Major Technology Hardware Earnings this Week

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The earning season is underway at full speed. Overall the Street is expecting a slow quarter due to general macroeconomic weakness and especially the fiscal cliff uncertainty. The results of Apple (NASDAQ: AAPL) and Western Digital (NASDAQ: WDC) can have an impact on the entire market; Apple due to its large market capitalization, and Western Digital because it will give a sneak peek into any possible revival of PC sales. Positives from the PC industry can reflect on the valuations of Microsoft (NASDAQ: MSFT) because it would indirectly mean positive sales data for Windows 8.

Apple

Apple will report its 1Q13 earnings after the market closes on Thursday. This might be its most important earnings announcement in more than a decade. The Street is expecting it to report EPS of $13.9, and the figure varies wildly between $15.5 and $11.97. This huge variation shows how divided the investment community is on the future of the iPhone and the iPad. The consensus revenue estimate is $54.69 billion and varies between $52.01 and $59.55 billion. The company has given guidance of $52 billion in quarterly revenues and EPS of $11.75, way below the consensus estimates.

The investment community will be closely monitoring the margins, iPhone sales, and outlook for the next quarter.  The market will need answers to these and other important questions from the management call in order to restore investor trust. Some of the key questions on investors’ minds are:

  • How much has the iPad mini cannibalized the iPad? What are the margins on the smaller product?
  • Is Apple looking to increase its dividend payout ratio?
  • What were the sales and margins of the iPhone 5? Is the company looking to accelerate the refresh cycle? Is it going to target the low end markets with a cheaper smartphone product?
  • What has been the progress on fixing the troublesome maps applications?

Satisfactory answers to these questions, combined with solid iPhone sales data, can improve Apple’s valuations. The company has missed analyst expectations in the last couple of quarters, and considering expectations are pretty low this time around, Apple needs to do well in order to remain an investor darling.

Western Digital

The last couple of years had been mixed ones for Western Digital. It plunged into a major crisis due to the flooding of its key production facilities located in Thailand. It has recovered superbly from the blow and posted stellar quarterly results for its 4th fiscal quarter and FY 2012. The company will announce its 2Q FY13 earnings at 6PM EST on Jan. 23. The market is expecting the storage giant to post an EPS of $1.82 and revenues of $3.68 billion. The company has beaten earnings estimates in the last four quarters.

<table> <tbody> <tr> <td> <p><strong>Earnings History</strong><strong></strong></p> </td> <td> <p><strong>Dec 11</strong></p> </td> <td> <p><strong>Mar 12</strong></p> </td> <td> <p><strong>Jun 12</strong></p> </td> <td> <p><strong>Sep 12</strong></p> </td> </tr> <tr> <td> <p>EPS Est</p> </td> <td> <p>0.71</p> </td> <td> <p>1.59</p> </td> <td> <p>2.47</p> </td> <td> <p>2.29</p> </td> </tr> <tr> <td> <p>EPS Actual</p> </td> <td> <p>1.51</p> </td> <td> <p>2.52</p> </td> <td> <p>3.35</p> </td> <td> <p>2.36</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>0.80</p> </td> <td> <p>0.93</p> </td> <td> <p>0.88</p> </td> <td> <p>0.07</p> </td> </tr> <tr> <td> <p>Surprise %</p> </td> <td> <p>112.70%</p> </td> <td> <p>58.50%</p> </td> <td> <p>35.60%</p> </td> <td> <p>3.10%</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

The quarterly report of WDC has significance for the entire technology industry. It will give us the first sneak peek into the success of Microsoft’s Windows 8 and the strength the market should expect in PC sales numbers. This is because the PC market remains the biggest customer of the storage industry, and WDC revenues are dependent largely on the revival of the PC industry.

The key investor concern from these earnings would be the growth in enterprise and HDD segments. The market has also been expecting WDC to accelerate its buyback programs, as it had announced in September that it plans to return 50% of FCF to investors. The company is currently offering a dividend yield of 2.2%, and I believe it will remain unchanged because WDC will use buybacks as the primary wealth returning tool.

There is minimum downside to WDC due to its excellent dividend yield and buyback program. I believe the company will beat analyst estimates due to WDC’s past record, strengthening PC market, and positive earnings preannouncement by Seagate Technologies. Solids earnings, and especially sales to PC OEMs, can be positive news for Microsoft and can positively affect the software giant’s share price.


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