Apple Buoyed as Holiday Penny Pinchers Make IPad Exception: Tech

Jan 27, 2014 10:07 am ET

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Jan. 27 (Bloomberg) -- Apple Inc. is poised to record its first profit gain in more than a year after shoppers who shunned clothes and purses during the holidays shelled out for iPads and iPhones.

The world’s most valuable company is projected to report 5 percent sales growth and a 2 percent profit increase today for its fiscal first quarter, typically the period when Apple generates its biggest chunk of revenue.

Chief Executive Officer Tim Cook is under pressure to reverse sliding profits, hurt by the dearth of new product categories since the iPad’s 2010 debut, and to return more cash to shareholders such as activist Carl Icahn. The company likely benefited from the latest versions of the iPhone and iPad, which were released late last year, helping Apple eke out gains during a dismal period for retailers as varied as Best Buy Co. to Victoria’s Secret owner L Brands Inc. That may lead to a profit upswing over the next quarters, according to data compiled by Bloomberg, amid new iPhone sales in China.

“Everyone is looking for signs that the worst is behind Apple,” said Alex Gauna, an analyst at JMP Securities LLC in San Francisco, who has the equivalent of a hold rating on the stock.

Apple shares gained 5.4 percent last year, trailing the 30 percent rise of the Standard & Poor’s 500 Index. The stock rose 1.2 percent to $552.62 at 10:03 a.m. in New York.

Kristin Huguet, a spokeswoman for Cupertino, California- based Apple, declined to comment.

IPhone, IPad

Revenue gains are set to be driven by sales of the iPhone 5s and 5c and the iPad Air and new iPad mini, which Apple refreshed late last year. The company also added new partners to sell its smartphones, including Japan’s NTT Docomo Inc.

Morgan Stanley’s Katy Huberty estimates Apple sold 54 million to 55 million iPhones and as many as 26 million iPads over the quarter, which are both records. Huberty wrote in a research note on Jan. 21 that Apple is at the “beginning of a new cycle of growth and innovation.” She has the equivalent of a buy rating on the stock.

“Apple products were a holiday gift of choice,” said Brian Marshall, an analyst at ISI Group, who has a buy rating on the stock.

China Sales

Apple will also give projections that investors will use to calibrate the company’s expectations for iPhone sales in China. The iPhone became available through the country’s largest carrier, China Mobile Ltd., this month. Strong demand will boost Apple during a stretch when sales typically decline as customers begin waiting for the next version of the iPhone and iPad. Cook traveled to China to celebrate China Mobile making the iPhone available on Jan. 17 to its more than 700 million subscribers.

Analysts on average predict profit will grow 8 percent to $10.89 a share on sales of $45.9 billion for Apple’s fiscal second quarter, according to data compiled by Bloomberg.

One question investors are asking is whether the iPhone’s hefty price tag in China will hold down sales, said Walter Piecyk, an analyst at BTIG LLC in New York, who has a buy rating on the stock. Rivals such as Samsung Electronics Co., the largest phone seller in China, offer a variety of handsets with different screen sizes and prices. Domestic manufacturers such as Xiaomi Corp. also are gaining market share.

“There’s this big missed opportunity with customers who can’t afford the phones Apple is offering today,” Piecyk said.

Gross Margins

Investors also will be watching Apple’s gross margins to glean how the company is managing costs and if it’s getting as favorable terms from carriers selling the iPhone as it once did. Apple said in October that margins would be 36.5 percent to 37.5 percent, down from a record 47 percent in early 2012.

Information about Apple’s share repurchase program also will be scrutinized because the company can boost its earnings- per-share results when fewer shares are in circulation, Piecyk said. Icahn, who has been pressuring the company to boost its buyback plan, last week revealed that he had increased his stake in Apple to about $3.6 billion and reiterated a call for a $50 billion share repurchase in fiscal 2014.

Cook has hinted Apple may enter new product categories in 2014, boosting prospects for growth this year.

“The big things for this company are product introductions,” Piecyk said.

--Editors: Pui-Wing Tam, Reed Stevenson