Ahead of Earnings, Apple Looks to Be on a Roll

Apple Inc is once again expected to top Wall Street’s estimates when it unveils quarterly earnings next week, but it may have to beat by a lot to drive an already lofty share price higher.

The maker of the Mac, iPhone and iPod is on a roll: CEO Steve Jobs is back at the helm, its stock has more than doubled this year to within spitting distance of a record high, and it has smashed profit expectations two years running.

Now, analysts say one potential speed bump this quarter is the iPhone. Sales of the device that competes with Research in Motion’s BlackBerry and Palm’s Pre may look weaker in comparison to strong numbers a year ago, and may not be enough to satisfy the voracious hopes of some investors.

“The driver is if the iPhone keeps selling well,” said Hudson Square Research analyst Daniel Ernst. He also noted that Mac sales, the largest single chunk of Apple’s (NASDAQ: AAPL) revenue, should be impressive.

“Mac is a huge part of the company and I think it’s going to get better next year, so while there may be some risk in the iPhone sales for the quarter, people will take some solace in that the Mac sales are pretty strong.”

Investors have grown accustomed to Apple crushing Wall Street estimates, so there are strong expectations for the company’s fiscal fourth-quarter, which ended September. Nearly 20 analysts have lifted price targets since September.

“Expectations for Q4 are high going into FY Q4, and we would not be looking to make a big bet on the quarter,” Sanford Bernstein analyst Toni Sacconaghi wrote in a recent research note, adding that Apple may not deliver a “blow-out” iPhone number.

Simply exceeding average expectations isn’t guaranteed to please investors. IBM surpassed Wall Street forecasts for revenue and earnings slightly and raised its full-year outlook, but its shares slid 5 percent on Friday. On the other hand, Google’s shares rose 4 percent after it beat by a wide margin.

Apple has bested consensus Wall Street EPS estimates in every quarter for the past two years, and beat on revenue every quarter save one.

That’s why Apple detractors are tough to find, and many analysts argue the stock still has room to run. The company has handily outperformed competitors despite an economic downturn that was supposed to hurt sales of its expensive products, and unlike others it has not slashed costs to protect its bottom line.

With Jobs back in the driver’s seat following half a year of medical leave — during which time his lieutenants carried on — this stock is now nearing it all-time high of $202.96. But Apple’s shares now trade at 32 times forward earnings, versus RIM’s 16 times.

“People are expecting a beat, EPS numbers have climbed up over the last couple weeks,” said Oppenheimer & Co analyst Yair Reiner. But for the top-line, “it depends on what happens with the iPhone.”

Next page: Room to move.

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The company moved 6.9 million iPhones in the year-ago quarter, so it will be a tough comparison. Wall Street expects around 7.5 million units this quarter although some estimates are well below that.

In September, Apple reported sales of more than 30 million iPhones to date, which some analysts say translated into about 3.5 million so far for the quarter, meaning the company would have to pick up the pace to best the total from a year ago.

It launched its latest iPhone in June and sales have impressed, even as the company expands into new markets such as China. But some analysts say the company has had a hard time meeting demand in foreign locales.

Analysts are forecasting a net profit rise of 15 percent, and sales to increase 17 percent. They see a profit of $1.42 a share on $9.2 billion revenue, according to Thomson Reuters I/B/E/S. Its gross margin is expected to hit 35.5 percent.

Wall Street is expecting Mac sales of around 2.8 million units on good back-to-school sales, implying growth of around 7 percent. But despite a recent refresh, analysts expect iPod units to fall 5 percent-to-10 percent from a year ago.

According to estimates by industry tracker IDC, Apple’s U.S. shipments surged 11.8 percent in the quarter, far outpacing the overall market.

Though Apple’s stock is often volatile around its earnings, few people are betting against it. Short interest stands at under 2 percent, compared with 32 percent for Palm.

Analysts believe Apple shares can move higher in coming months. And a new product — in the form of a rumored tablet device — looms on the horizon.

One wrinkle is recently approved accounting rule changes that would allow Apple to record much more revenue from iPhones when they are sold, rather than over time.

Apple, which supported the rule change, will not say when it would move to adopt the new standard, but many analysts expect it to see the change take effect from the December quarter, its first of fiscal 2010.

Still, it has been reporting non-GAAP results to provide a better picture of sales and profit, and analysts say investors have already been valuing the company by that metric.

Shares of Cupertino, California-based Apple fell 1.3 percent to close at $188.05 on Nasdaq, in line with the market’s decline.

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