Apple's Earnings Could Start a Turnaround (Update 1)

Updated from 6:30 a.m. EST to provide analyst comments in the eighth paragraph.

NEW YORK ( TheStreet) -- To say Apple ( AAPL) has had a rough go of it as of late would be an understatement. The company's third-quarter earnings may just show that the company is poised to a turn a corner, as investors, journalists and consumers alike wait for "one more thing."

Apple's share price has continued to underperform the broader averages, falling 19.6% year-to-date, compared to an 18.8% gain in the S&P 500. Apple was once the darling of Wall Street, as it could seemingly do no wrong, selling more iPhones and iPads than anyone thought imaginable. Now, the perception and reality on Apple has changed, but the company's fiscal third-quarter earnings report could start to change all that.

Though he reduced fiscal third-quarter estimates going into the report, Topeka Capital Markets analyst Brian White believes the attention is starting to shift in a positive way for Apple, as investors start to look toward next year.

"With Apple on the verge of what we believe will be a major product cycle over the next 12-18 months and the stock trading at an anemic 6x CY14 P/E multiple (ex-cash), we believe it would be shortsighted to place too much emphasis on the Company's near-term financial performance," White wrote in his report. "In fact, we remain confident that Apple is on track to meet the three phases for a sustainable stock recovery that we first outlined in March."

White now expects Apple to earn $7.37 per share on $35.28 billion in revenue for the quarter, down from $7.45 and $36.52 billion, respectively.

Analysts surveyed by Thomson Reuters expect Apple to report earnings of $7.32 per share on $35.01 billion in revenue for the quarter ended June 30. For Apple's fourth-quarter, analysts surveyed are expecting $7.95 per share in earnings on $37.08 billion in sales.

Much of the concern has been due to the iPhone growth slowing in recent months. It's still the top product for Apple, generating more than half of Apple's revenue last quarter, but the smartphone market itself has matured. While Apple does not reveal products until they are officially announced, many are expecting Apple to announce a lower-end iPhone to try and take back some of the market share Samsung and Google ( GOOG) own.

Citi analyst Glen Yeung, who rates Apple "neutral" with a $430 price target, believes heavy iPhone 4S sales could hurt Apple's ability to meet or beat top line estimates. "In light of a mix shift toward lower-end iPhone 4S and relatively weak iPad sales, we see risk that Apple's 3Q13 revenues/earnings could fall below the mid-point of their $33.5B-$35.5B revenue (consensus $35.1B, Citi $34.5B) and implied $6.66-$7.42 EPS guidance (consensus $7.31, Citi $7.09)," Yeung wrote in the note.

The Wall Street Journal reported that Apple also is experimenting larger iPhones and iPads in an attempt to recapture market share as well.

Earnings from Verizon ( VZ) last week showed that the concerns investors have over the iPhone may be overblown. UBS analyst Steven Milunovich, who rates Apple "buy" with a $500 price target, raised his estimates for the quarter on iPhone strength at Verizon, a strong iPad quarter seasonally, and the hope that gross margins are stronger than they have been previously. Milunovich expects Apple to earn $7.60 per share on $33.9 billion in revenue for the quarter.

All eyes (and ears) will be on the conference call, to see if CEO Tim Cook has any update on Apple's product plans. In a rare occurrence last quarter, Cook said Apple would have new hardware, software and services coming in the fall and 2014. Apple is expected to refresh the iPhone later this year, as well as the iPad.

Product refreshes generally hurt gross margins, as Apple in the past has been able to squeeze out higher gross margins the further away it gets from releasing a product. Last year, the company refreshed nearly its entire product lineup in September and October, hurting margins. This year, the company appears to be on the same path, having only unveiled new MacBook Airs at its developer conference last month.

That could be some cause for concern, as JMP Securities analyst Alex Gauna expects Apple will miss results this quarter. "Based on checks during the quarter and early earnings season indications from several of its suppliers, we expect the company to miss Street revenue expectations and guide the outlook lower than consensus targets and we are lowering our FY13 revenue estimate from $173.7B to $167.4B (+7% y/y, Street $170.8B)," Gauna wrote in a research note.

One thing Apple has going for it which may be tough to model for Wall Street is the company's enormous buyback program. Apple raised its buyback program to $60 billion last quarter, as it looks to use some of its ample cash to boost its share price. Gauna is factoring in around $1.5 billion in buybacks this quarter, but any upside to that could boost Apple's earnings significantly.

There has been an incredible amount of negative press surrounding Apple in recent months. One earnings report isn't going to change all that, but any upside to estimates could start to push momentum in Apple's favor. Guidance for the September quarter will be especially important, as product launches get near.

Apple desperately needs to get its mojo back. With expectations so low for the tech titan, perhaps Apple can show it's starting to turn the corner. If not, Apple's shine may be lost forever.

-- Written by Chris Ciaccia in New York

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