Hot Stocks: Three Reasons Apple is Bucking the Recession

By Bob Blandeburgo
Associate Editor
Money Morning

Is high-tech stalwart Apple Inc. (Nasdaq: AAPL) bucking the worst downturn since the Great Depression?

It sure looks that way.

Despite a cautious veneer during Apple’s quarterly conference call Tuesday, company executives ended up painting a picture of a company that continues to elbow aside recessionary pressures – thanks chiefly to three key factors. Indeed, executives said that Apple:

  • Is gaining market share in its computer business, while PC rivals are losing ground.
  • Once again obliterated forecasts in its iPhone business.
  • And continues to see growth in its company-operated retail unit – at a time when many retailers are literally running on fumes.

Apple said earnings zoomed 15% in its fiscal third quarter – the best non-holiday quarter in the company’s history – at a time when virtually every other major electronics manufacturer is looking at slumping sales and market-share performance.

Apple’s business “continues to hold up really well in this tough economy,” Shaw Wu, an analyst at Kaufman Bros., told Bloomberg News.   

Take computers. Apple’s computer business is defying trends in the category. Overall, industry PC shipments slumped between 3% and 5% during the April-June quarter. And market leaders Hewlett-Packard Co. (NYSE: HPQ) and Dell Inc. (Nasdaq: DELL) showed declines in PC sales of 19% and 27% respectively in their last reported quarters.

But Apple said that computer sales grew 4% following its June price cuts on some of its popular laptops. The company also said it sold 2.6 million Macs in the just-finished quarter, a jump of 18% from the quarter that ended in late March. One key: About half of the consumers who purchased Macs in one of the company-run Apple retail stores had never before owned an Apple computer, the company said.

While Apple’s Mac platform has made modest gains on Microsoft Corp.’s (Nasdaq: MSFT) Windows in the first half of the year, Apple seems just fine with not being the best-selling player in the market.

“Our goal is not to build the most computers; it’s to build the best,” Cook told analysts in the conference call. “At this point, we don’t see a way to build a great product for this $399, $499 [price point],” referring to the rise in popularity of sub-$500 netbooks, which are smaller, lightweight laptop PCs that are designed primarily for navigating the Internet.

Sales of the company’s popular iPhone continue to defy analyst estimates: Apple moved more 5.2 million iPhones in its third quarter ended June 30, more than sevenfold of last year’s 717,000. There are two driving forces behind the huge jump: The release of the iPhone 3GS in June, and the simultaneous price cut of the 8-gigabyte 3G model to $99.

In the quarterly conference call Tuesday, Apple execs would not break down sales of each model, citing competitive reasons. However, the 3GS model, which sold more than 1 million units in its first weekend, remains in short supply and Apple is “working very hard” to fill demand, Chief Operating Officer Tim Cook told investors.

In the midst of a global downturn, the performance of Apple’s company-operated retail chain is enough to make rivals turn green. Even in the face of Microsoft opening stores this fall near Apple’s retail locations and tightening consumer spending, Apple is seeing modest sales growth at its 258 stores, six of which were opened in the last quarter. Retail sales rose to $1.47 billion in the quarter, compared to $1.44 billion in the same quarter last year.

Apple remains on track to open 25 stores in its fiscal year ending September 30, Chief Financial Officer Peter Oppenheimer said.

Apple easily exceeded Wall Street’s expectations for its third quarter, reporting a net income of $1.23 billion, or $1.35 a share, on revenue of $8.34 billion. That compares to a net income of $1.07 billion, or $1.19 a share, on revenue of $7.46 billion in the same quarter last year.

Analysts were expecting earnings of $1.17 a share on revenue of $8.20 billion.

Looking ahead, Apple’s forecast is for earnings of $1.18 to $1.23 per share on revenue of $8.7 billion to $8.9 billion. The company’s guidance is conservative when matched up with Wall Street’s average earnings estimate of $1.30 per share on $9.05 billion in sales.

Much has been made of Apple’s huge cash reserves, now at $31.1 billion. “Our investment priority for the cash continues to be preservation of capital, which has served us well in the current environment,” said Oppenheimer, who added that in the current quarter Apple did make a $500 million payment to Toshiba Corp. for the manufacturing of the flash memory that is found in many of Apple’s products, including the iPhone.

While acquisitions made by Apple are rare, if it does make any, it will likely be for a small company that can easily be integrated into its existing projects.

Although Apple has long been one of Wall Street’s high-tech darlings, analysts continue to warm to the company’s current game plan, and are upgrading its stock – a potentially bullish development for existing shareholders, or for investors considering a move into Apple shares.

Canaccord Capital Corp. said Apple’s decision to add video functionality to the iPod lineup is "very positive" as it expands its market into the low-end camcorder area, according to Canaccord also views the launch of the iPhone 3GS in all countries by the end of this year as another strong potential catalyst for Apple sales and profits.

Canaccord boosted its rating on Apple’s shares to “Buy” from “Hold.” It also raised its target price from $150 to $200.

Shares of Apple climbed 3.45% yesterday (Wednesday), or $5.23 to close at $156.74.

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