From "How to trade Apple as Morgan Stanley predicts more iPhone issues ahead" which aired Wednesday on CNBC:
Morgan Stanley cuts estimates for iPhone shipments. With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Karen Finerman, Steve Grasso and Guy Adami.
My take: With end-of-the-year vacations kicking in, I'm having a hard time getting my hands on this Morgan Stanley note, but I'm pretty sure it wasn't written by Katy Huberty. And given that other analysts had already forecast larger iPhone shipment cuts, I suspect it's not worth all the attention it got on Wednesday.
UPDATE: Got the note. It's a puzzler. See Morgan Stanley sees no iPhone demand destruction, cuts estimates anyway
He said this :
We cut Dec Q iPhone units by another 3M (to 75.5M) to account for a slower Zhengzhou production ramp, bringing Dec Q rev down 3% to $120B. Remain constructive on iPhone demand durability given solid lead time data, but for now, conservatively assume no add’l units are pushed into the March Q.
Reducing near-term iPhone forecasts following news of slower production ramp at Hon Hai; Overweight thesis and $175 PT remain unchanged.
Folks who had been bullish on AAPL at $150 now say its expensive, going to $125 to $130.
AAPL normally trades at around a 10% discount to average analysts’ PT’s which is currently $178. And, when the market does drop so far below PT’s, analysts tend to lower their PTs.
Meanwhile Apple buybacks slightly more shares for the same buyback spend.
“ Meanwhile Apple [buys back] slightly more shares for the same buyback spend.”
The present revaluation of stocks generally ignores one very real result of Apple’s buybacks; they are a self-devaluation mechanism. Massive buybacks reduce the P/E ratio substantially. In January of last year, Apple’s price was about $140/share, but its P/E ratio was about 42. Yesterday, the price was again about $140/share, but the P/E ratio was about 23. That’s a massive 45% devaluation!
There is only one way that the price per share can be exactly the same and for a 45% devaluation to happen, and that is for the share count to decrease. Ergo, massive buybacks are a self-devaluation mechanism, and these calls to force the valuation even lower ignore an aspect of Apple that is unique. And that means either that they are truly ignorant of these facts, or that they want Apple’s valuation to suffer disproportionately to everyone else’s, and are only faking their ignorance.
“And that means either that they are truly ignorant of these facts, or that they want Apple’s valuation to suffer disproportionately to everyone else’s, and are only faking their ignorance.”
Understand: There is huge money to be made by feigning ignorance, and artificially dunking AAPL. The “recovery” of Apple is inevitable; it has too much going for it. The lower the price can be forced now, the bigger the gain in the future.
Bottom line: What they’re doing is just a variant of the old slingshot gambit from way back when. In the meantime, people who have to sell get shafted.
Leaches, every one.
Please explain your thought process here, because it makes no sense to me.
Realistically, if earnings stay flat, and share count goes down, earnings per share go UP.
But honestly P/E ratio has both Price and Earnings included, so it is independent of … well, share count to be sure, because E in P/E is EPS (PER SHARE), not E. And P/E (price) is really just a degree of markets belief in “something extra” other than just earnings.
Let’s look at FY2022, trailing 12 months.
If price was $142.65 (close yesterday) and earnings were 12 month net income ($99.8B) and shares were 16.325B, EPS is $99.8B/16.325B = $6.11/share.
Initial P/E = $142.65/$6.11 = 23.34.
Now let’s say in those trailing twelve months, Apple had purchased an extra 150M shares / quarter or 600M more shares retired (a 3.675% change) Total shares would then be 16.326B – 600M = 15.726B (ignoring any new shares issued). EPS then is $99.8B/15.726B = $6.346/share, a 3.86% difference.
Buybacks P/E then is $142.65 / 6.346 = 22.48, a reduction of 3.85%.
If no share buybacks, to get a PE of 22.48, the price would have to come down to 22.48 x $6.11 = $137.35.
Assuming the share price was absolutely unchanging over a year, it would cost 600M x $142.65 = $85.6B to purchase.
Now let’s assume Apple earnings EPS actually increased to $6.23 with no change in shares, what net income would that be? 16.325B shares X $6.23 EPS = net income of $101.70B. Now if shares bought back, instead we would have $101.7B / 15.725B = EPS of $6.467 instead of $6.23, a 3.8% increase. Again, assuming an unchanged price, the new PE is $142.65 / $6.467 = 22.06,
So as usual, the PE can go down by decreasing the share price,
or increasing share buybacks = decreasing shares = increases EPS = decreases PE.
Or increase revenues —> increases net income —> increases EPS = decreases PE
Or do it all – increase revenues, increase net income, decrease shares —^ more of an increase in EPS, decreased PE IF price remains flat.
Of course, if you’re increasing revenue & increasing net income, your company is growing, and someone is going to bid up your price. Which increases the PE all over again.
Numbers give me a headache.
“Numbers give me a headache.”
You are correct: EPS is itself a ratio of earnings and share count. Many years ago, Robert Leitao and I reached agreement on that. Indeed, earnings growth from the iPhone/iPod Touch/iPad severely compressed Apple’s P/E ratio in the years just following the Great Recession, which was unfortunately coincident.
Horace Deidu recognized the insanity of punishing Apple for it’s success by interpreting a shrinking P/E as A Bad Thing, and driving its valuation even lower. He railed about the way the price of AAPL was comparable to that of “a steel plant going out of business”.
It is, of course, the height of irony that those same voices are now claiming that Apple is “overvalued” at its present P/E, by harking back to the many, many years when the stock was horribly, woefully undervalued, and claiming that those were the times when it was fairly valued!
The chart shows AAPL finding support at $130 in summer, then $135, and lately at $140. So far, lows are getting higher. And each dip is short.
Importantly, Woodring suggests due to reduced iPhone supply overall revenue estimates cut to about $120B, compares now turn slightly negative -3.1% to YOY $123.9B. That would still be the second highest Apple quarterly record ever!
To me, that would imply other Apple revenue segments to be flat to slightly higher. I would think iPads flat to higher on a previous year parts constrained compare, Macs flat to slightly higher despite no new products, iPhones down $3-6B-$9B, Wearables up 5-12%, and Services up 3% exceeding $20B for the first time. All of this despite about 700-800 basis points of improving Foreign exchange headwinds.
If prior normal good times estimates were $126B, this is in line with a $6B-9B iPhone decrease buoyed by other segments increases.
My hope is that all analysts revise their total revenue numbers down to account for an iPhone shortfall, making any expectations more realistic. Apple and AAPL doesn’t need unrealistic expectations to be compared with as if nothing untoward had happened.
But the other thing that we need to remember is that these guys make more money with more market churn so it is also in their best interest to keep things moving. Probably part of that going on as well.