Bernstein's Sacconaghi Cuts Apple Estimates On Projections Of Weaker iPhone Sales

Apple Inc. AAPL is scheduled to report its fiscal second-quarter earnings May 1, and one of the Street's most notable analysts lowered his expectations ahead of the print.

The Analyst

Bernstein's Toni Sacconaghi Jr. maintains a Market-Perform rating on Apple's stock with an unchanged $170 price target.

The Thesis

Apple's stock has consistently underperformed the broader S&P 500 index since mid-April, when initial signs of weak supply chain data points surfaced, Sacconaghi said in a note. (See the analyst's track record here.) 

Bernstein's analysis of 45 companies within Apple's supply chain signaled that the company could report 50 million iPhone units were shipped in fiscal Q2, he said. Bernstein lowered its iPhone estimates accordingly from 52 million to 51 million in Q2; if the forecast proves true, it would represent Apple's largest sequential decline in history at 34 percent.

For the third quarter, Bernstein lowered its iPhone unit estimate from 41 million to 38.8 million, beneath the consensus estimate of 43 million units. 

Data from the Chinese government suggest Apple could report a 5-10-percent decline in units in Q2, Sacconaghi said. Apple likely faced intense competition from rival Samsung, with the Note 8 available for a full quarter and the Galaxy S9 having reached the market in early March, the analyst said. 

Guidance Beyond Q2

As is typically the case, a major focus of Apple's earnings report is Cupertino's forward-looking guidance, Sacconaghi said. The company could guide its revenue to a range of $47 to $49 billion in the fiscal third quarter, which would fall short of the consensus estimate of $52.8 billion, the analyst said. 

Apple is also expected to provide clarity on how it plans to use its repatriated cash; the company could lift its capital return authorization from $300 billion to as much as $480 billion, according to Bernstein. This alone could boost Apple's earnings per share by 12 cents in fiscal 2018 and 79 cents the following year, the sell-side firm said. 

Buybacks vs. iPhones 

The key debate for Apple's stock is which of the two themes will take precedence: "potential weakness in iPhone units" or the company's new "buyback bazooka," Sacconaghi said.

The analyst's hypothesis is that the two "forces" will result in a net lower EPS for fiscal 2018 and 2019, although the ultimate answer depends on the timing and magnitude of share buybacks and whether a new iPhone for fiscal 2019 is compelling enough to reinvigorate demand.

Bernstein revised its fiscal 2018 EPS estimate for Apple from $10.93 to $10.71 — 79 cents per share below consensus estimates. While Bernstein's 2019 EPS estimate was lifted from $12.06 to $12.12, it still stands 97 cents below consensus estimates, and downward revisions to the Street's expectations are likely in the coming months, Sacconaghi said. 

Price Action

Apple shares were up 0.27 percent at $164.10 at the time of publication midday Thursday. 

Related Links:

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Photo courtesy of Apple.