Munster on Apple’s March Quarter: More Than a Product Cycle Stock

Source: Thinkstock

Source: Thinkstock

Piper Jaffray analyst Gene Munster offered his thoughts on Apple’s (NASDAQ:AAPL) recently released fiscal 2014 second quarter financial results in a recent note to investors. On Wednesday, Apple announced stronger-than-expected quarterly revenue of $45.6 billion and earnings per share of $11.62. As noted by Munster, Apple’s earnings beat the Street’s estimates of $43.7 billion revenue and $10.19 EPS. Apple also reported gross margin of 39.3 percent, topping the Street’s expectation of 37.6 percent.

Not surprisingly, Munster remained bullish on Apple and maintained an “Overweight” rating and a $640 price target on the Cupertino-based company’s shares. However, even Munster was surprised by Apple’s strong iPhone sales during the March quarter. Apple said it sold 43.7 million iPhones, above Street expectations for 38.5 million, according to Munster. The Piper Jaffray analyst admitted that he had anticipated weaker iPhone sales in the months ahead of the expected release of the large-screen iPhone 6.

“Given the March quarter strength in the iPhone and gross margins, we are incrementally encouraged that there may be a reason to own AAPL shares outside of a product cycle,” wrote Munster. He noted that the strong iPhone sales were driven by emerging markets. “The strength came from China up 28%, Brazil up 61%, Russia up 97%, Turkey 56%, and India 55%.” The analyst also credited Apple’s recent distribution deal with China Mobile (NYSE:CHL), the world’s largest carrier. Apple’s iPhone unit sales grew by 17 percent compared to the year-ago quarter, but Munster estimated that iPhone unit growth would have only been 11 percent without the China Mobile deal.

According to Munster, the only downside to Apple’s iPhone unit growth was a lower average selling price that slipped from $637 to $596. However, he also observed that “Despite this decline, overall gross margins were 39.3% compared to 37.9% in the Dec-13 quarter.”

Although Apple’s overall earnings and iPhone sales were strong, Munster also noted that Apple reported lower-than-expected iPad sales. Apple sold 16.4 million iPad units, 17 percent lower than the Street’s expectations. While Munster continues to believe that “Apple has the best tablet product in the market with the iPad,” he also pointed out that “the lowest hanging fruit in the high-end tablet market has been harvested.”

On the other hand, Munster believes several “new product categories” are still on track for a launch in the second half of 2014. “The three leading product categories include the watch, TV and mobile payments,” wrote Munster. Although not all of the new products will necessarily boost Apple’s revenue, Munster believes that the “investor optimism” surrounding the new products will be “positive” for Apple shares.

Finally, Munster weighed in on Apple’s capital return program expansion announcement. On Wednesday, Apple revealed another significant increase to its capital return program that is expected to utilize over $130 billion of cash by the end of calendar 2015. Apple’s Board of Directors also announced a seven-for-one stock split. “Each Apple shareholder of record at the close of business on June 2, 2014 will receive six additional shares for every share held on the record date, and trading will begin on a split-adjusted basis on June 9, 2014,” stated Apple. Munster noted that the capital return program increase was at the “high-end of what we expected.” The Piper Jaffray analyst believes that the unexpected stock split will be a “mild positive for shares.”

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