Apple On Deck; Tumult vs. Triumph?


No question these are tumultuous times for Apple Inc. , and while it's easy to be distracted by the management, or mis-management at its highest echelons —depending upon who and what you believe — let's not forget that there is a company operating beneath those headlines, and that it will report its first quarter earnings Wednesday.

Apple entered its first fiscal quarter late last year amid dampened expectations and concerns that the company was merely sandbagging once again, though more deeply than in quarters' past. Alas, the global economic meltdown has taken its toll on just about every company during the holiday shopping season — the worst this country has endured in almost 40 years, and most analysts don't expect Apple to escape injury free.

RBC Capital's Mike Abramsky, dramatically lowered estimates, cut Apple effectively to a "sell," and shaved his target from $125 to $70 a share, not just on the Steve Jobs news, but on what the firm says is a precipitous slowdown in Mac and iPhone order expectations.

RBC anticipates $1.48 a share on $9.8 billion. The Street, incidentally, expects $1.39 on $9.9 billion. By device sector, RBC projects 4.5 million iPhones, 2.5 million Macs and 20.4 million iPods. For Apple's second quarter guidance, analysts are looking for $1.13 on $8.3 billion. RBC expects a more conservative guidance of 94 cents to $1.06 on revenue of $7.75 billion to $8.25 billion.

Gene Munster at Piper Jaffray is looking for $1.38 a share on $10 billion in revenue. He's also looking for 6.4 million iPhones but now concedes the number might be "too aggressive;" between 2.5 million and 2.6 million Macs; and better than 18.6 million iPods.

And for what it's worth, the so-called "whisper" number for EPS is $1.42 to $1.45.

What seems so striking about the Apple story lately is the affect, or lack thereof, of Steve Jobs' announcement last week that he'd be taking a medical leave of absence because his health issues were more "complex" than originally thought. Of course, that announcement came only a week after he had disclosed his "hormonal imbalance" and that it was "easily treatable." Initially, the news sent Apple shares reeling, down about 10 percent. But the following day, during normal trading, Apple stock recovered nearly half that loss. Today, along with the rest of tech, demonstrably weaker.

Some analysts believe a Jobs-less Apple had already largely been factored into Apple stock, and a "Heard on the Street" column Tuesday suggested Apple might be undervalued.

The Wall Street Journal suggests that the company should carry a trading premium because of its "unbeatable brand and diversified product line-up." Still, with a P/E of 13x next year's earnings, Apple indeed does carry a premium, with HP trading at 8x next year's earnings, and Dell trading at 9.5x. But in order to value Apple properly, you have to take into account the company's enormous cash position of something near $28 billion, or roughly $30 a share. This company's balance sheet is virtually second to none, and unless its business fell off a cliff during last quarter, and its fundamentals suddenly imploded, you have to wonder whether Apple is as undervalued as some think it might be. If the Steve Jobs departure had largely been factored in, you have to wonder whether investors today are beginning to worry about sales fundamentals, or whether the sell-off today is just part of the broader tech sector falling into severe disfavor. Again.

A word on Steve Jobs: As we covered ad nauseum last week, he'll be replaced day-to-day by chief operating officer Tim Cook who certainly stands in line as a possible successor if Jobs doesn't return to his CEO job in June as he says he will. Some pundits worried last week that Cook simply could not fulfill the legendary shoes of Jobs and that Apple would ultimately suffer from that. And deeply. Ashok Kumar from Collins Stewart issued a note this morning saying, "The notion that Apple will fall on dark times when Jobs steps down fails to recognize the strength of its products." He adds, that "Business success does not hinge on market share leadership but on the ability to make money. Success also comes from taking advantage of your competitors' mistakes. Apple's track record on these fronts is second to none."

Apple will face a PR nightmare and some nuclear fall-out from the handling, or mis-handling, of Steve Jobs' and his health issues.

But as I suggested last week, those significant controversies aside, consumers want good products. On so many levels, Apple enjoys the perception of offering better mousetraps. So much so, that consumers are willing to pay premiums for them. Not an insignificant marketing and engineering trick in an economy like this one.

As I have said before, and will continue to say, the Apple story ought to come down to fundamentals, which is what we get to focus on Wednesday. Now that Jobs is effectively out of the picture for the next six months (despite his claims in his note that he'll be actively involved in key decisions), those overhanging dark clouds are beginning to dissipate. The distractions surrounding his health are now set aside. We'll get numbers, we'll get guidance, and we'll get to deal with the facts. We can focus on the main event of market performance, sales, profits and margins. No idle speculation. Or sources. Or rumor. The numbers. The guidance. The facts. The analysis. The stuff that matters. Has always mattered.

No pressure here, but this report, and the conference call after it comes out, may just be the most important in the company's history.

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Questions? Comments?