Apple (AAPL): The Strength Of Branding Over The Economy

Wall St. analysts expect Apple’s earnings to do better than estimates. This is not surprising. Apple (AAPL) has a history of setting low expectations about its figures and then beating them handily. It has become a game of chess between the company and experts who follow it. Some of the analysts that track the company go so far as to send people to Apple stores and other retailers to count how its products are selling. Others check with companies that supply components to Apple for its products like the iPhone and Mac to see what the demand is for these parts.

Apple’s results should be pulled down by the same gravity that has hurt the consumer electronics and PC markets. The relentless slowing of the economy has made both individual and business purchasers of computers slow to upgrade their hardware. The Apple iPhone is more expensive than most other handsets. A recession is hardly a good time to overpay for a phone.

The current consensus estimate for Apple’s earnings from the last quarter is that it earned $1.16 per share on $8.2 billion in revenue. The EPS figure would be about what it was last year. The revenue figure would be an improvement of 10%.

Investors have marveled at how far Apple’s shares have risen in the last six months—more than 80%. That number may be misleading. Since Apple announced its earnings for the June quarter a year ago, Apple’s shares are down about 10%, a performance that is no better than that of PC market leader Hewlett-Packard (HPQ). Expectations for Apple’s numbers are relatively low when looked at through the lens of its share performance during the last year.

Apple may beat expectations, even if they are relatively modest because it has built a brand that still allows it to command premium prices combined with robust unit sales. Most companies have to drop what they charge during an economic downturn to keep volume from collapsing. There is no evidence that Apple has had to do that, at least not aggressively. It has cut the prices of some of its older iPhone models but the “hot” iPhones, the ones released most recently with the most advanced features, are still substantially more expensive than most Nokia (NOK) and Motorola (MOT) handsets found in Sprint (S), AT&T (T) and Verizon Wireless (VOD)(VZ) stores. It is a financial stretch for many consumers to buy Apple products, and it is a stretch that a large number are willing to make, even though it goes against the buying trends for most products and services have fallen sharply over the last year.

It has been said many times before, but it is worth repeating. Apple may be the single best example of the power of large global brands to command sales even in a recession.  Apple is a brand that was mediocre just a decade ago after years of producing unimaginative products.  It went through a transformation based mostly on the creation of the iPod, the product in Apple’s line which gets the least credit for the company’s success today.     The commercial demand for and the overwhelming popularity of the iPod preceded the surge of sales in the most recent generation of Macs and the ability of the iPhone to command increasing market share in a handset industry that is crowded with large companies.

Analysts often focus on Apple’s innovation as a reason for its success.   Innovation, when the term is applied to a technical product, implies that it is much more advanced than its competition. This may be true of the iPod, the iPhone, and the Mac but largely to the extent that Apple has made these products intuitive to use and handsome to look at. Innovation, in Apple’s case, may involve complexity in the way its products are designed but not in the way that they operate for the owner. This philosophy, as much as anything else, has taken Apple to the top of the personal computer and consumer electronics industries.

In the world of technology, “simple” may be the most underrated quality of all

Douglas A. McIntyre