Analyst: Are Some of Apple’s Lost Profit Margins Coming Back?

lost-3Wells Fargo (NYSE:WFC) analyst Maynard Um took a look at Apple’s (NASDAQ:AAPL) recent 10-Q filing and discerned some interesting profit margin positives. Via Barron’s, Um characterizes Apple’s overall accounting practices as “conservative” and asserts his belief that the Cupertino-based company’s cash flow hedges and overestimated warranty accruals will eventually return it more profit margin than a cursory view of its 10-Q would indicate.

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Um notes that “Apple had a net deferred gain of $517 million associated with cash flow hedges, net of taxes, that was recorded in accumulated other comprehensive income as of March 30.” Based on the income from its cash flow hedges, Um expects these deferred gains to “benefit gross margin by more than 150 bps [basis points], or $0.41 in EPS [earnings per share].”

Um then turns his attention to Apple’s warranty accrual issues that are widely believed to be related to its well-publicized iPhone warranty readjustment for the Chinese market. Apple was prompted to make the warranty changes after significant, government-led criticism of its post-sales service in China.

Apple now offers brand new replacements that feature a one-year warranty for any returned iPhone 4 or 4S models in China, rather than repairing the phone or providing a refurbished substitute. In its 10-Q filing, Apple estimated the cost of this product warranty accrual to be $414 million…