RBC expects Apple to beat own Q3 guidance
Apple (APPL:NASDAQ) reports on Wednesday, and RBC’s equity research team is looking for more good things out of Jobs & Co. If you were to go any mall in the U.S. yesterday, the only store that would have been busy from the moment the doors were open would have been the Apple retail outlet. Makes you wonder if too much is anticipated, if analysts are expecting, as RBC is, the results to be ahead of Apple’s own guidance:
Apple reports Q3 July 25, with focus on iPhone, but expect Mac momentum to drive results.
• Expect Q3 Above Guidance and EPS above conc. On Mac momentum, Q3 results are expected above guidance, with revenue at $5.3B (up 21% Y/Y), inline with $5.3B conc. and above guidance for $5.1B. We expect 33.2% GMs vs. 32% guidance. GAAP EPS is expected at $0.77, above conc. at $0.72 and guidance at $0.66, on solid GMs.
• 450-500k Phones Sold. We believe Apple will report 450-500k iPhones sold Q3 (sell-in to AT&T, sell-through online and Apple stores, 2 days ended June 30). Checks suggest subsequent sustained iPhone demand, with est 1.1 – 1.5M sold by July 25. We expect iPhone to contribute $10M to Q3 (nominal to EPS). We recently raised our iPhone outlook to 13.5M units by end CY08.
• Conservative Q4 Guidance, with Possible NAND Margin Impacts. We expect Q4 guidance for $5.8-6.2B revenue, inline with $6B conc. and below RBC for $6.4B (Apple guides conservatively, our thesis is for Q4/Q1 upside driven by Mac momentum and sustained iPhone demand). We expect Q4 GAAP EPS guidance at $0.80-0.85, inline with conc. at $0.83 and below RBC
at $0.88. Recent sharp upward NAND pricing (up 71% Q/Q) may impact our Q4 EPS expectations by ($0.05) to ($0.10). We would accumulate on any
margin-related weakness, given our thesis for upside Mac-related top-line
momentum, expected to trump margin concerns.
• Upside Mac Momentum Expected Q4/Q1. For Q3 we expect $2.4B Mac revenue (up 31% Y/Y) on 1.6M units, with portables at $1,662M on 1,093k units (up 37% Y/Y) and desktops at $782M on 543k units (up 3% Y/Y). June data from RBC’s Technology Adoption Panel point to upside surprise in Mac momentum Q4/Q1. Checks suggest 9.4M iPods shipped in Q3 (up 16% Y/Y) at
$157 ASP or $1.5B rev (down 1% Y/Y on ASP declines).
• Maintaining Estimates. Our F08 estimates remain $32.2B revenue and $4.52 EPS on 15.5% EBIT margins. Our F09 outlook remains $39.5B and $5.67 EPS on 15.7% EBIT margins.
Valuation and Recommendation
• Reiterating Outperform and $160 target. Our $160 target is DCF-based (WACC of 10.5%, 4.5% terminal rate, FTM cash $20.70/share) and equates to 39x FTM P/E, below “Premium Technology” peers at 41x, and vs. historical 25x-38x valuation.