Apple (AAPL) Q3 Margins Could Surprise to Upside

July 23, 2013 9:57 AM EDT
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Heading into Wednesday's Q3 print, Wells Fargo maintained an Outperform rating on Apple (NASDAQ: AAPL) with a price target of $$485-$525. Analyst Maynard Um sees potential for positive gross margin levers.

"We forecast revenue/EPS of $35.4B/$7.35. We forecast gross margin of 36.7%, but believe Apple could see a potential gross margin benefit in the quarter by upwards of 150bps ($0.41 in EPS, all else equal) from the recognition of a net deferred gain associated with cash flow hedges, as deferred gains are typically recognized in the same period that the related revenue is recognized," said Um.

"Additionally, Apple should also see less pressure from warranty accruals, which were impacted last quarter by the one-time warranty extension "catch up" accrual in China (negatively impacted gross margin by 100bps), as well as a potential decrease in deferred margin on component sales (a gross margin benefit)," he added.

With a broader view, Um sees Apple as a gross 'margin story', but he thinks it has the potential to become a 'revenue story' depending on the price point and distribution of its lower priced phone expected later this year.

For an analyst ratings summary and ratings history on Apple (NASDAQ: AAPL) click here. For more ratings news on Apple click here.

Shares of Apple closed at $426.31 yesterday.

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