Ahead of Apple’s (NASDAQ:AAPL) upcoming quarterly report — scheduled for release after the markets close on April 23 — Wells Fargo analyst Maynard Um postulated whether an “Apple Spring” is around the corner in a research note sent to Wall St. Cheat Sheet Wednesday morning.
Drawing in the term “spring,” seemingly with the intention of making a connection to the idea of rebirth, the analyst proceeded to outline the reasoning behind his firm’s Outperform rating on shares of the iPhone maker. “We reiterate our Outperform rating given our confidence in Apple’s ability to continue to introduce new innovative products, a relatively inexpensive valuation [which stands at about 9.2 times the firm’s expectations for earnings per share in the 2013 calendar year] and a potential capital allocation update [referring to the anticipated increase in Apple’s dividend or a possible share repurchase].”
Included in his assessment was an in-depth look at the major segments of Apple’s product lineup, with particular attention given to the iPhone…
Um noted that “there is potentially some risk” to the firm’s estimates for Apple’s fiscal second quarter earnings because iPhone sales are expected to come in below its 38.7 million unit estimate. Wells Fargo has predicted earnings of $43.6 billion, or $11.02 per share, compared to the Street’s consensus estimate for $42.7 billion, or $10.10 per share. However, the analyst believes that the possibility that sales of the company’s flagship smartphone will miss forecasts for the March quarter and for the June quarter is already “expected by investors” and that near-term risk is “likely reflected in the stock.”
Adding his voice to the already loud clamor of analysts making predictions for the release date of the rumored iPhone 5S, Um said that the June-quarter guidance could be dependent on the timing of the new iPhone — which has yet to be confirmed by Apple. But “rather than add fuel to the fire on the speculation,” Um wrote, “suffice it to say that our forward estimates imply a [September] launch.”
For the March quarter, Wells Fargo’s gross margin forecast, a key metric for the quarter, stands at 40.3 percent, well above Apple’s guidance of 37.5 percent to 38.5 percent…
Because of the predictions for sales, earnings, and gross margin that his firm has made, Um wrote that analysts at Wells Fargo “believe sentiment should improve post-earnings into a new iPhone launch, improving gross margins particularly with easing year-on-year compares in the back half and, with any luck, reset Street estimates.”
Currently, Street iPhone expectations are “likely already tempered.” As customers may pause to preview competitors’ new product launches and wait for Apple’s next iPhone, Wells Fargo’s iPhone estimates for the March and June quarters may be overly optimistic. However, according to Um, this fact is already embedded in investor expectations. With this seemingly convoluted analysis, Um seemed to indicate that while his expectations may be elevated, investors should not be worried because their concerns are already priced into the stock. It is this optimism that prompted him to consider that an Apple Spring is, in fact, around the corner.
Um noted at the very end of his note that relative strength will be seen in desktop sales, as demand has been pent-up ahead of the launch of the iMac refresh, but its sales will likely be offset by soft demand for notebooks. He added that the firm remains confident in its prediction for iPad sales of 18 million units, driven by a jump in iPad Mini sales.
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