Wells Fargo‘s Maynard Um this afternoon reiterates an Outperform rating on shares of Apple (AAPL), and a $600 to $630 “valuation range,” after perusing the company’s 10-Q filing on Thursday with the Securities & Exchange Commission for the fiscal Q1 reported last Wednesday, and turning up some clues as to diminished profit.
That report, with revenue slightly less than expected, and earnings per share falling year on year, prompted a sell-off of 12% in Apple shares the next day.
Um thinks about 20 cents disappeared from last quarter’s report because of “deferred margin on component sales” and because some derivatives instruments used by Apple to manage cash flow in the quarter had adverse results:
Deferred margin on component sales increased $101MM sequentially, which we estimate adversely impacted gross margin by about 20bps or $0.08 in EPS. We believe a reversal is likely in the next qtr, which could benefit gross margin by about 70bps or $0.25 if it reaches levels to that of the June qtr. In our view, the timing of the component purchases is key to understanding
whether this is a bullish sign for units into the March qtr (and not reflected in guidance) or a function of inventory not burning off relative to expectations [...] Apple recognized a $150 million derivative instrument loss that was reclassified from Accumulate Other Comprehensive Income to net income for cash flow hedges, the vast majority of which impacted cost of sales. We estimate this had about 30bps adverse impact to gross margin ($0.12 to EPS) and note that
in the prior four qtrs Apple had gains, making this seq. comparison more difficult.
There were some other effects upon gross profit margin that were less surprising, writes Um, including a 53-cent hit from the company having “over-accrued for warranties” in the quarter, perhaps reducing gross margin by 120 basis points: “accrued $673MM more than it expensed, vs. a $73MM over-accrual in Sept. and $436MM over-accrual in Dec. 2011 qtr). This was anticipated given several new product launches.”
Apple shares today rose $9.95, or 2.3%, to $449.83.
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