Technology

Despite DJIA 20,000, Another Cut to Apple's Expectations

Jon C. Ogg

Published: January 25, 2017 11:55 am

Last Updated: January 12, 2020 3:32 pm

Now that the Dow Jones Industrial Average (DJIA) has finally hit 20,000, it seems that investors are going to have to spend more time evaluating their investments. The real target from 24/7 Wall St. is for DJIA 21,422 in late 2017 or early 2018. That might make some investors wonder how and why one analyst might be trimming earnings expectations for shares of the mighty Apple Inc. (NASDAQ: AAPL).

Credit Suisse’s Kulbinder Garcha has maintained his Outperform rating and $150 price target on Apple. That still implies upside of close to 25%, but one of the problems here is that this marks yet one more analyst report that is lowering some expectations for revenues or earnings.

Apple’s end of 2016 report is due on Tuesday, January 31. Garcha sees some headwinds against gross margins from currency exposure, and that headwind is more than what some other analysts have braced investors for.

Credit Suisse’s revenue and EPS estimates are $75.6 billion and $3.11, respectively. The Thomson Reuters consensus estimates of $3.22 per share and $77.4 billion. The numbers from a year earlier were $3.28 in EPS and $75.87 billion in revenues.

On how much the margin headwinds appear to be, the Credit Suisse report says:

We believe that recent data points from the supply chain suggest that overall iPhone shipments remain in line to ahead of expectations, with potential for a stronger mix. We do note however, that recent moves in FX could present a top line and gross margin headwind of as much as approximately 300 basis points to Fiscal Year 2017 estimates. Additionally, the recent currency moves may trigger price increases in local currencies on the next product cycle. Both of these factors lead us to lower our iPhone unit, average sale prices, and gross margin expectations. We now see EPS at $9.57/$11.50 in CY17/CY18 and reiterate our Outperform rating.

Credit Suisse is targeting iPhone units in line with expectations. The firm sees 77 million units in the first fiscal quarter of 2017 (December) and 52 million units in the second quarter (March). The firm is targeting average sale prices of $641 in 2017 and $659 in 2018.

On an iPhone 8 super-cycle, Credit Suisse believes that Apple has a solid ecosystem to look forward to. The analyst sees three models coming up, one having an OLED screen, which should drive up iPhone replacement rates and also drive new customers. Garcha even sees volumes growing to 250 million or so in 2019 from about 215 million in 2016. All of this is giving free cash flow of about $67 billion being sustainable long term.

As far as Credit Suisse’s $150 target price, the current valuation is on a P/E ex-cash basis of about nine times 2018 EPS. Also considered is the services growth and an installed base that could reach about 1.4 billion in the long run.

The excitement around Dow 20,000 has helped investors forget about Credit Suisse having some FX headwind caution on gross margin. Apple shares were last seen up 1.1% at $121.30, and the new 52-week range is $89.47 to $121.69.