Apple Is Poised to Move Even Higher After Reporting 3Q Earnings

NEW YORK (TheStreet) -- We don't generally trade prior to earnings but both technical and fundamental factors are suggesting a long play on Apple  (AAPL) prior to the earnings announcement later Tuesday.

Wall Street has been riding high on AAPL for some time now and expects it to report $1.22 per share in earnings for for its fiscal third quarter, an increase of over 10% year over year. So the company is making money.

What else is new? From a fundamental perspective, the breaking news is Apple's recent deal with IBM  (IBM). These long-time competitors are now teaming up to ride the tablet and app wave. According to Forrester Research, business and governments (i.e. enterprise) spent approximately $11 billion on iPads alone in 2013.

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This is a significant amount for any industry but only accounts for a small portion (about a third) of the Cupertino, Calif., giant's total iPad sales. Furthermore, the $11 billion number is expected to increase by 20% over the next two years.

The objective here is to get more users into the Apple ecosystem, which is the holy grail of the triple-play gods -- computer, tablet, phone. Getting more users in the enterprise space to function with iPads will invariably cause more demand for complementary products such as iPhones, Macs and associated apps, music services. The list goes on.

The deal with IBM clearly allows Apple to gain a stronger foothold in the enterprise space. A secondary and, sometimes overlooked benefit, is that they are now in business with the company that is the gold standard in enterprise and they did it before Google (GOOGL) could maneuver into that space with its Android offerings. The consumer space for iphone and other i-products is getting saturated but the enterprise space is still fertile ground. Thus, with Apple showing signs of growth even in the relatively sleepy consumer space, its outlook only looks better over the next 6 - 12 months as it rolls out its initiatives in the enterprise space.

On June 9, Apple's stock started trading post 7-1 split. Even though the company's stock isn't really any cheaper based on the way Wall Street analysts value stocks, the stock is undoubtedly more affordable. Shares recently traded at $94.34, up nearly 18% for the year to date.

From a technical perspective, the news is even more exciting as AAPL is coming off a three-day pullback to its 20-day simple moving average and looking to bounce. The daily chart has also formed an Inside Bar formation which could be a catalyst for a move upward. An inside bar is a bar (or a series of bars) that formed totally within the range of the proceeding bar (see chart below). An inside bar indicates a time of indecision or consolidation. Inside bar formations usually occur after a market makes a large directional move and can also occur at turning points or key areas of support or resistance. See full video tutorial here.

There are two ways to trade an inside bar formation: As a continuation signal or as a reversal signal. When faced with an inside bar setup, traders should be looking to trade a breakout. Meaning, they should be looking to go long (buy) if the high of the previous (larger) candle is broken or go short (sell) if the low of the previous (larger) candle is broken. In this particular case, since AAPL is clearly in a strong uptrend, we would only be interested in trading AAPL to the long side. If it trades above $95.28 (the high of last Thursday's candle), we would consider it a strong entry point for a long position.

At the time of publication the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AAPL's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 4.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although AAPL's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 43.45% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.39% is above that of the industry average.
  • Net operating cash flow has slightly increased to $13,538.00 million or 8.26% when compared to the same quarter last year. In addition, APPLE INC has also modestly surpassed the industry average cash flow growth rate of 5.16%.

This trade was first identified through one of our proprietary scanning systems which is free and can be learned here.

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