I always marvel at the quarterly earnings at Apple Corporation. Not necessarily because of the impressive fundamentals, but because of the game being played. Corporate earnings are a game. The best managements know how the game works and they play the analysts for fools by consistently managing expectations. No one does this better than Apple. Every quarter they beat and every quarter they sandbag earnings. Like clockwork, the analysts peg their estimates near Apple’s “projections”. And Apple blows them out of the water. This quarter should be no different.
Today, I was particularly intrigued to see CNN’s list of quarterly estimates. They are broken down by analyst, but also show a few “unaffiliated” estimates. What’s interesting to note here is how much higher the “unaffiliated” estimates are. The average “unaffiliated” estimate calls for revenues of $12.6B while the consensus analyst estimate is for just $12.15B – a full $450MM difference. The average “unaffiliated” EPS estimate is for $2.75 while the consensus Wall Street estimate is for $2.48 – a full $0.27 difference. We’re not talking about a small difference here. This is night and day. It makes me wonder just how these two parties could both be considered reasonable sources, yet so far apart in terms of their estimates?
While we’re at it I’ll go ahead and throw my own hat in the ring. My estimates are calling for $2.81 EPS on $12.65B in revenues, 7.3MM iPhones, 10.1MM iPods, 2.95MM MACs, 41% GM so I expect Apple to beat handily. But this all raises an interesting question we’ve been discussing of late. It’s clear that these analysts are highly impacted by management’s communications with them (yes, they get phone calls from the companies if their estimates drift too high). But it’s also clear that management is sandbagging them to high heaven. Knowing all of this, we have to ask ourselves – why do investors even pay attention to these analysts? They’re not “analyzing” anything. They’re just copying the right numbers down after management gives them a nudge in the right direction. Nonetheless, Apple’s stock is likely to soar or tank after the earnings are compared to these phony estimates. That’s what is so frightening here. These men and women can add or remove billions in market cap based on this “analysis”.
In sum, Apple is going to report another superb quarter (particularly when compared to Wall Street’s estimates). But the quality of those earnings really depends on who you listen to. It will be interesting to see which set of “analysts” is closer to the actual figures. I have no doubt the “unaffiliated” set will prove far more prescient and give investors a much better idea of how well Apple really performed this quarter.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.