Q/Q) on mix.

Rodman & Renshaw's Ashok Kumar: Conservative outlook (again): Apple guided for June quarter revenues of $23 billion (-7% Q/Q) and below street estimates of $23.8 billion. Gross margins of 38%, down 340 bps Q/Q, will be impacted by higher mix of iPad 2 and lower top line. We do expect a sizeable sequential decline in iPhone sales ahead of the iPhone 5 launch in September.

Cowan's Matthew Hoffman:  AAPL reported F2Q11 results AMC on 4/20 that again comfortably topped consensus top and bottom line expectations. The upside came primarily from very strong iPhone and Macintosh PC shipments, which more than offset weaker iPod and below-consensus, supply-constrained iPad/iPad 2 shipments. Given current iPhone franchise momentum (esp. in U.S.), a very limited impact from Japan on costs or supply, huge iPad 2 backlog through April (13 countries are set to launch next week, just now reaching ~40 total), we believe estimates are likely to rise post-call. We remain constructive on AAPL stock and see 15% appreciation relative to the market over the next 12 months.

Cross Research's Shannon Cross: We think Apple is very well positioned with demand continuing to outpace supply for iPad2, international carrier expansion of iPhone and retail store expansion. We are raising price target to $470 (from $440) reflecting 13x our increased F2012 pro forma EPS of $30.01, net of cash interest and incorporating $80 per share in cash at period end. Reiterate Buy.

Goldman Sach's Bill Shope: We reiterate our CL-Buy on Apple. We are raising our forecasts as we remove some of our Japan-related supply conservatism and adjust estimates on significant iPhone upside. Although we still need to monitor Japan supply chain risk closely, it appears that Apple's supply chain clout is allowing it to avoid any material challenges.

Webush's Scott Sutherland: iPad shipments of 4.7 million were below our estimate of 5.9 million but were impacted by 0.4 million units of channel depletion as iPad 2 deliveries could not keep up. However, with the iPad 2 launch late in the quarter, a large backlog of orders, and additional country launches, we expect solid sequential growth in FQ3.

Citigroup's Richard Gardner: We are raising FY11-FY13 ests for AAPL on the heels of yet another iPhone-driven blow-out. We are also taking this opportunity to reflect the introduction of a lower-end iPhone in late-CY11/early-CY12 in our ests. As a result, we are raising our price target from $415 to $435 and reiterate a Buy rating on the shares.

Credit Suisse's Kulbinder Garcha: We maintain that Apple should be able to deliver outsized revenue/ earnings growth of 48% over the next two years given a sustained competitive advantage in software, hardware and services/ apps ecosystem. On our CY12 estimate, Apple trades on a P/E multiple (ex-cash) of 8.1x, which is inexpensive, given the EPS growth of 48% over the next two years.

CLSA's Avi Silver: The net result of all the puts and takes is we raise our FQ3 (June) EPS estimate from $5.25 to $5.49 (on $24bn in sales), which compares to the company's highly conservative EPS outlook of $5.03 (on $23bn in sales). Apple's gross-margin guidance of 38% includes sequential pressure blamed on a higher mix of iPad sales, negative leverage on an expected sequential sales decline and the net impact of iPhone channel inventories returning to normal levels in FQ2.

Jeffries' Peter Misek: We view Apple as the preeminent growth story in our coverage universe, and believe H2:CY11 is setting up strongly with iPhone 5 and cloud- based service launches. We reiterate our Buy and raise our target to $500/sh.

Hudson Square's Daniel Ernst: Driven by a growing portfolio of well-designed, easy-to-use, media-centric devices/software, coupled with strong earnings growth and a cash-rich, debt-free balance sheet, we maintain our Buy rating on Apple, and the stock remains on the Hudson Square Conviction List.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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