Shares of Apple (AAPL) are up 77 cents at $406.90 recovering from earlier losses following a fiscal Q2 report last night that saw revenue and earnings per share top expectations but a view for this quarter s results much lower than the Street had been expecting. Apple more than doubled its planned capital return policy over a three year period through 2015 to $100 billion consisting of $60 billion in buybacks and a 15% rise in the quarterly dividend.
Although most Apple bulls are encouraged by the larger payout there was some quibbling over the split between buybacks and share repurchases.
On the conference call following the results with CEO Tim Cook and CFO Peter Oppenheimer the focus was on Apple s slowing growth its earnings fell in Q2 for the first time in a decade and on declining gross margin. While acknowledging the slowing growth Cook s remarks about new products coming in the fall gave some analysts the sense there will be no products to act as catalysts between now and then perhaps causing the September quarter as well to come in lower than is currently expected.
There was nothing in particular offered on the call to allay fears of further margin shrinkage as Apple doesn t provide a forecast beyond the quarter. However Oppenheimer when pressed on the point noted that the original iPod had started out below Apple s corporate margin when it was introduced in 2001 and pointed out that four years later it and the iTunes revenue made up half the company s annual sales.
Said Oppenheimer We are managing the business for the long term and are willing to trade off short term profits where we see long term potential.
The sole ratings change today that I ve seen comes from Keith Bachman of BMO Capital Markets who cut the stock to Market Perform from Market Outperform and trimmed his price target from $440 to $435.
Writes Bachman
We think the March Q results were also consistent with our longer term concerns about Apple having to trade off revenue growth vs. margins. We don t think Apple can do both as we previewed in our notes of the past few weeks. Moreover while the material increase in capital allocation is a positive we think the challenges of the 1) increased competitiveness of the smartphone market which we believe will pressure ASPs and margins will largely offset 2) improved capital allocation. We believe the stock will therefore trade in a range between $380 and $440.
Bullish
Laurence Isaac Balter Oracle Investment Research Reiterates a Strong Buy rating and cut his price target to $600 from $670. In pure dollar terms Apple is now the largest dividend paying company in the world surpassing Exxon by $1 Billion ... At the current price should Apple repurchase $60 Billion in stock and pay the remainder in dividends for the next 2 years it becomes a compelling total return stock with a 3% dividend. We think the SP rating of AA is a joke after all it s being brought to you by the same folks who rated junk mortgages AAA . Please. No other company on planet Earth offers such a pristine balance sheet. Now that Apple has finally made that painful transition from a Growth stock to a Growth Income stock incoming shareholders will find it an excellent place to park their idle capital. We lower our target price to reflect the new reality. New shiny devices that come out of the belly of Cupertino are a bonus. Sacconaghi cut his estimates for fiscal 13 to $175.76 billion in revenue and $41.63 per share from a prior $175.86 billion and $43.56 per share.
Toni Sacconaghi Bernstein Research Reiterates an Outperform rating and cuts his price target to $600 from $725. On balance we were pleased with the magnitude of the return but would have preferred a higher dividend and lower buyback and a cash return commitment that was expressed as a percentage of free cash flow. Our analysis indicates that the larger buyback could realistically add about 500 600 bp to EPS growth in each of FY 14 and FY 15 for AAPL (Exhibit 6) We also believe that AAPL could look to announce a significant ASR ($10 $20B) in the next few weeks ... While we believe that Apple faced some one time margin pressures in the quarter it is not enough to qualm our fear that secular pressures (largely a mix shift down) are becoming more evident suggesting that Apple s margins on its current set of offerings may struggle to increase from current levels going forward ... A bet on Apple remains a bet on the company s innovation prowess if Apple can bring to market new offerings that create new markets and/or expand its addressable TAM EPS will improve and the stock represents a very attractive value at current levels. If not the stock could be range bound for a while.
Bill Shope Goldman Sachs Reiterates a Buy rating and cuts his price target to $500 from $575. Our sense is that the tepid guidance and increasingly depressed earnings trajectory will remain the key focus for investors and concerns on this front are unlikely to completely subside until it becomes clear that Apple s next product and ecosystem refreshes can begin to form a bottom for earnings power. Meanwhile the $100 billion capital allocation program through 2015 should provide a critical downside buffer for the shares in the short term over time as the downside risks to Apple s steady state earnings power and cash flow subside this hefty capital allocation activity and the prospects for steady increases in the dividend and buyback should provide a powerful accelerant for the share price recovery. Shope cut his fiscal 13 view from $190.3 billion and $44.64 to $168.6 billion and $38.11.
Katy Huberty Morgan Stanley Reiterates an Overweight rating and cuts her price target from $600 to $540. Apple provided increased transparency into the timing of new product launches ( Fall and throughout 2014 ) which implies a September iPhone launch in line with supplier data points ... Perhaps most interesting was Apple s increased focus on content/software/services which hit a $16B annual revenue run rate up 30% Y/Y. Apple also broadened its comments on product pipeline to include software services and new product categories. Most interesting to us is the potential for a killer service like mobile payments to better monetize the 500M account base and drive further differentiation and share gains in mobile devices. Huberty cut her fiscal 13 profit view from $40.31 per share to $38.33 per share on $168.7 billion in revenue.
Bearish
Stuart Jeffrey Nomura Equity Research Reiterates a Neutral rating on the shares and cuts his price target to $420 from $490. Falling ASPs gross margins and market share might be a product cycle issue but it seems unlikely to us. Rising demand for iPhone 4 and lower storage versions all point to saturation of high end at least for 4 screens and point to further ASP and gross margin weakness. An evolutionary iPhone 5S will likely struggle to change this dynamic while a mid range iPhone could further pressure gross margins and ASPs. Further low point in 2013 EPS is 17% below the 2012 trough further suggesting that falling EPS is more than just a mid cycle product issue. Jeffrey cut his fiscal 13 estimates to $171.7 billion and $39.51 per share from a prior $182.8 billion and $45.02 per share.
Glen Yeung Citigroup Reiterates a Neutral rating and cuts his price target to $430 from $480. While bulls will laud Apple s substantial buyback increase we note that its impact to EPS is more than nullified by Apple s below consensus guidance. With capital allocation no longer a future catalyst investor attention will likely revert back to fundamentals. Here we remain concerned about Apple share noting that loss is clearly evident in F3Q13(Jun) guidance. Meanwhile with iPhone mix already negatively impacting GM our concerns about Apple s longer term gross margin sustainability are supported. When then factoring in a relatively weak result from China (another area of concern for us) and the likelihood that iPhone5S is delayed and we think the bear case outweighs the bull case. Although it is fair to say much has been built into the shares in our view we found little from Apple s results to warrant buying the shares. Yeung cut his fiscal 13 outlook to $165.5 billion in revenue and $37.48 per share in profit from a prior $171.6 billion and $41.49 per share.
Will Power R.W. Baird Reiterates a Neutral rating and cuts his price target to $438 from $465. We applaud the long awaited buyback and dividend increase but remain concerned with increasing competitive pressures and the lack of a near term product catalyst. In addition company comments suggested that its next products might not launch until this fall which could also create a challenging September quarter. Power cut his fiscal 13 view to $167.8 billion in revenue and $37.84 per share in profit from a prior $170.3 billion and $40.37.
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