Why a Key Analyst Is Less Positive on Apple Ahead of Earnings

After seeing how other companies have dealt with strong currency headwinds, it is now time to see how Apple Inc. (NASDAQ: AAPL) will handle this issue, amid other concerns of a weakening product mix. Wells Fargo has given its opinion ahead of Apple’s earnings, which is overall positive but slightly mixed.

Wells Fargo expects a beat in the fiscal second quarter and an inline outlook. Thomson Reuters has consensus estimates of $2.14 in earnings per share (EPS) on $55.76 billion in revenue, driven by strength in iPhone sales plus channel inventory fill to build in roughly an extra two weeks. The brokerage firm expects this to offset any potential softness in MacBooks driven by a potential pause due to the new MacBook announcement in March, as well as iPad softness. Wells Fargo’s gross margin forecast of 40.2% may be slightly aggressive, given potential for a lower end iPhone mix shift relative to last quarter and warranty accruals.

Regarding currency, Apple appears to have raised some pricing to offset currency impacts, though potential negative impact on unit elasticity bears watching.

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Wells Fargo expects Apple to announce a higher three-year capital allocation plan to replace the current expiring $130 billion plan, with $90 billion in share repurchases plus dividends and net share settlements. At a minimum, assuming an increase to the share repurchase and dividend, Wells Fargo would anticipate at least a $140 billion program over the next three years. This would include an 8.5% dividend increase to $0.51.

There are some worries, however, that the iPhone mix may skew lower, compared to last quarter, which would impact the average selling price (ASP) and margins. Next quarter, currency, mix and scale could have an adverse impact on gross margin, though Apple appears to have raised some pricing, a development Wells Fargo presumes to have been taken to offset some currency effects.

Overall, the firm is maintaining its Market Perform rating with a valuation range of $120 to $130.

Wells Fargo’s Maynard Um described the investment thesis as:

We believe the positives of the current 6 cycle and perception as a relatively defensive stock to be offset by gross margin pressures and secular issues as it relates to a limited market cap opportunity in the existing product segments, and a potential balance of power shift back to wireless operators from handset vendors.

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Other analysts are way more positive on Apple, as they have made clear in their most recent calls:

Shares of Apple were up 1.9% at $127.12 late Monday morning, in a 52-week trading range of $74.85 to $133.60. The stock has a consensus analyst price target of $139.95.

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