The Halo is Not Cracked: Jefferies' Misek Talks Apple (AAPL) Q1 EPS, Component Cuts, and 'Cheap' iPhone

January 15, 2013 11:12 AM EST
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Apple (NASDAQ: AAPL) continues under heavy pressure Tuesday as weak iPhone demand and margin fears continue to dominate trade. However in just 8 days the world will get a quarterly report card from the iPhone giant and will be able to see for themselves just how bad, or good, the company is doing.

Jefferies' Peter Misek, who was ahead of the Street on the Apple iPhone 5 component cuts (which dominated trade Monday), offered a preview of Apple's upcoming December quarterly report (FQ1) today. His view is that everything is okay and he expects a beat and solid guidance.

Misek remains comfortable with his estimate of 53 million iPhone estimate and revenue/EPS of $59.6B/$15.50, which is sharply above the Street at $54.58 billion and $13.34, respectively. He sees gross margin of 39%, which compares to the Street at 38.4%.

The analyst believes guidance when adjusted for Apple's typically conservatism will be slightly above consensus and imply 40M+ iPhones versus the fears of mid-30s. Misek sees 44 million iPhones in the March quarter (FQ2).

Misek also said checks indicate that preliminary builds for the iPhone 5S will start in March for a launch in June/July. "As word of the earlier production schedule starts to spread, we believe we could see a slight slowing of demand CQ1 in anticipation of the new product launch and Apple will likely start curtailing channel inventory. Therefore we tweak down our CQ1 iPhone shipment estimate from 48M to 44M, which is still well above widespread fears of shipments in the mid-30Ms."

Commenting on fears of of large CQ1 component order declines, Misek believes
the primary drivers are: 1) an assembly bottleneck caused component inventories to rise in CQ4; 2) new iPhone builds starting in March; 3) demand being in line to slightly below optimistic expectations.

On rumors of an entry level iPhone, Misek said he expects a concentrated low-cost iPhone rather than a "cheap" one. Likely specs, according to Misek: polycarbonite case with 4" non-Retina display and no LTE. We believe a new low-cost iPhone would increase Apple's share, decrease GM, but have little impact on EPS.

China Mobile will possibly introduce and subsidize a 3G TD-SCMDA version of the iPhone by mid-2013, according to Jefferies China TMT analyst Cynthia Meng. Also, two iPhone 5S prototypes are in serious testing, according to developer logs and code analysis (but one could be the low-cost solution and the other the 5S). Misek said he seen no further evidence of the 4.8" prototype; this is likely the iPhone 6.

Misek maintained a Buy price target of $800.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple are down 2.8 percent to $487.69 in mid-day trade.

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