Morgan Stanley analyst Katy Huberty lowered her EPS for the next three quarters but has a significant rebound in earnings in fiscal 2014 ($51.64) and 2015 ($57.06). She changed her estimates due to slower demand and inventory adjustments ahead of September product launches and believes the June quarter could be the trough with new iPhones and iPads helping regain momemtum.
Source: Morgan Stanley
For the March quarter Huberty is forecasting 33 million iPhones (down from 37 million) and 21 million iPads (up from 19 million) with gross margin of 38%. Total revenue is projected to be $41.4 billion (vs. guidance of $41 to $43 billion and the Street at $42.7 billion) with EPS of $9.59 (vs. guidance of $9.24 to $10.24 and the Street at $10.13).
Source: Morgan Stanley
Huberty believes that March quarter’s gross margin and the June quarter’s EPS guidance are the two key numbers when Apple announces on April 23.
Her target price of $600 is based on a 14x PE multiple on calendar EPS of $43 or a 11x PE multiple when Apple’s large cash position is taken into account. Huberty has a downside scenario of the stock dropping to $400 with an upside case of $700.
CJ Takeaway #1: It is good to see expectations get ratcheted down again on Apple and not have the stock take a significant hit (it is down 0.4% vs. the S&P 500 up 0.3% this morning). I would agree that how the company performs to its guidance ranges, especially gross margins, is critical since if the numbers are in the range or slightly above it will give credence to the June quarter guidance.
CJ Takeaway #2: The Street is estimating $9.34 for June quarter’s EPS and Huberty has just taken hers down from $8.76 to $7.45 (I am at $9.51). While it is good to have a low bar I do believe that if the company’s guidance at the mid-point is below $8 (or probably even under $8.75) the stock could take another hit and go to the low $400’s.
Huberty also believes that the company is likely to announce an increase to its share buyback program (around $25 to $30 billion) and its dividend to yield over 3% from the current 2.5%. This could help offset disappointing guidance.
Disclosure: My family and I own Apple shares
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