Don't be shortsighted: Apple is still a buy

by Geoffrey Seiler, editor BullMarket.com

For the first time since 2004, Apple (AAPL) -- a buy-rated stock on our Recommended List -- missed analyst estimates.

Nevertheless, by most accounts, most companies wish they could post the kind of growth Apple generated this past quarter.

While the miss seems to largely stem from the company drawing down the iPhone 4 channel before the launch of the 4S, it was nonetheless an unremarkable start for a company known for the extraordinary that is beginning a new chapter without founder Steve Jobs.

Apple reported a fiscal Q4 profit of $6.62 billion, or $7.05 a share, up 54% from the $4.31 billion, or $4.46 a share, it posted a year ago.

Revenue jumped 39% to $28.27 billion. The results missed the analyst consensus of $7.28 in EPS on sales of $29.45 billion.

Gross margins rose 340 basis points to 40.3%, and was 230 basis points above guidance helped by lower component and other product costs. Apple had guided for gross margins of 38.0%.

Apple's first earnings miss since 2004 drew a lot of headlines, but we think the most interesting thing to come out of the quarter was its guidance.

Apple has been notorious for sandbagging guidance and it very rarely forecasts EPS above the consensus.

To put things in context, when it reported fiscal Q3 earnings, the company guided for FQ4 EPS of $5.50 on sales of about $25.0 billion, while analysts were looking for EPS of $6.42 on sales of $27.7 billion.

Apple, of course, greatly exceeded both of those projections when it announced its results last night, reporting EPS of $7.05 and revenue of $28.27 billion.

However, analyst estimates greatly moved up throughout the quarter, which is where this quarter's "miss" stems from.

If the company is still guiding ultra conservatively under new CEO Tim Cook (and there is really no reason to believe that Apple has changed its stripes), then it's possible the company could put up EPS of close to $12.00 next quarter.

The "miss" appears to largely stem from overeager analysts and a drawdown in inventory and slowdown in iPhone sales ahead of the introduction of the iPhone 4S.

Given the huge initial reception of the device, we're not concerned that the Apple growth story is suddenly being derailed.

The fact that the company is trading at just above 9x this year's fiscal EPS estimates after excluding its next cash and investment and growing at a rapid clip, it's a "Buy."

Sometimes investors miss the forest through the trees, though. The good thing is that this shortsightedness often creates good buying opportunities. Our $550 target remains unchanged.


Learn more about this financial newsletter at Geoffrey Seiler's BullMarket.com.

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