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Even with record sales, Apple's earnings report may disappoint

Amid rising concern that the iPhone's dominance is ending, the report is highly anticipated. Analysts expect earnings to drop for the first time in a decade.

January 22, 2013|By Chris O'Brien, Los Angeles Times
  • The consensus among Wall Street analysts is that Apple will report $54.7 billion in revenue and $13.41 a share in earnings for the quarter that ended in December. Above, an Apple store in New York.
The consensus among Wall Street analysts is that Apple will report $54.7… (Spencer Platt, Getty Images )

If all goes according to plan Wednesday, Apple Inc. will report record revenue. The company will reveal that it sold more iPhones than in any previous quarter. And it will confirm that it hauled in another boatload of cash to swell its overflowing coffers.

In other words, Apple's earnings have all the makings of a colossal disaster.

That's because no matter how mind-blowing its performance, there is growing concern among investors that Apple's remarkable run of smartphone dominance is coming to an end. Although analysts' estimates for the company are all over the map, there is general agreement that Apple will not grow at nearly the same pace as it has over the last five years.

But after months of speculation and countless rumors that have helped drive the company's stock down 28% from its September peak, there is still widespread disagreement about how much that growth will slow and whether investors should be alarmed.

With observers desperate to finally hear what Apple executives have to say, the company's earnings report scheduled after the market closes Wednesday has become one of its most pivotal and highly anticipated in years.

Ben Reitzes, an analyst at Barclays, sent a recent note about Apple's earnings to clients under the title "Preparing for the Most Important Conference Call in Years."

"We believe that investor sentiment is quite negative right now for Apple, with significant concerns around demand trends for the iPhone 5," he wrote.

How investors adjust to that reality of slower growth is hard to predict. Will it be interpreted as a sign of weakness? Or just the reality that as a company gets bigger its pace of growth will inevitably slow?

First, the numbers. In October, Apple told Wall Street analysts that for its first quarter, which ended in December, investors should expect the company to report $52 billion in revenue and earnings of $11.75 a share.

But Apple tends to be notoriously conservative in its own guidance. For the same quarter a year earlier, Apple beat revenue estimates by more than 25% and earnings forecasts by nearly 50%. The surprising quarterly performance sent its stock into the stratosphere over the next nine months, eventually hitting an all-time high of $702.10 in September.

Such a huge surprise seems unlikely this time around. The consensus among Wall Street analysts is that Apple will report $54.7 billion in revenue and $13.41 a share in earnings. If the latter figure proves correct, that would represent a decline from the $13.87 a share in earnings that Apple reported for the same quarter last year. Not only would it be the first drop in a decade, but it also could confirm fears that Apple's new mix of products, including the iPad Mini, are hurting the company's historically high profit margins.

Making this all the more complicated is a quirk in the calendar. Last year, the same quarter had 14 weeks. This year, it has only 13 weeks. That means once the numbers are released, analysts and investors will have to do some fast calculations to make comparisons that are truly apples to apples.

In addition to worries about profit margins, investors have been fretting over rumors that the iPhone 5 has not been selling as well as expected, that rival Samsung Electronics Co. is widening its lead in smartphone sales, and that Apple's product upgrades don't dazzle like they once did. Of course, much of this is conjecture. But it has muddled projections, with analysts predicting that Apple could report earnings from as low as $11.53 a share to as much as $15.50 a share.

That kind of uncertainty has made investors even more eager than usual to hear any news about Apple's performance. Even more important than the numbers, however, is what Apple executives say about the future.

Since last summer, analysts have been growing more pessimistic about the current fiscal year, which ends in September, lowering their earnings projections to $48.86 a share from $54.87 a share in July. Should Apple lower that outlook further in the conference call Wednesday, it could trigger panic among Apple's investors.

"I think the concerns being reflected in the stock today have more to do with the next quarter than this one," said Walter Piecyk, a research analyst at BTIG.

To some analysts, the gloom over Apple's prospect is simply absurd. The value of the stock, trading at about 11 times earnings, is low by historical standards. Its price-to-earnings ratio hasn't been this low in more than five years, a period in which it has hovered between 15 and 20 times earnings.

And according to research firm Bespoke Investment Group, Apple is currently trading further below the consensus target ($728.36) than any of the other 100 largest stocks in the Standard & Poor's 500 index. Apple on Tuesday closed up $4.77, or 1%, to $504.77‎.

In this view, the world's most valuable company is trading at bargain basement prices.

"There's nothing wrong with their business," said Colin Gillis, director of research at BGC Financial. "It's just a question of whether growth is going to slow. That had to happen eventually."

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