Apple iPhone Declines Will Hit Trough This Quarter, Sterne Agee CRT Predicts

Rob Cihra of Sterne Agee CRT asks investors to look for trough in year-over-year iPhone declines when Apple Inc. AAPL reports its second quarter results on April 25. "We continue to believe KEY will be marking the Y/Y trough in iPhone declines ~20%Y/Y (we est 49 mil units) vs. last year's big iPhone 6 cycle," Cihra wrote in a note to clients. The analyst, who estimates iPhone to account for 64 percent of Apple's sales and 68 percent of profit, sees June-quarter iPhone declines to narrow to about 9 percent and September-quarter declines at just 3 percent on an iPhone 7 refresh. Cihra continues to estimate 43 million iPhone units for the June quarter and sees 46 million iPhone units for the September quarter. However, the analyst expects iPhones should cyclically grow again in fiscal 2017. "Replacement cycles lengthening >2 yrs raises worry iPhones structurally declining but we believe LT cross-cycle low single digit growth still seems sustainable, chalking up much of FY16E's -8%Y/Y down-cycle to an extraordinary comp off FY15's +37%Y/Y," Cihra added. On the earnings front, the analyst expects earnings of $2 a share on revenue of $52 billion, in line with Street. This implies a drop of 14 percent in EPS and 10 percent decline in revenues from last year. Cihra forecasts second-quarter iPad units to fall 18 percent to 10 million although ASP is expected to rise 4 percent on premium iPad Pro. The analyst also sees 15 percent growth in "services" revenue at $5.7 billion, representing 11 percent of revenues and 16 percent of gross profit. On the capital returns front, Cihra expects greater than 10 percent increase to Apple's dividend and more than 20 percent rise in buyback as net cash keeps growing. "Apple has continued growing its net cash balance to $27/share (albeit ½ that fully taxed), which we see supporting a >10% increase in its dividend and >20% increase in quarterly buybacks to $9-10B/qtr," Cihra added. According to TipRanks, Cihra has a success rate of 56 percent with an average return per recommendation of +8.5 percent. The analyst is ranked 569 out of 3,895 analysts. Shares of Apple were up 0.66 percent to $107.62. Cihra has a Buy rating and $145 price target on the stock.
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