Ap­ple earn­ings need to over­come tech­ni­cal malaise

The Pak Banker - - BUSINESS -

To those who study tech­ni­cal stock charts, Ap­ple Inc looks bro­ken. Even though it is widely viewed to be un­der­val­ued af­ter hit­ting an 11-month low this week and nine out of 10 bro­ker­ages rec­om­mend that in­vestors buy or hold the stock, Ap­ple share­hold­ers could still be in for more rough times if tech­ni­cal strate­gists are right.

They note that trad­ing charts show few price points where in­vestors can ex­pect clus­ters of buy­ing to sup­port Ap­ple's shares. For ex­am­ple, the stock's medium-term mo­men­tum, based on its 50-day rate of ac­cel­er­a­tion, has been on a down­ward slope since March, but has not hit over-sold lev­els. Ryan Det­rick, se­nior tech­ni­cal strate­gist at Scha­ef­fer's In­vest­ment Re­search, said it is hard to find an en­try point at cur­rent lev­els, call­ing the stock "bro­ken." "There's been a lot of tech­ni­cal dam­age, but at the same time it still looks like it's in a down­trend," Det­rick said. "This could still be a name you want to avoid and could very well still un­der­per­form in our opin­ion." Ap­ple has a chance to turn things around when it re­ports re­sults for the De­cem­ber quar­ter on Jan­uary 23. In­vestors are un­usu­ally ner­vous be­cause of re­ports that Ap­ple might be cur­tail­ing pur­chases of screens for its iPhone and iPad, which to­gether ac­count for over 70 per­cent of rev­enue.

If Ap­ple can sub­stan­tially beat Wall Street's sub­dued ex­pec­ta­tions, that would go a long way to­wards restor­ing con­fi­dence in the near term. It is not enough for Ap­ple to just meet tar­gets - that could cause shares to fall fur­ther in the short term, some an­a­lysts say. Ap­ple has only missed an­a­lysts' profit fore­casts four times in the last 10 years, two of those in the most re­cent re­port­ing pe­ri­ods. "If you have a 10 per­cent to 15 per­cent beat on es­ti­mates, it will be enough to have peo­ple say, ' Oh my gosh, Ap­ple has its game back,'" said Chris Ber­telsen, chief in­vest­ment of­fi­cer of Global Fi­nan­cial Pri­vate Cap­i­tal, a Sara­sota-based wealth man­ager with $1.7 bil­lion as­sets un­der man­age­ment. The fund had cut back its hold­ings in Ap­ple to less than 1 per­cent of its port­fo­lio from about 5 to 6 per­cent last fall, but Ber­telsen said it is now adding again. He likes Ap­ple's longert­erm prospects as the global smart­phone mar­ket grows, par­tic­u­larly in de­vel­op­ing coun­tries such as In­dia and Brazil.

An­a­lysts on av­er­age es­ti­mate Ap­ple's fis­cal first-quar­ter earn­ings per share at $13.41, down slightly from $13.87 in the year-ear­lier quar­ter. Rev­enue is seen up 18 per­cent at $54.7 bil­lion. The De­cem­ber quar­ter is typ­i­cally the strong­est one of the year for con­sumer elec­tron­ics sales and Ap­ple had a new prod­uct, the iPad mini, in its hol­i­day sea­son line-up.

Wall Street es­ti­mates Ap­ple sold be­tween 47.5 mil­lion and 53 mil­lion iPhones, up con­sid­er­ably from the 26.9 mil­lion sold in the pre­vi­ous quar­ter, when the iPhone 5 had not made it to all mar­kets. IPad sales are ex­pected at 23 mil­lion to 25 mil­lion. Ap­ple shares have fallen nearly 30 per­cent af­ter hit­ting a record high in Septem­ber, in part on wor­ries that its mo­bile devices are no longer as pop­u­lar as they were. As com­pe­ti­tion in­ten­si­fies from Sam­sung Elec­tron­ics Co Ltd and oth­ers us­ing Google Inc's An­droid soft­ware, in­vestors are won­der­ing if Ap­ple's days of hy­per growth are over.

There are still plenty of Ap­ple bulls on Wall Street. Forty-eight out of 58 equity an­a­lysts who cover the stock rate it a "buy" or "strong buy" and an­other seven say it is a "hold,". Only three rec­om­mend that in­vestors sell the stock. The me­dian price tar­get is $745, which is roughly 50 per­cent above Ap­ple's close of $500. The com­pany is ex­pected to con­tinue to post dou­bledigit rev­enue growth into at least 2015 and a StarMine anal­y­sis of its ex­pected growth over the next decade puts the stock's in­trin­sic value at about $708 a share.

"We still ex­pect iPhone growth. They are still point­ing to a strong De­cem­ber quar­ter and, if you think there's any mo­men­tum left, that they can grow on the high end (of the smart phone mar­ket) or find growth in other sec­tors, this is a buy­ing op­por­tu­nity," said Morn­ingstar an­a­lyst Brian Colello, who has a fair value call on Ap­ple at $770. In­vestors also ex­pect Ap­ple to fol­low through on a promised $10 bil­lion stock buy-back pro­gram. "If the com­pany is not buy­ing back at this level, I think it's ab­surd and sug­gests that some­thing is se­ri­ously wrong with the com­pany," said Mark Mul­hol­land, man­ager of the Matthew 25 fund, which has about 17 per­cent of its hold­ings in Ap­ple.

Last year, the fund posted a con­sid­er­able 29 per­cent gain, al­though it lost 2.8 per­cent in the last quar­ter as Ap­ple slumped. (Ap­ple shares gained 31 per­cent over 2012) Mul­hol­land val­ues Ap­ple at more than $1,000 per share, based on its growth prospects and cash level. Ap­ple had cash and se­cu­ri­ties of $121.25 bil­lion at the end of Septem­ber, or about $129 per share. Still, he agrees with tech­ni­cal an­a­lysts who say there is lit­tle mo­men­tum be­hind the stock. Some point to sup­port near $425 per share, which means there is room for the stock to fall an­other 15 per­cent from cur­rent lev­els.

"Three things in­flu­ence a stock price: growth, value and mo­men­tum. The growth and value are there, but you've com­pletely lost your mo­men­tum," said Mul­hol­land. Ap­ple shares are trad­ing at 15.4 times pro­jected 12-month earn­ings, a level that an­a­lysts say is un­usu­ally in­ex­pen­sive for a com­pany with its growth pro­file. Sam­sung trades at a for­ward P/E of 7.6, while Nokia trades at 92.3 times. Sandy Villere, port­fo­lio man­ager of the $356 mil­lion Villere Bal­anced Fund, said the fund has been scoop­ing up more shares as the price fell, but notes it is more fash­ion­able to be down on the iPhone, iPad and Mac com­puter maker th­ese days.

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