A look ahead to Apple’s earnings

As earnings go, few are more closely watched than Apple. Can it end the steady downtrend that has persisted since December 2013?

Last time earnings season rolled around, Apple failed to live up to expectations. iPhone shipments fell short, and guidance for the first quarter of 2014 came in below expectations.

A key thing to watch out for on 23 April when it announces Q2 results will be an increase in dividends or a new stock repurchase plan. In the last quarter of 2013, Apple set the bar for the tech sector in terms of share buybacks. These help to boost earnings per share figures, since there are fewer shares in issue, but they strike me as a rather disappointing way to return cash to shareholders. Far better to do it via dividends, providing a solid stream rather than a one-off boost.

In some ways though, Apple earnings aren’t really about the numbers. The real focus seems to be on the next big gadget, whether that be an iPhone, an iPad, a watch or a TV. It is the sort of company that has come to rely on news, not numbers, to drive its share price. But, leaving aside a new product, the guidance will be key for shareholders. Gross margins, which are the difference between revenues and costs (before certain other costs are included), usually decline in the second quarter of the year, which will put pressure on the bottom earnings line.

Apple’s share price is brushing support last seen in late February, when $516.60 helped to halt a wave of selling. However, I fear that these results may not be all that the market is hoping for. Expectations are for headline earnings per share of $10.17, on sales of $43.60 billion. Apple has beaten expectations for earnings and sales in six of the last eight quarters, while the average one-day move for the stock on results day has been 5.3%. On a trailing PE of 12.9 and a forward PE of 11.9, the share still look reasonably valued; but with earnings reports it is sentiment, rather than valuation, that becomes key.

Apple is available for extended hours trading. Here is a list of US stocks that can also be traded outside New York Stock Exchange trading hours of 2.30pm to 9pm (London time).

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