Analyst: Get Ready for an AAPL Q3 Gross Margin Surprise

| Apple Stock Watch

When Apple announces its third fiscal quarter earnings later on Tuesday, Wells Fargo analyst Maynard Um expects we're in for a pleasant surprise in the form of better than expected gross margins. Mr. Um has been expecting the Mac, iPhone and iPad maker to report a gross margin of 36.7 percent, but now thinks the company could do even better.

Maynard Um says Apple's Q3 gross margins may be better than expectedMaynard Um says Apple's Q3 gross margins may be better than expected

Mr. Um said,

We forecast revenue/EPS of $35.4B/$7.35. We forecast gross margin of 36.7 percent, but believe Apple could see a potential gross margin benefit in the quarter by upwards of 150bps ($0.41 in EPS, all else equal) from the recognition of a net deferred gain associated with cash flow hedges, as deferred gains are typically recognized in the same period that the related revenue is recognized.

While he is expecting good numbers overall for the quarter, Mr. Um thinks Mac sales could come in below his 4.1 million unit projection. Mac sales could miss his estimate by as much as 300,000 units thanks to weakness in the overall PC market, slower sales ahead of the June MacBook Air refresh, and iPad cannibalization.

Verizon's quarterly iPhone sales came in at 3.9 million units, a 44 percent increase year-over-year. That jump has Mr. Um modeling 34.7 million iPhones for Apple's third fiscal quarter, up from his earlier estimate of 26 million units. He's expecting iPad sales to come in at 18 million units.

Looking forward, Mr. Um thinks the next iPhone refresh will have a positive impact on Apple's gross margins. He also sees potential for a revenue boost if the company does ship the rumored low cost iPhone "depending on the price point and distribution."

Apple will be hosting its third fiscal quarter earnings report after the market closes Tuesday afternoon. Be sure to check in with The Mac Observer for our usual coverage and analysis.

Mr. Um is maintaining his "Outperform" rating and target range of $485 up to $525. Apple is currently trading at $422.00, down 4.31 (1.01%).

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Comments

wab95

Curious.

I just heard an analyst yesterday argue that Apple’s iPhone numbers will be below expectations, negatively affecting revenue, and that this was attributable to competition from Samsung and Android more generally, as well as to a lack of an iPhone refresh - with the emphasis being on competitors (read Samsung) taking marketshare from Apple.

That analyst appears to have not factored in the relatively disappointing sales performance of Samsung’s Galaxy S4, but perhaps he believes this has been offset by other handset sales.

In about 4 hours, we can cease speculation, and see data. Then the engines of spin will fire up.

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