Apple iPhone Builds Are Stabilizing: Credit Suisse Still Bullish Before Earnings

A Credit Suisse analyst said iPhone builds are stabilizing, infusing further optimism in Apple Inc. AAPL ahead of its second-quarter earnings.

The comment comes on the heels of an analysis from Pacific Crest's Michael McConnell who cut the estimate of iPhone suppliers to reflect weaker-than-expected demand trends for the iPhone 6S in Asia, mentioned.

Related Link: Apple Demand "Cold As Ice" In Asia, iPhone Suppliers Face Risk Of Earnings Misses

Apple earnings, due April 25, is one of the most watched events on Wall Street. This time, investors and analysts alike will keep a close watch on iPhone sales numbers, and how its recently-launched iPhone SE is faring in emerging markets such as India.

Looking To Q2

Kulbinder Garcha of Credit Suisse said own his checks suggest that builds are stabilizing at about 40–45 million units for the second quarter of 2016, implying unit estimate of 51 million iPhones for the second quarter. The analyst believes the launch of the iPhone SE should grow Apple's iPhone installed base.

Garcha sees second-quarter EPS of $2.09 on revenue of $52.9 billion, above consensus estimate of $2 in EPS and $52.05 billion in revenue.

Meanwhile, Apple is also expected to announce a dividend increase, as during the last three years, the technology giant has hiked dividends in its earnings report for the quarter ended in March.

Garcha also echoed the same sentiment, saying that the Cupertino, California-based Apple has the potential to raise its capital return "even further again this year."

"Given Apple had $75.2 billion of fully taxed net cash when it introduced its capital return program in 2012 and we forecast this quarter (F2Q16) to end with a fully taxed net cash balance of ~$85.0 billion, we believe AAPL could comfortably raise its capital return by approximately $10 billion per year over the next 2–3 years. This would result in a capital return of about $53 billion per year, or ~8.5 percent of AAPL's market cap," Garcha wrote in a note to clients.

Currently, Apple's quarterly dividend stands at $0.52 ($2.08 annual), with a payout ratio of about 23 percent and yield of 1.9 percent.

The analyst also noted that Apple can sustain its high level of earnings and free cash flow of about $65 billion, driven by high retention rates, strong ecosystem and high margin service business.

Garcha reiterated his Outperform rating and $150 price target on Apple shares, which fell 0.31 percent to $111.75 mid-morning Friday.