(AAPL) Apple Fourth Quarter 2011 Earnings Preview

Apple Inc. (AAPL) is scheduled to release its fourth quarter 2011 results after the market closes on Tuesday, October 18, 2011. In the run up to the earnings results, we have noticed analysts raising their estimates over the past few days, and considering the past trends we continue to believe another earnings beat is on the cards.

Prior Quarter Recap

Apple’s third quarter earnings per share (EPS) comfortably exceeded the Zacks Consensus Estimate of $5.81 per share by $1.98 (34.1%). Apple reported earnings of $7.79 per share in the third quarter, well ahead of its conservative guidance of $5.03. Earnings shot up 122.0% from the year-ago quarter.

Total sales in the reported quarter surged 82.0% year over year to $28.57 billion, representing the highest sales in the company’s history. The growth was primarily driven by strong sales of the iPhone and the iPad devices.

Current Quarter Expectations

For the current quarter, the Zacks Consensus Estimate for Apple’s earnings is pegged at $7.30, way ahead of Apple’s own conservative guidance of $6.40 per share.

Apple projects its revenues to be $25.0 billion. The Zacks Consensus Estimate expects Apple’s revenues to be around $29.51 billion.

Apple expects gross margins of 38.0%, reflecting stock-based compensation expense of approximately $55 million. Operating expenses are estimated to be $2.7 billion, including about $245 million related to stock-based compensation, while Other Income and expenses are anticipated at around $50 million. The tax rate is estimated to be roughly 24.0%.

Estimate Revision Trend

For the current quarter, out of the 36 analysts covering the stock, 20 analysts raised their estimates and there was just one negative revision in the last thirty days. As the estimates revision was positively biased, the Zacks Consensus Estimate increased from $7.03 to $7.30 over the same period.

We note that Apple has consistently exceeded estimates in the previous four quarters. The average surprise in the preceding four quarters is a positive 21.95% and we expect another positive earnings surprise from the company.

Analysts believe that the strong sales performance from iPad and iPhone would drive results for the quarter. Moreover, they believe that the tech-giant is gaining momentum with the iPad and expanding its iPhone addressable market through additional wireless carriers in new regions and multiple carriers per country, which should sustain solid-unit growth.

Additionally, analysts expect iPad sales in the fourth quarter to range from 8.8 million to 14.8 million, with the average being 11.9 million, representing a staggering growth of 184.6% from the comparable prior-year quarter.

Moreover, analysts believe that Apple is gaining market share in foreign countries, especially in the Asia-Pacific region. International expansion of the iPad and iPhone will boost the company’s profitability over the long term. Additionally, analysts are incrementally positive about Apple’s iOS 5 and iCloud services. The latter would help the company to maintain a dominating position in digital music through iTunes, thus helping it gain an advantage over its competitors.

Conclusion

We believe Apple is well positioned to achieve strong top-line growth over the long term, based on product innovation. Apple provided conservative revenue and earnings guidance for the current quarter.

As Apple remains heavily dependent on iPhone and iPad sales (68.8% of third quarter revenue), the company is taking every possible step to safeguard its dominant position in the smartphone and tablet markets. Apple has been targeting Google Inc.’s (GOOG) Android based smartphone makers, especially Samsung and has temporarily stalled its growth in Europe and Australia through patent litigations.

Apple’s primary smartphone and tablet markets are crowded with the likes of Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung, Cisco Systems Inc. (CSCO), Toshiba and Acer, which are gaining popularity in several international markets. However, Apple has managed to maintain its leadership position in the tablet market so far, and it enjoys a very strong position in the smartphone market as well.

Moreover, Apple has launched its latest iPhone 4S, the fifth edition of its revolutionary smartphones. Though many Apple fans were expecting an iPhone 5, the iPhone 4S with its attractive new features is likely to help Apple maintain its leadership position in the smartphone market.

Thus, we have a Neutral recommendation on Apple shares in the long term.

We currently have a Zacks #2 Rank for Apple Inc., which translates into a Buy rating in the short term.

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