Forget Apple's iPod; Big Mac Is Back

Impressive sales of the company's personal computer are expected to drive its third-quarter earnings, analysts say. The report will be out after the close.
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SAN FRANCISCO -- The Mac is expected to be the star for

Apple

(AAPL) - Get Report

in its third-quarter report on Monday.

Strong sales of the Mac over the past three months have pushed Apple into

the third position

in the U.S. for the first time, behind

Dell

(DELL) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

, according to the research and consulting firm

Gartner

.

With the release of the new 3G iPhone on July 11 coming in too late for the quarter, which ended June 30, and growth in iPod sales slowing down, Apple's Mac is being counted on to save the day.

"People tend to lose focus on the Mac," says Barry Jaruzelski, vice president, strategy and innovation practice at management consulting firm Booz & Co. "The Mac has been in ascendancy and is gaining market share and going forward, more of the action is going to be around the continued revitalization of the Mac."

Apple's Halo

Apple's Mac division has being going through a resurgence in the last few quarters on the basis of what company watchers call the halo effect. The popularity of the iPod and buzz around the iPhone have influenced sales of the Mac as users of the first two devices try out the Mac.

About 46% of Apple's revenue in the second quarter came from sales of Mac computers, up 54% from a year ago.

Apple still has a small share of the U.S. PC market, with

Microsoft's

(MSFT) - Get Report

Windows OS based systems dominating the marketplace. The Mac's growing popularity, though, is a sign that Apple may be bringing in new users to its fold.

Over the last few weeks, Apple cleared out its inventory of the first generation iPhone as it prepared for the launch of the 3G version. During the transition period, sales of the original iPhone were affected. Apple sold just about 700,000 iPhones in the June quarter as potential buyers held out for the newer version.

Meanwhile, Apple increased Mac shipments in the U.S. 38% year over year in the April-to-June period and now has about 8.5% share of the PC market.

Analysts say the strong growth in the Mac division is likely to drive Apple's third-quarter earnings.

"Sales of the iPhone were weak while Macs remained strong in the quarter," says Tony Ursillo, an analyst with Loomis Sayles. Loomis Sayles and Ursillo own shares of Apple. Ursillo believes that iPod sales might end up surprising analysts, mainly because expectations from the division are low.

For the third quarter, analysts polled by

Thomson Reuters

expect earnings of $1.08 a share on revenue of $7.36 billion, compared with earnings of 92 cents a share on revenue of $5.41 billion in the same quarter a year ago.

Apple has said it expects to report at least $1 in EPS and revenue of $7.2 billion.

American Technology research analyst Shaw Wu expects Apple to see at least sales of 2.5 million Macs during the quarter.

But it's the company's guidance for the fourth quarter that will drive the Street's reaction to the results.

"More than any other stock I cover, people always seem to be focused on what's coming next for Apple," says Ursillo.

In typical Apple fashion, the company's guidance will be fairly conservative and will hinge on its estimates of back-to-school sales and the iPhone's deferred revenue, among other factors.

Analysts are expecting Apple to report EPS of $1.24, or $8.32 billion, compared with EPS of $1.01 on revenue of $6.22 billion the year before.

In Comparison

Apple shares closed down $6.66, or 3.9%, to $165.15 Friday. The stock has gained about 3% over the last three months. Rival BlackBerry maker

Research in Motion

(RIMM)

lost about 10%, while

Motorola

(MOT)

shed nearly 20% during the same period.

Apple's stock still has a fair bit of juice left in it, says Ursillo. "I think the stock is set up to have a positive reaction to Monday's report," he says. "There's at least 20% upside in it between now and year end, with much of that hinging on how the 3G iPhone sales turn out."

On the iPod side, analysts estimate sales to range from 10.25 million devices (from Piper Jaffray's Gene Munster) to 10.5 million (AmTech's Wu).

The third quarter, ended June, is also the first full quarter that the iPod shuffle has sold at a price cut. Apple

shaved

$20 off the Shuffle in mid-February to $49 from $79.

Slowing growth in iPods is only to be expected as the market for it saturates, says Jaruzelski. Luckily for Apple, its iPhone and Mac business are going strong.

"The iPod is hamstrung by its success," he says, "but in iPhone and Mac there is still tremendous amount of volume and share they can capitalize on."

Another key number that analysts and investors will be watching is the company's gross margin. "It's the biggest swing factor on EPS and is dependent on Apple's ability to capitalize on component pricing," says American Technology Research's Wu.

Wu expects Apple to report margins of 33.5%, higher than the company's guidance of 33%.