Despite Apple having beaten market estimates (both top and bottom line) when management reported Q4 results (year ending September), shares in Apple were weaker on the news for three main reasons:
1. Missing shipment estimates on iPhones;
2. Offering weaker guidance than expected (Apple is guiding revenue in the range of $89-$93bln for Q1 2019 (vs. consensus of $92.7bln) and gross margin in the range of 38.0%-38.5% (vs. consensus of 38.6%) and;
3. Announcing major changes to its reporting structure (Apple said on its earnings call that starting next quarter, the company will no longer break out individual sales numbers for the iPhone, iPad and Mac. The three main product lines will be wrapped into one reported revenue figure).
Management said they are boosting the price of the iPhone in order to make up for a weakness in sales (Average Selling Price of $793 (vs. consensus of $751).
Our concern going forward the weakness in data coming out of China as well as the weakening of Emerging market currencies, which will a headwind on demand from emerging markets. Having said this our price target is pricing in lower end of guidance. We are also of the view that global trade tensions will improve and if this is the case, shares of Apple should continue to do well.
We like Apple shares for the following reasons:
• The iPhone is reaching a saturation point in developed markets. Still the average selling price of the iPhone is increasing. This demonstrates the health of the iPhone brand.
• Apple is well positioned to increase revenue on other products. While Apple has rarely been the first out of the blocks with new products, Apple products have consistently disrupted and revolutionised the status quo. Our base assumption is that Apple will remain at the forefront of technological innovation.
• The new tax of 15% this year, repatriation of cash holdings and possible share buybacks are expected to boost earnings growth per share.
Valuation
Our $208 12-month price target factors in a discount rate of 10% and a forward Price-to-earnings multiple of 17x.
We are forecasting gross margins of 38% in 2019 and 2020. Our model also reflects an income tax rate of 15% going forward.
Investment Rationale
Moving into earnings season, we had change our stance on Apple from a BUY to a HOLD with a price target of $208. Updating our model with the new figures, we kept our stance and Price Target unchanged.
Given its revenue base and size, Apple's recent growth has been impressive. However, with 80% of the company's sales exposed to secularly challenged businesses, we believe the long-term growth outlook remains limited.
We continue to see support for the shares from the company's substantial share buy-back, however, with positives and negatives largely balanced at current levels.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.