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UBS Warburg Raises Apple Earnings Estimate, New iBook Released

Apple Stock Watch - UBS Warburg Raises Apple Earnings Estimate, New iBook Released

by , 5:00 PM EDT, May 20th, 2002

Monday morning UBS Warburg analyst Don Young raised his fiscal year 2002 estimates for Apple. Citing dropping component prices, Mr. Young raised his current quarter earnings per share estimate from $.12 to $.14 and his fiscal year 2002 earnings estimate to $.56.

In a Reuters report, Mr. Young was quoted as saying "We no longer view Apple as in a battle for PC market share -- instead we see the platform becoming a premium PC capturing selective PC demand". This revised view of Apple is what may propel AAPL to new highs as investors begin to view Apple as an important player in select markets. In other words, Apple is successful in its markets, profitable in its operations and no doubts should remain that the company is here to stay.

In early Monday trading the markets fell as investors took profits and evaluated their holdings in light of last week's strong gains. Last week the NASDAQ Composite Index racked up a 130 point gain, closing higher each of the five trading days. Both the Dow and the S&P 500 turned in positive performances for the week, but the NASDAQ was the clear winner of investor confidence. Early Monday trading evidenced caution as the market continued to look for leadership to sustain a broad market advance.

In afternoon trading, investors continued to move away from tech shares in the wake of last week's advance. The Dow Jones Industrial Average closed down 123.58 at 10,229.50. The S&P 500 ended at 1,091.88, down 14.72 and the NASDAQ Composite Index lost 39.80 and stood at 1,701.59 when trading stopped. AAPL finished the day off $.27 at $24.74.

Apple

In other Apple news, this morning the company announced a revision to its popular iBook line of portable computers. The new iBook sports up to a 700 MHz G3 processor, larger hard drives than its predecessor, double the amount of on-chip L2 cache, an updated graphics processor, and a new output port that supports VGA, S-video and composite video signals.

The iBook is the most popular portable computer in public education and plays an important role in Apple's education sales strategy. The education-buying season is in full swing and this update to the iBook line may be timed to attract new education customers. Please join in the discussion of Apple's education activities in the Mac Observer's newest forum An Apple A Day: Macs In Education.

Dell Computer

On Thursday Dell Computer released its quarterly results which exceeded Wall Street estimates for the quarter. Dell's earnings per share were flat when compared to the year-earlier period, but reflected a nominal drop in total net earnings. Net earnings were $457 million on sales of $8.07 billion.

Executives at Dell claim that they will continue to grow earnings and revenues by winning sales from rivals while cutting costs. Dell has continued to perform well under challenging market conditions but analysts wonder how long Dell can continue to cut costs without impeding the company's ability to effectively compete with rivals for market share.

In order to increase sales and earnings, Dell is aggressively pursuing new business in the server market. This puts Dell head-to-head with established and successful rivals such as Hewlett-Packard, Sun Microsystems and IBM. To prop up earnings per share, Dell is systematically repurchasing shares of its common stock. Due to the share repurchase program, Dell ended the quarter with $3.641 billion in cash and equivalents versus $4.886 billion nine months ago. Dell's balance sheet reflects $2.249 billion in treasury stock holdings from the share repurchase program.

Dell has done well competing for market share in the PC market. However, competition in the server market is much more intense and crowded with well-financed competitors willing to go to great lengths to maintain market share and stymie Dell's efforts to grow at their expense.

The next six months will provide clear indicators as to how well Dell is able to execute on its plans to successfully move deeper into the server market while maintaining growth in its core PC business. The markets reacted modestly to Dell's earnings report as the stock moved up $.10 on Friday with heavy volume.

Share Repurchase Programs

Curiously, with Dell a notable exception, comparatively few companies have announced major share repurchase programs during this time of low stock prices. Historically companies often repurchase shares as prices dip in order to boost earnings per share and set-aside shares for executive stock options so as not to materially dilute earnings per share as options are exercised. Interest rates are at forty-year lows and share repurchases could be seen as an effective use of cash in the current market.

Apple has more than $4.3 billion in cash and equivalents. However, executives have publicly stated that the company has purposely chosen not to repurchase shares or otherwise reduce its cash position in order to support the company's education sales effort. Education buyers tend to be risk averse and Apple's large cash position signals to educators and administrators that the Mac maker is here to stay.

Battle of the Balance Sheet

A quick look at the balance sheets of the major PC players such as Apple, Dell, HP and IBM reveals that the companies have worked hard to fortify their financial statements. Each of these companies is cash rich and maintains strong financial fundamentals. In short, these companies are ready to battle to maintain their profitable market share. No doubt the HP-Compaq merger will lead to large extraordinary charges as HP completes the largest technology merger in history, but HP's goal is to aggressively cut costs and maneuver the company to compete more effectively on price.

Trench Warfare

Absent the release of a breakthrough technology, the major PC players are positioning themselves to defend their sales turf and gains in share outside of the consumer PC business may be measured in square inches, not square miles. Questions remain as to whether or not HP will purposely challenge Dell's continued growth in the commodity-priced consumer PC business this year. But the major PC players are positioned to compete on price to maintain their leadership in more lucrative markets. Dell's efforts to grow share in the profitable server business will be challenged each step of the way by competitors that can and will survive an aggressive price war. Whether or not Dell chooses to move its price war tactics to the server market is a question that will be answered by summer.

Gateway

The San Diego-based company is really between a rock and a hard place. Much has been written about Dell's impact on Gateway's sales and market share. But in the end it may be Apple that delivers the final blow to the company's chance to survive. Apple is aggressively challenging Gateway's position in education and the quick pace of successful Apple Store openings leaves Gateway with nothing unique to offer customers.

Gateway is set to go head-to-head with Apple this summer with a low cost, all-in-one LCD PC. But even this effort may be too little too late to revive the PC mini-major's chance to survive.

Silicon Graphics

On Tuesday, an analyst at Buckingham Research reiterated a strong buy rating on SGI causing the stock to move up sharply for the week, closing on Friday at $2.96 up $.46 from last Monday's open.

Government and defense industry sales now represent thirty percent of SGI's revenues and the company is a direct beneficiary of increased defense and domestic security spending. Since the September terrorist attacks on the United States the market for SGI's advanced visualization products has dramatically improved.

SGI's balance sheet as of 3/29/02 reflects the difficult years Silicon Graphics has recently endured. As of the March date total liabilities slightly exceed total assets. The company reported a small $10.3 million profit for the March-ending period due to a $32 million tax refund. Absent the refund and extraordinary expenses, SGI lost $9.8 million on declining sales of $313.6 million. The sales decline is due to the overall drop in technology spending and the company's efforts to reduce expenses by focusing its efforts on specialty markets in order to reduce expenses and regain profitability.

In Monday activity:

Apple (AAPL) closed off $.27 at $24.74

Dell Computer (DELL) ended the day's trading at $27.23, down $.72.

Gateway (GTW) finished at $5.88, down $.25.

Silicon Graphics (SGI) was off $.03, at $2.93 when trading stopped on Wall Street.

Check out the new and vastly improved Apple Finance Boards, a moderated forum for Apple Investors and people who are interested in Apple's financial dealings!

For full quotes on all the companies mentioned in this article, we have assembled a set of stock quotes at Yahoo! for your reference. For other stories regarding Apple's stock activity, visit our updated Apple Stock Watch Special Report.

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