Apple Bulls Win This Quarter

Looking at the second quarter, consensus is calling for EPS of $1.07 on revenue of $6.95 billion. Several recent estimates have been increased above consensus. My own spreadsheet has EPS of $1.13 on revenue of $7.15 billion.

Mac sales are expected to drive EPS, rising to at least 2.1 million units. Mac estimates have been rising, so any shortfall here is going to be greeted rudely. Look for desktop growth of 30% and laptop growth of 40% with stable ASPs.

iPod and iPhone estimates are more controversial. iPod units are projected at 10 million to 10.5 million, but a number in the 9.5 million to 10 million range would not be a surprise. Watch ASPs to see whether a surge in Shuffle sales since the price cut is the reason for units to hit the high end. Last quarter, a 5% unit gain translated to a 17% revenue gain because of rising ASPs as the mix shifted to Nanos and the Touch. I'd expect a 1,200-basis-point bump for revenue relative to units again this quarter. That would sooth worries over iPod units if they fall short.

Most analysts expect iPhone units to come in below 2 million, with some estimates as low as 1.8 million. A few analysts are more bullish with numbers at 2.2 million. The recent case of the missing iPhones was interpreted differently by analysts. Trends in sales in the U.S. and Europe may be as important as the actual figures. Of course, there will be plenty of questions about the timing of a 3G introduction and its potential impact on current demand.

The margin environment for Apple in the quarter was favorable. Management guided to just 32% gross margins, but component costs and firm ASPs suggest that a number north of 34% is possible.

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At the time of publication, Birenberg was long Apple, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.