Apple’s beat and 7:1 split: What the analysts are saying – update by Philip Elmer-DeWitt @FortuneMagazine April 24, 2014, 5:36 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons What they are not telling their clients is that they’ve missed a chance to make some money. FORTUNE — If the small army of analysts who track Apple AAPL are embarrassed by their failure — across the board — to alert clients that Apple was about beat the Street’s consensus and announce a 7-for-1 split, and that its shares might pop better than 8% in overnight trading, you wouldn’t know it from their post-earnings notes. “Many analysts,” Carl Icahn tweeted after the numbers were released, “fail to understand company.” In the 19 notes that have come our way I count 10 small, almost pro forma price target increases — three of them apparently fresh from the currency converter (up $48? $38? $29?). We also saw several exhortations to purchase the stock. “Buy Apple, before Tim [Cook] does it himself,” RBC’s Amit Daryanani tells his clients. Now he tells them. After the stock has moved. Excerpts below: Katy Huberty, Morgen Stanley: Stronger iPhone and User Growth Tees Up 2H14 Product Cycle. “We are buyers of the stock in light of low institutional ownership, stronger-than-expected iPhone sales, and upcoming product cycles not baked into consensus estimates… iPhone shipments of nearly 44M were above consensus of 38M and in line with the strength indicated by our AlphaWise Smartphone Tracker during the quarter. iPhone growth improved in a number of geographies, including double-digit growth in the US, 50% in Japan, and 28% in China. Improved mix drove gross margin to 39.3%, above guidance of 37-38%. Better-than-expected June guidance is in line with our prior model and straddles consensus at the high-end.” Rating: Overweight. Price target: $630 Colin Gilis, BGC: Haihu. “The iPad sales drop, should draw investor focus, more than iPhone sales.” Hold. $550. Bill Shope, Goldman Sachs. The platform shows its strength “Overall, we believe the iPhone and gross margin upside should overshadow the iPad shortfall and slightly disappointing guidance. Most important, the company’s commentary around its installed base momentum and new user acquisition was far more encouraging than we anticipated; indeed, the company noted that it now has nearly 800 million iTunes accounts, up almost 40% from the levels in June of last year. Bottom line: this installed base growth provides a far more robust platform for future device growth (old and new categories) than the bulls or bears previously believed.” Buy. Raising price target to $620 from $610. Charlie Wolf, Needham: Finally, Apple Surprises On The Upside. “Notwithstanding the second quarter upside surprise, Apple’s ongoing dilemma is that in the segment of the smartphone market the iPhone is targeting—the high-end segment—demand is brand-driven and price-inelastic. In this segment, price reductions are an ineffective weapon to grow market share. In contrast, in the low price segment, brand is unimportant and demand is very price elastic. To grow the iPhone’s share, Apple would have to build a phone for $300 or less that targeted this segment. But the brand would count for little in the endeavor. Buy. $590. Toni Sacconaghi, Bernstein: Results Surprisingly Strong: Core Issues Remain the Same, but the Trade is ON. “On one hand, iPhone sales strength is encouraging. Units were well above consensus expectations, driven by strength of low end iPhone 4S sales in emerging markets, as well as some incremental share gains in select countries. Additionally, we note that iPhone channel inventory levels were flat sequentially, consistent with our expectations, so they were not a contributing factor to the upside. On the flip side, excluding estimated sales from new carriers (i.e., China Mobile, NTT DoCoMo and T-Mobile) iPhone units grew ~5% YoY, and ASPs declined. Moreover, Apple may have also benefitted from “pulled in” sales in Japan, in advance of a VAT increase in April. On net, we continue to believe that the high end smartphone market is likely to have limited to no unit growth going forward, and that share shifts are difficult to effect across platforms, given high repurchase intentions for both iOS and Android.” Overweight. Raising price target to $615 from $575. Stuart Jeffrey, Nomura. Product Cycle Offers Some Upside. “China and Japan, where Apple recently added China Mobile and Docomo to its customer list, drove 93% of absolute year-on-year revenue growth. Excluding these markets, growth was just 0.4% yoy, suggesting that growth opportunities are diminishing… We see little risk of a material negative disappointment in the coming months now that (achievable) June guidance has been given. Attention is now likely to shift to the iPhone 6 launch. Weak trends outside of China and Japan suggest that we could already be seeing the start of pent-up demand. When released in Q4, this could result in a very strong end to the year.” Neutral. Raises price target to $574 from $545. Amit Daryanani, RBC. Buy before Tim does it himself. “All you need to know: AAPL reported material upside to March- qtr expectations and guided June-qtr in line with tempered investor expectations. We think the stock will work well from here through the end of FY14 (Sept) driven by: i. Improved capital allocation, ii. iPhone 6 product cycle (large form factor), iii. iPad refresh and large form factors and iv. “New Product categories” launch in H2:14 (iWatch and more?).” Outperform. Raising price target to $625 from $590. Timothy Arcuri, Cowan: Don’t Call it A Comeback. “With a solid print and guide a little better than feared, iPhone is growing double digits again in both March and June and this is even before what looks to be a very strong iPhone 6 build. Additionally, capital allocation continues to grow and new categories add the potential for some multiple expansion moving through this year.” Outperform. Raising price target to $630 from $590. Andy Hargreaves, Pacific Crest: The iPhone’s Still Got It. “We continue to believe Apple is well positioned to gain unit share in the iPhone 6 cycle and maintain or increase gross profit per iPhone by raising prices. If Apple raises prices by $50 at the high end and waterfalls that through the lineup, we estimate it could add $2.5 billion or more to our current F2015 EBIT estimate. Management commentary seemed to support this view, as Tim Cook repeatedly said that they would price products commensurate with the value delivered. Management also firmly reiterated that it would be expanding into new product categories, which could provide a source of upside to our estimates and investor sentiment over the next year.” Outperform. Raises price target to $650 from $635. Walter Piecyk, BTIG: Apple Could Benefit From Rising Phone Upgrade Rates In The United States. “Apple’s earnings beat and solid guidance was driven by iPhone upside that the company claims was geographically broadly based. This should be enough to mitigate the near term concerns of investors that are interested in investing ahead of the new products that Tim Cook has promised but were previously hesitant to own the stock through what was expected to be tough March and June Quarters. We think the risk of earnings misses might be further mitigated by a possible increase in phone upgrade rates at US wireless operators, which are still the largest driver of iPhone sales. The change in upgrade policies at US wireless operators that we highlighted in our downgrade two years ago have now run their course and we believe new leasing programs will stimulate more frequent upgrades as long as Apple can deliver products that interest the customer.” Raising price target to $600 from $552. Scott Craig, Merrill Lynch: Improved capital allocation, stock split announced. “As expected, Apple announced a meaningful increase to its already sizable capital allocation program. The share buyback program was increased by $30 billion and now stands at more than ~$44 billion remaining. The company repurchased more than $17 billion of stock in F2Q14 to bring its program-to-date total to $45+ billion. Given a relatively low domestic cash balance of $18 billion at end of F2Q14 given annual expenditures for capex of $5+ billion (global), dividend payments of $11+ billion (domestic), and general corporate necessities (global), coupled with the new buyback (domestic), Apple expects to raise debt again in F2014. We assume the company raises ~$17 billion (domestic and international but mostly domestic), a similar amount to F2013, at the end of F3Q14, to help fund the buyback and dividends. Apple also announced an ~8% increase to its dividend to $3.29 per share (first payable on May 15, 2014). Lastly, a seven-for-one stock split was also announced (shareholders of record at June 2, 2014; trading on a split-adjusted basis on June 9, 2014).” Neutral. Raises price target to $615 from $590. Keith Bachman, BMO. Better on Margin. “We are making changes to our estimates driven by higher iPhone units and iPad ASPs, offset somewhat by lower iPad units. In addition, we have increased our gross margin assumptions across our forecast period, which is the most meaningful part of our estimate revision.” Outperform. Raising price target to $610 from $565. Glen Yeung, Citi: Solid Quarter on Strong iPhone Sales but Guides below Street Expectation. “The company shipped 43.72M iPhones in the quarter, above expectations for 38.45M but disappointed street estimates for iPads, shipping only 16.35M vs. consensus at 19.83M. Management cited inventory reductions as the reason iPad sales disappointed and highlighted channel inventory is now within Apple’s targeted range. Management guided 3Q’14 revenues to be in the range $36-38B slightly below consensus at $38B and gross margins to be in the range 37-38%, in line with street estimates for 37.4%.” Neutral. Raising price target to $570 from $560. Gene Munster, Piper Jaffray: iPhone Growth Reassuring Business Is Largely Healthy Going Into Cycle. “Emerging markets drove the upside to the iPhone driven by lower capacity 5S’s and a more normal distribution of sales across the iPhone family. We see this as an encouraging sign the global iPhone franchise is intact. The strength came from China up 28%, Brazil up 61%, Russia up 97%, Turkey 56%, and India 55%. Overall iPhone unit growth accelerated to 17% y/y vs. 7% in the Dec-13 quarter. We estimate that iPhone unit growth would have been 11% excluding the impact of China Mobile launch which we believe added around 2 million units based on public reports. The irony of the 14% upside to iPhone units in the quarter is the biggest issue with the company’s Dec-13 report was iPhone units missed Street estimates by 7%.” Overweight. $640. Gene Munster, Piper Jaffray: First take: iPhone A Positive Surprise As Focus Remains On New Products. “Overall we view the significant upside to iPhone in the March quarter as a sign that the iPhone business is healthier than we and the Street previously expected, but note that the iPad business appears to be facing challenges. In terms of June, Apple guided slightly higher than we had expected, but given the reality that the Street will go to the high-end of guidance, we would view the guide as in-line with what the Street was already expecting. Overall we view the guide as a positive indicating the business is holding together with aging products.” Overweight. $640. Rod Hall, J.P. Morgan: A Beat and Not as Weak as Expected. “Apple delivered a strong quarter with only slightly weak guidance in spite of what we believe was negative sentiment heading into earnings. Visibility through June allows investors to begin looking forward to the typically strong H2 in our opinion and should provide support for the stock from here. We believe that AAPL has the ability to outpace expectations by tapping the $63bn sub $1,000 laptop market with iAnywhere as well as new products like the iPhone6 and iWatch.” Overweight. Raises price target to $623 from $585. Brian Marshall, ISI: Larger Screen iPhone is Desired by All… “The Mar-14 quarter reminded investors of the power of AAPL’s franchise (e.g., near double-digit underlying growth, etc.). We believe new product category introductions in the 2H can help further restore/enhance the brand and ecosystem while an iPhone (~60% of gross profits) refresh invigorates sales/EPS growth… While we view the current lack of a ~5.0” iPhone as AAPL’s largest product “misstep” in recent years, we believe the “stickiness” of the ecosystem is as strong as ever. In our view, a large form-factor iPhone in 2H will spark a massive upgrade cycle (i.e., “mother lode”) in the ~280mil install base as well as the return of some former iPhone users from the Android platform. Strong buy. $600. Brian White, Cantor Fitzgerald: Apple likely to Silence iPhone Naysayers with a Crushing Beat but iPad Weakens. “In our view, last night’s Apple call had a positive vibe and the company sounded more confident than in recent quarters. There were also some impressive statistics discussed, including that the company has now amassed 800 million iTunes accounts and up nearly 40% from the 575 million nine months ago. Also, Apple highlighted the sale of approximately 20 million Apple TV units in aggregate and up from 13 million units in June 2013. Looking forward, we believe the iPhone 6 will prove to be a big hit in China and elsewhere around the world, while the iWatch opens up a new product category for Apple, and we believe the ramp with China Mobile will accelerate in the second half of the year. Given Apple’s expanding ecosystem and anticipated new product launches, we believe this product cycle could prove rewarding for investors.” Buy. $777. Peter Misek, Jefferies: First thoughts on FQ2. “iPhones were much stronger than expected but CQ2 guidance is worse as some iPhones we expected for CQ2 were pulled forward. Demand is clearly there and now with the feared June guidance out of the way it is possible to be aggressively buying the shares ahead of what we believe will be a successful iPhone 6 launch.” Buy. $625. That’s the bulk of them.