Market Preview: All About Apple
By Michael Baron - 07/23/12 - 6:46 PM EDT
NEW YORK (TheStreet
) -- It's summertime but the livin' is far from easy on Wall Street again this year.
Monday's steep sell-off
turned out much better than it seemed it would during the ugliest moments of the morning's swoon. Nothing much changed in those few hours but it is at least a little heartening that investors were out there willing to jump into equities despite the murky backdrop presented by so many lingering problems.
There's Greece's austerity problem, Spain's yield problem, China's growth problem, just to name a few. The quarterly equivalent of a soggy fry from McDonald's
gave investors a clear view of how all these problems are rapidly becoming everyone's problem as few blue chips will be able to thrive and lend support to the slow domestic recovery if they are getting squeezed overseas as well.
Up until Friday, of course, things were starting to brighten up. In commentary early Monday. Sam Stovall, chief equity strategist at S&P Capital IQ
, offered up his explanation.
"We think that much of the recent advance of equity prices since the early June low in the face of slowing global economic growth, weakening corporate earnings increases and faltering investor confidence can be summed up in two words: anticipated stimulus," he wrote. "From China, many are looking for interest rate cuts and a reduction in the reserve requirement ratio. In Europe, expectations are for additional rate cuts and larger bailout packages. Here in the U.S., there appears to be an endless stream of debate on a possible third round of quantitative easing (QE3). The discussion does not surround 'if,' but 'when.'"
That view provides some perspective on what a dangerous game policy makers have landed in. Everyone has a different agenda but ostensibly is working toward the same goal. Each time events take a turn for the worse on one front or the other, the investor reaction is somewhat balanced out by the idea that a stimulus solution will arrive to save the day. The flaw, of course, is that by the time conditions get bad enough to justify turning the spigot back on it may be too late.
And the scenario Stovall is leaning toward is that investors counting on Federal Reserve
Chairman Ben Bernanke to come through with another round of quantitative easing may have longer to wait than they think. He argues against the idea that the latest the central bank would act is probably around its Sept. 12-13 policy meeting because to do so later than that would "run the risk of being painted by the political-collusion brush."
Stovall said history shows the Fed has a track record for acting late in a presidential election years, lowering and raising interest rates numerous times in the cycles since 1976. He's expecting Bernanke & Co. to hold off on QE3 as long as they can, putting some pressure on the legislative branch.
"S&P Capital IQ believes the Fed probably has one meaningful action left, in the form of QE3, and will likely wait until forced to use its last option, possibly later in the year should Washington show no further progress toward resolving the Fiscal Cliff dilemma," he said. "Even then, we don't see QE3 being effective enough to offset the recession-inducing impact of forced tax increases and expenditure reductions. Also, we think the market's resulting euphoria following the announcement of QE3 will likely fade if it is not accompanied by clarity on the fate of our tax and regulatory policies."
Not exactly a rosy outlook. And that was prior to Monday's ugliness. Like investors, Stovall seems to getting impatient waiting for the people in charge to act.
"We believe that the near-term direction remains upward, as investors expect additional stimuli from global central bankers to arrest the slowdown in economic and profit growth," he said. "Yet until leaders show a willingness to fight economic challenges, rather than rivals, the advance is likely to be limited."
As for Tuesday's scheduled news, it's all about Apple
. The beloved gadget maker delivers its much-anticipated quarterly report after the closing bell and if any one company has the ability to salve market sentiment, this is the one. The average estimate of analysts polled by Thomson Reuters
is for earnings of $10.36 a share from Apple in its fiscal third quarter ended in June on revenue of $37.23 billion.
This is an in-between quarter for Apple with the product cycle experiencing a lull ahead of the anticipated release of the iPhone 5 later this year. Right now, the company has more rumored products in the pipeline -- think mini iPad, Apple TV -- than it does actual confirmed ones for investors to look forward to (a Mac refresh).
That's fueled speculation of less-than-robust sales this quarter and the next as some Apple fanatics hold off on the current menu of i-everything in anticipation of the next big release. Apple's own outlook
is for earnings of $8.68 a share in the third quarter on revenue of roughly $34 billion, well below consensus.
The stock is up more than 45% so far in 2011, but it's pulled back a good amount since hitting an all-time high of $644 on April 10. At current levels, the shares are still reasonably priced, trading at a forward price-to-earnings multiple of roughly 11X vs. 13.3X for the S&P 500 as of Friday's close.
The sell side is still overwhelmingly bullish with 48 of the 53 analysts covering Apple at either strong buy (22) or buy (28) and the 12-month median price target sitting at $745, implying potential upside of 23% from Monday's finish at $603.83.
Sterne Agee previewed the quarter on Monday, lifting its earnings estimate to $10.45 a share from $10.16 a share and boosting its full-year view to $47.10 a share from $46.75 a share. The firm has a buy rating and a $780 price target on Apple, which has beaten Wall Street's profit expectations in three of the past four quarters.
"Based on our supplier checks, we anticipate light revenue, an EPS beat, and conservative guidance," Sterne Agee said. "Talking to investors, there appears to be understanding that the next two quarters will be 'choppy' ahead of the 6th gen. iPhone, the big picture being that this will likely be the most powerful mobile phone upgrade cycle ever."
In particular, Wu thinks the headline number on iPhone shipments could be a miss vs. Wall Street expectations, which have been slowly coming down as analysts parse recent guidance from Apple suppliers.
"We believe that iPhone upside in the June and September quarters is less likely due to lower supplier build plans," Wu said. "While we are pleased to see consensus estimates being cut over the last few weeks as analysts aim to be more responsible, we believe they may still be too high at 29 million units, compared to what our checks indicate will more likely be in the 26-28 million range (we are at 27 million)."
Check out TheStreet's quote page for Apple for year-to-date share performance, analyst ratings, earnings estimates and much more.
The other heavy hitters on the earnings front on Tuesday are Dow components AT&T
, along with the always entertaining Netflix
After a disastrous 2011, Netflix was one of the high fliers of early 2012, peaking above $133 in February. The stock finished Monday at $79.94, still up 18% since the start of the year but down an incredible 72% from a 52-week high of $285.50 reached in July 2011.
Wall Street is looking for a profit of a nickel per share from Netflix in the June-ended period on revenue of $888.9 million. Last time around, the company handily beat the analyst view but the outlook was a big disappointment as Netflix forecast revenue ranging from $873 million to $895 million for this quarter.
The domestic subscriber growth outlook was also nothing to get overly excited about with Netflix forecasting 23.6 million to 24.2 million total U.S. subscriptions vs. the 23.2 million total it finished the first quarter with. Wall Street will be laser-focused on those subscriber numbers as well as how the international business is doing and just how fast streaming is countering the impact of the flagging DVD-by-mail business.
Even with its big comedown in the last year, Netflix shares still trade at an expensive forward P/E of 37.2X.
Elsewhere, the morning's earnings schedule features Air Products & Chemicals
, AK Steel
, Altria Group
, Biogen Idec
, Domino's Pizza
, EMC Corp.
, Hershey Co.
, Illinois Tool Works
, Lexmark International
, Lockheed Martin
, Peabody Energy
, Regions Financial
, Rockwell Collins
, Ryder System
, Six Flags
, Spirit Airlines
, Under Armour
, United Parcel Service
and Whirlpool Corp.
The late roster includes AFLAC
, Buffalo Wild Wings
, Cabot Oil & Gas
, Juniper Networks
, Norfolk Southern
, Panera Bread
, RF Micro Devices
, Riverbed Technology
, Robert Half International
, Ruby Tuesday
and Weatherford International
Tuesday's economic calendar is light with just the Federal Housing Finance Agency's housing price index for May at 10 a.m. ET.
And finally, Baidu
was a big winner after the bell as the Chinese Internet search giant reported a 60% year-over-year increase in revenue
in its latest quarter.
The stock was last quoted at $112.87, up 5.4%, on volume of 1.34 million, according to Nasdaq.com
. The company said it expects revenue of $983 million to $1.01 billion in the third quarter, up from its second-quarter total of $858.8 million.
--Written by Michael Baron in New York.
>To contact the writer of this article, click here: Michael Baron
Latest news from section
Latest news from TheStreet