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Apple’s earnings review & analysis

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Apple’s earnings review & analysis

Shares of the technology giant Apple (NASDAQ:AAPL) traded higher by 4% during the after hours session after the company reported a strong third quarter. The company beat analyst consensus earnings and revenues estimates on the back of better than anticipated iPhone sales. Net income fell by 22% to $6.9 billion, or $7.47 per share, from $8.8 billion, or $9.32 per share, in the third quarter of last year. Analysts were expecting $35.02 billion in revenues while the company reported $35.3 billion, a slightly rise on a year over year basis.

If we breakdown the results on a segment by segment basis we see mixed results. Apple shipped 31.2 million iPhones in the quarter, up 20% from the 26 million shipped during the third quarter of last year. However, due to increasing competition and aggressive discounting from competitors, the company reported weak iPad sales in comparison to a strong showing during the third quarter of last year. 14.6 million iPads were sold during the quarter, down from 17 million a year earlier.

As some had feared, the company’s gross margin shrank dramatically to 36.9% from 42.8% a year ago, presumably as a result of the company selling a greater number of discounted iPhones. At the end of the call management provide the street some clarity for the fourth quarter, Apple forecasted revenue of $34 billion to $37 billion during the quarter and a gross margins between 36%-37%. This guidance comes in slightly lower than analyst estimates for the fourth quarter. It will be interesting to see in analysts revisions will have any impact on the stock during the remainder of the week.

While shares are well off the highs earlier this year, the stock looks more like a value play at these levels. With the confirmation of the company’s quarterly dividend after the close, investors are looking at a company trading at 10 times this years earnings, 2.9 times book, and a 2.95% dividend yield. Lets just say Apple never does anything innovative ever again, its product pipeline including the iWatch, low cost iPhone, and television all miss, the company is still completely capable of generating enormous cash flows on any conventional measure while being completely capable of paying its current dividend.

For the investor looking to start a position in the company today, I say why not, there is limited downside at these levels and fears of gross margins falling below 30% are irrational. Now lets assume Apple does release a low cost iPhone. I find it highly unlikely current iPhone users will trade down for a less advanced product. Meanwhile a lower priced iPhone should greatly increase the customer base for the company within its emerging market business segment. While Apple may have a strong foothold here in the United States, its performance in emerging markets has been poor to say least due in large part to the higher than average price points. Going forward, I think the longer term investor, buying Apple today, is looking at a limited risk scenario, with the potential for growth in the decades to come.

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