Apple: the smart money?

Apple earnings are set for release after the bell on Monday, and with record revenue expected they will be of interest to both shareholders and non-shareholders alike. 

Expectations for Apple’s fiscal first quarter are high, while the period is considered the most important as it encompasses the holiday season. Apple sold 55.3 million iPhones in the fourth quarter of last year, and the company has broken its own record every year in Q1 since 2010. Earnings per share is forecast to increase to $14.09 from $13.81 year-on-year, while revenue is projected to rise 5.4% to $57.46 billion.

The added bonus of the new alliance with China Mobile has also whetted investor appetite. The nation’s largest wireless carrier has 760 million customers, so the potential for additional sales in the world’s second biggest economy puts a new spin on the valuation of Apple.

The company has barely been out of the headlines in recent days, with billionaire investor Carl Icahn signalling his belief in growth potential by increasing his stake to $3 billion over the past fortnight. The current share price lies around $552 and Mr Icahn suggests that, with an increased buy-back in place, this would surge to $840 based on the price-earnings ratio, aligning itself with the average price-earnings ratio across the S&P 500.

This is based on the principle that overall growth is not nearly as important as growth per share. The simplified breakdown of this is, if a company reduces the amount of shares available through buy-back announcements, each share that an investor owns becomes more valuable and represents a greater percentage of equity in the company. This is clearly a profitable solution for long-term investors.

Nevertheless, there are no indications from Apple that the current buy-back plan will be increased, and the stock price has been unable to breach the $560 mark in recent days. This consolidation in price action may leave us poised for some heavy volatility in the coming days.

The run up to $700 per share back in September 2012 was something to behold. Apple was almost its own asset class with an almost parabolic trend driven by demand. The share price has since settled down, finding a comfort zone around $500/550 per share as the market has become more infiltrated and saturated with competition.

This is particularly the case at the top end of the market from companies such as Samsung. Today the South Korean company signalled a warning shot – that weak-earnings momentum is likely to continue this year. Its operating profit fell for the first time in two years in the final quarter of 2013; a strong Korean won has exacerbated the issue here. Still, a respectable 35% smartphone share and the release of the new Galaxy S5 phone in April may well see sales rebound. Though the Apple product suite still offers a certain degree of status over and above its rivals, this news from Samsung has dented sentiment over the past few days.

We have a bullish channel in situ from the June lows, and the rise through the 50-day moving average sets up the Apple share price well for an attack at the technical resistance level of $570/572, where we should we see earnings meet consensus. The closing highs of $570 in December still represent something of a barrier to upside.

In the event that earnings disappoint, the 100-day moving average is likely to lend a supportive metric, lying at $520 per share.

IG is offering out of hours trading on Apple shares. Being one of our most popular equities, we are expecting to see record flow in the trade in the immediate aftermath of the earnings report.

Apple chart

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