Inaccurate Jobs Day, Apple, Apple and More Apple
Happy jobs day...or should we say, "Happy inaccurate jobs report day."
The May 1st FOMC policy decision has come and gone. The monthly BLS Employment Surveys for the month of April will be released this morning. Sure, they're important. The market, led around by keyword reading algorithms will still react.
That said, what we now know about the accuracy of these monthly reports, thanks to the BLS "BED" report released last week, is not just that these monthly survey results have overstated job creation but have grossly overstated job creation.
For those readers that may have missed the release of the Bureau of Labor Statistics' "Business Employment Dynamics" report for Q3 2023 that the agency published last week, the implication is that for quarters 2 and 3 of 2023, the BLS monthly Non-Farm Payrolls numbers had overstated job creation by 1.321M positions. We do not have the Q4 "BED" report yet and won't for months as this report is far more thorough and considered by economists to be far more accurate than are the monthly reports.
So, enjoy "jobs day" because those numbers will move markets. but understand that those numbers stand a very good chance of being walked back, not just over the next two months as the BLS revises the survey results, but down the road as the BLS continues to work on creating more accurate data. Now, on towards something that probably matters even more to financial markets.
Apple Reports
On Thursday evening Apple undefined, the most widely held publicly traded US company, also the greatest consumer electronics company in world history, went to the tape with the firm's fiscal second quarter financial performance.
For the three-month period ended March 30th, Apple posted a GAAP EPS of $1.53 on revenue of $90.753B. The earnings print beat Wall Street by three cents, while the top line reflected a year over year contraction of 4.3%, but still beat Wall Street's expectations even if by just a smidge.
While consensus view was for something along the lines of $90.1B, whisper numbers for total revenues had dropped towards something with an $89B handle just prior to the release. The stock ran higher overnight. I see the shares as I work through the zero-dark hours of Friday morning, were trading above $183, which is up almost 6% from Thursday night's closing price. In full disclosure, I was trading this name on Thursday evening, after-hours and had decided to leave a long position in place as I caught a few hours of shut eye.
What I think got investors really excited, more so than the results and the guidance provided, was the announcements of a 4% increase in the quarterly dividend payout to shareholders and a new $110B share repurchase authorization. This will be the largest buyback plan in US corporate history, and to put the plan in perspective, that's roughly what the market values one of my favorite defense stocks, Lockheed Martin (LMT) at.
That's right. Lockheed Martin is a $110B company. Apple plans to buy back the financial equivalent in this new authorization.
Operations
Within that 4.3% contraction in revenue generation to $90.753B, sales of products contracted 9.5% to $66.886B, while sales of services grew 14.2% to $23.867B. Fortunately, total cost of sales also contracted... by 8.3% to $48.482B.
This left a gross profit of $42.271B (+0.7%) on a gross margin of 46.6%, up from 44.3% for the year ago comparison. The improved gross margin was not unexpected. Product gross margin dropped to 36.6% from 36.7%, while services gross margin improved from 71% to 74.6%.
Operating expenses did increase from the year ago period by 5.2% to $14.371B. This left the firm's operating income for the quarter at $27.9B (-1.5%). After accounting for interest, taxes, and other income, net income hit the tape at $23.636B, which was down 2.2% from last year's comp. This works out to earnings of $1.53 per share on both a basic and diluted basis and compares to a diluted $1.52 for the March 2023 quarter.
Business Line Performance
- iPhone generated sales of $46B, beating consensus, but down 10% year over year.
- iPad generated sales of $5.56BB, below consensus, and down 16% year over year.
- Mac generated sales of $7.45B, beating consensus, and up 4% year over year.
- Wearables, Home & Accessories generated sales of $7.91B, beating consensus, but down nearly 10% year over year.
- Services (App Store, Apple Music, Apple TV+, iCloud, Apple Fitness+, etc.) generated sales of $23.867B, beating consensus, and up 14% year over year.
China...
After a disastrous fiscal first quarter in China, performance there still showed a year over year contraction, but also beat expectations. China generated for Apple, sales of $16.4B, beating the consensus view for about $15.9B, but still down roughly 8% year over year.
Guidance
Assuming a steady macroeconomic environment, Apple projects revenue to grow in the low single digits (percentage wise) for the current quarter. This projection includes an expected 2.5 percentage point FX headwind. Services, when isolated, are seen growing at a double-digit percentage rate for the quarter. iPad is expected to show double digit growth as well as the firm is expected to release updated versions of this product for the first time in over a year next week.
Keep in mind that Apple has not been very specific in its guidance since the pandemic began and though this is more information than Apple usually provides, the guidance remains less than detailed.
Fundamentals
For the first half of the fiscal year, Apple has generated operating cash flow of $62.585B, in line with the year prior. Capex spending over that six-month period dropped from the year prior to $4.388B, leaving free cash flow of $58.197B, which is up 4.2% y/y. Out of that number, Apple repurchased $43.344B worth of common stock for the firm's treasury, while paying out $7.535B in cash dividends to shareholders.
Looking at the balance sheet, Apple ended the period with a cash position of $162.337B, which includes investment in marketable securities labeled both as current and noncurrent. Cash and marketable investments labeled as current add up to $67.15B. Inventories stand at $6.232B. This puts current assets at $128.416B. Current liabilities ended the period at $123.822B, including $8.102B in deferred revenue, which is not a financial obligation.
As of quarter's end, Apple's current and quick ratios stood at 1.04 and 0.99, which is a bit misleading. The balance sheet is actually stronger than that. Not only do we have those deferred revenues on the current liability side of the equation, but we have $95.187B worth of marketable securities that count as part of the cash position but are not labeled as being current.
Total assets amount to $337.411B. Apple claims no value for "goodwill" or any other intangible assets. That's impressive. Total liabilities less equity comes to $263.217B. This does include $91.831B in term-debt, which seems daunting, but was borrowed for the most part when interest rates were much lower. Not only that, but the firm can pay that number and more out of pocket if need be. This balance sheet is in better shape than it looks.
Wall Street
There seems to be a real difference of opinion up and down Wall Street. Since these earnings were released last night, I have come across 13 highly rated (4+ stars at TipRanks) sell-side analysts that have opined on AAPL. Among these 13 analysts, after allowing for changes, we have eight "buy" or buy-equivalent ratings, four "hold" or hold-equivalent ratings and one outright "sell" rating. One of the "holds" did not set a target price so we have just 12 of those.
The average target price across these 12 analysts is $203.25 with a high target of $230 (Wamsi Mohan of Bank of America) and a low target of $164 (Tim Long of Barclays). Once those two are omitted as potential outliers, the average target across the remaining 10 analysts rises to $204.50. The average "buy" target is $211.88, while the average "hold" target is $193.33.
My Thoughts
I am impressed with the improvement in gross margin. I am impressed with the services side of the business overall. This, I think, will continue to improve as the total installed base has reached yet another record.
The firm is planning a push into generative artificial intelligence. There is a real chance that the next iPhone launch could provoke a very broad upgrade "super cycle."
Cash flows are better than people are making them out to be. The balance sheet is not in bad shape. Best of all... the reason I left a few shares in inventory last night was the share buyback authorization. It's that large.
Readers will see that what had been staunch support from January through February had become stiff resistance through March and April. That said, both relative strength and the stock's daily MACD (moving average convergence divergence) started improving from weakish levels two months ago.
On Thursday night, AAPL closed above the stock's 50-day SMA (simple moving average). Overnight, if these levels hold, the stock took back its 200-day SMA. That line is huge. Really huge.
If AAPL looks like it may hold that 200-day line into the weekend, what professional money that is not aboard will be pressured to increase long-side exposure. The 200-day line is key.
For now. I intend to go into the weekend long the shares as long as that thin red line holds. Don't forget, the WWDC conference looms in June. My target price for now is $208.
April Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 243K, Last 303K.
Unemployment Rate: Expecting 3.8%, Last 3.8%.
Underemployment Rate: Expecting 7.3%, Last 7.3%.
Participation Rate: Expecting 62.7%, Last 62.7%.
Average Hourly Earnings: Expecting 4.1% y/y, Last 4.1% y/y.
Average Weekly Hours: Expecting 34.4, last 34.4 hours.
Other Economics (All Times Eastern)
09:45 - S&P Global Services PMI (Apr-F): Flashed 50.9.
10:00 - ISM Non-Manufacturing Index (Apr): Expecting 52.0, Last 51.4.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 613.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 506.
The Fed (All Times Eastern)
19:45 - Speaker: Chicago Fed Pres. Austan Goolsbee.
19:45 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (FLR) (.53), (HSY) (2.77), (XPO) (.68)
At the time of publication, Stephen Guilfoyle was long AAPL, LMT equity.