By David Holohan
Apple will report quarterly results later this week, covering the very important Christmas trading period.
As one of the largest companies in the world, worth $900bn (€724.3bn), the earnings report is regarded as one of the most important for US investors.
It makes up 3.5% of the total market value of the S&P 500 index, dwarfing most others.
As a key player in the global phone market, it is a key customer for many semiconductor chip manufacturers. Any change in Apple’s outlook can have a very large impact on the supply chain of the company.
Analysts expect a strong quarter, driven by accelerating demand from China. While demand for iPhones in North America and Europe is more tepid, sales levels in China, Latin America and India continue to grow healthily.
Revenue for the three months to the end of December is expected to be $86bn, resulting in net income of just over $19.5bn, with net cash balances of $165bn.
With such a significant cash hoard that grows rapidly each day, it will be interesting to see what management will seek to do, given a significant portion will be brought back to the US from other countries after recent corporate tax changes. Staff are likely to be happy that management was to provide them with a $2,500 bonus, passing on a small part of the benefit of the lower corporate tax rate the company will now pay in the US.
Apple currently provides investors with a very unexciting dividend yield of 1.5%. While the dividend is expected to increase by 10% per year, there is significant scope to return meaningfully more cash to shareholders given the limited requirements the company has for maintaining such a high cash mountain.
It is likely management will increase the share buyback programmes that allow companies to flatter the earnings per share metric by reducing the number of shares outstanding in the company. This technique has been particularly prevalent among US companies in recent years, given many executive management teams tie their remuneration to the growth in earnings per share.
There will be significant focus on the next quarter guidance, and the year ahead. Suppliers have been giving indications Apple is reducing the number of iPhones built and shipped, which would be a negative if confirmed.
Investors should be all too aware that when US companies report earnings every quarter, while it is important go come in ahead of expectations for the prior three months, even more focus is attached to the forward guidance provided by management. There is a heightened risk investors and analysts will be left disappointed if the forward guidance reflects what has been reported from companies that make up Apple’s supply chain.
Stock markets had a fantastic start to 2018, with the S&P 500 reaching the most overbought technical conditions in history. With so much optimism baked in to the current levels, several companies have experienced sharp double-digit selloffs in the last week due to their 2018 guidance coming in below expectations.
Apple is likely to have had a strong end to 2017 but for investors, the focus has turned to 2018, where it may prove more challenging to satisfy elevated expectations. Given Apple shares have increased by value by 40% in the past year, a staggering feat given that the company was the largest in the world before the jump in price, investors may be best placed to consider locking in profits.
Maintaining the current share price level may prove difficult unless Apple can identify new product and service categories to boost growth while its core iPhone franchise continues to mature, and the level of innovation becomes less prominent in the updates the company provides for existing versions of its best sellers. It is very difficult to see how 2018 will be anything like a repeat of 2017 for Apple.
David Holohan is chief investment officer at Merrion Capital.