In a note to clients issued early Thursday, Munster offered his estimated earnings per share under the new and old rules for fiscal years 2009 (which ends in two days) and 2010:
2009 EPS: $8.21, up from $5.71 — a 43.8% increase
2010 EPS: $8.90, up from $6.00 — a 48% increase
Apple wouldn’t be required to switch to the new accounting method until Dec. 2010, but Munster expects the company will start as soon as possible, probably with the new fiscal year that begins next week.
“While this has been expected for the last month, we believe this will be a positive for shares of AAPL,” he wrote, before raising his price target to $235 from $186.
Of course it’s possible that the impact of the rule changes have already been factored into Apple’s share price. The stock closed Wednesday at $185.50, having soared 137% over the past eight months. The stock is up more than 10% since Aug. 31, when Munster first reported that the Financial Accounting Standards Board (FASB) task force was considering the rule changes.
What are the new accounting rules? Munster does a pretty good job of explaining them:
“Before yesterday’s ruling, any product that offered free upgrades to software and services installed on a device like an iPhone required subscription accounting (revenue deferred over 8 quarters in the case of the iPhone and Apple TV). However, the vast majority of the value of the device was realized at the time of purchase. While the value at the time of purchase as a percentage of the purchase price is debatable, we believe about 90% of the value of an iPhone is realized at the time of purchase. Under the previous rules, Apple was only allowed to recognize 12.5% (1/8th) of the revenue from each sale; under the new rules, the percentage will be decided on a case-by-case basis for each given product.”
That case-by-case factor means that Apple’s earnings under the new generally accepted accounting principles (GAAP) won’t be exactly the same as the non-GAAP earnings it’s been reporting (alongside GAAP earnings; see chart below) for the past year — but they will be a lot closer. Under the previous accounting rules, says Munster, there was about a 35% difference between the two. Under the new rules, he expects the difference to be closer to 5%.
These and other issues related to the accounting changes are likely to be hot topics of discussion at Apple’s next earnings call with analysts, sometime in October.
Below: A chart of GAAP vs. non-GAAP earnings for Apple’s third fiscal quarter, courtesy of Kaufman Bros.’ Shaw Wu: