Saturday, October 19, 2019

Fiscal 4Q 2019 Final Estimates

As of Friday's close of $236.41, AAPL is trading at a 17.8x multiple on my next-twelve-months EPS estimate (16.2x when excluding NTM net cash and dividends).

After a brief panic early this year, market is back at previous-2-years-or-so trend of looking ahead a couple of years and pricing in expectations of mid-high single digit growth, mostly driven by more efficient balance sheet and narrative shift to services—even if new ones will take several years to bear fruit—and against loud noise from trade and threats of regulation. This has allowed for a valuation gradually inching up to broad market multiples for the first time in at least 12 years.

Given this gradually more positive (or rather less negative) sentiment I'm extending my valuation multiple expansion towards 15x (was aiming for 14x) forward-looking EPS plus net cash and dividends over the next 3-5 years. Currently at just 12.5x up from 10x 2.5 years ago, and one point per year expansion rate beginning to slow down after next year.

Attention to mainstream user needs is a great tactical move on this pre-5G cycle: photography, battery life, speed, and price will sell more iPhones. Free exclusive content is just a nice perk for now but eventually a strong strategic advantage if they have a hit or two.

Detailed estimates:

3mo ending Sep19  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   62.9     -  2.83
Apple guide low    61.0  37.5  2.66*
Apple guide high   64.0  38.5  2.96*
My estimates       63.8  38.3  2.93 (4.52b shares)

3mo ending Dec19  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   87.3     -  4.44
Apple gde lo (e)   85.0  37.5  4.26*
Apple gde hi (e)   89.0  38.0  4.61*
My estimates       87.6  37.9  4.50 (4.45b shares)

*EPS guidance ranges derived from other figures provided
 by Apple and diluted shares outstanding estimated by me

12m ending Sep20  Rev$B   $EPS
----------------  -----  -----
Analysts consens  271.0  12.76
My estimates      274.3  13.31

Timeframe  NTMfrom   $EPS  Y/Y   Mult  Val  $*   Div  Tot
---------  -------  -----  ---  -----  ---  --  ----  ---
Trail Val  Oct2018  11.76  -1%  11.50  135  21  3.00  159
 Fair Val  Oct2019  13.31  13%  12.50  166  17  3.24  187
1y Target  Oct2020  15.09  13%  13.45  203  14  3.60  221

*Cash per share balance net of debt and commercial paper

(click to enlarge)
F4Q19 Statements of Operations Revenues F4Q19e F4Q18* Y/Y% -------- ------ ------ ----- iPhone 33,676 36,755 -8.4 Mac 7,759 7,340 5.7 iPad 4,627 3,983 16.2 W/H/A 5,672 4,223 34.3 -------- ------ ------ ----- Products 51,734 52,301 -1.1 Services 12,069 10,599 13.9 -------- ------ ------ ----- Tot Revs 63,804 62,900 1.4 Gross Margin Breakdown (est) -------- ------ ------ ----- Products 16,535 17,505 -5.5 Services 7,880 6,579 19.8 -------- ------ ------ ----- Tot GM 24,415 24,084* 1.4 -------- ------ ------ ----- Prod GM% 32.0% 33.5% -1.5 Svcs GM% 65.3% 62.1% 3.2 -------- ------ ------ ----- Tot GM% 38.3% 38.3% 0.0 Op Expns 8,772 7,966 10.1 -------- ------ ------ ----- OpIncome 15,643 16,118 -2.9 Op Mrgn% 24.5% 25.6% -1.1 OIE 216 303 -28.8 -------- ------ ------ ----- Pre-Tax 15,859 16,421 -3.4 Tax Rate 16.5% 14.0% 2.5 Tax Prov 2,617 2,296 14.0 -------- ------ ------ ----- Net Incm 13,242 14,125 -6.2 Net Mrg% 20.8% 22.5% -1.7 Dil Shrs 4,519 4,848 -6.8 -------- ------ ------ ----- EPS $2.93 $2.91 0.6 Amounts in millions except EPS in dollars and ratios in % * F4Q18 actual as reported except Gross Margin Breakdown


indigoprint said...

Thanks! - Roger

Anonymous said...

First of all, great work as always!

I see you model W/H/A up 34% yoy - a big increase no doubt. However, Q3 YoY was up 48% for that segment. Furthermore, if you look at the QoQ growth (from Q3 to Q4) the last couple of years, it's all in the mid teens. You currently have it up 2.5% QoQ - may I ask why?

Daniel Tello said...

Hi anon, thanks!

Very good points on W/H/A revenue last quarter. I can only give a sort of hand-wavy answer here, hope you understand there’s not too much data to support a more convincing argument. I hardly ever look at sequential growth patterns, since I believe product launch timing and other effects introduce too much variability. Given the many untractable components in this category it may well be that I missed (or misplaced) something along the way.

I’ll share a few details. For Watch, I have it growing near 50% but that still left it flat sequentially, could by my June Watch estimate is a bit high. As for the rest, I doubt anything other than AirPods grew too much. I have AirPods growing over 40% and 10% the rest. As I said I didn’t look at where those land sequentially, but checking now it’s 9% for AirPods and 4% the rest. I feel there’s an outlier component of these in the June quarter, but without much validation from Apple I have no way of figuring it out precisely.

Finally I’ll mention that this year’s back to school promotion involved Beats while last year I think it was gift cards or store credit, if I remember correctly. It’s likely I charge a few hundred million to the category on this, however, I now realize this is wrong as the accounting of the promo would be to charge the purchased Mac or iPad proportionally. In short, you may want to shift some from Mac and iPad where I’m probably a bit high into W/H/A where it seems I’m low. Make sense?

Cheers, and thanks again for the input.

Daniel Tello said...

Correction: I had to double check on that last point and seems I misread something somewhere on the back to school promotion. They’ve been offering Beats headphones since 2015, before that it was store gift cards, so my bad in that regard. The only changes this year is now you can get a Beats Studio3 ($350 value which is $50 more than the Solo3, last year’s top offer) with a Mac, and the addition of the iPad Air as a qualifying purchase. Perhaps more significant is the fact they simultaneously refreshed several Mac models so students likely felt this year was way better value than last.

Anyway, all of this may amount to a couple hundred million here or there, and I’m ok with that range of error.

Anonymous said...

Fair points. Yeah I agree for W/H/A to hit mid teens QoQ growth either Airpod 2 or Watch will have to grow substantially more than the 40% and 50% assumptions you made, which seem reasonable.

I do agree with your point about QoQ variations; at the same time, there are YoY variations as well, depending on the launch schedule, etc. Over time though, QoQ variations tend to stay on a pattern, as Apple doesn't change its offering schedules that dramatically different each year - so there is a method to the madness (I hope!)