Jan 112016
 

Over the weekend I published a new chart showing Free Cash Flow (FCF) net of Net Cash.  This valuation metric is worth some additional commentary:

AAPL ended Friday with price sitting exactly on the ‘5’ line on that chart.  That’s a 5x multiple of FCF if you subtract out Apple’s net cash position.  That’s a compelling valuation level.  Here’s the scenario we will examine to illustrate that.  Forget buying shares.  Let’s get away from the stock market and directly examine the cash flows of the company.  Let’s buy the company outright.  Let’s assume you were able to buy all the shares, at the then market price of 55.50 in April 2013 when AAPL last touched the ‘5’ line on my chart:

Company would have cost you $367.53B.  Net cash at the time was $144.69B.

Fast forward to now (i.e. as of the most recent earnings announcement, Oct 2015):

Net cash is $141.21B. But you’d have received all the dividends and cash used for share buyback directly paid to you. That comes to $133.50B. Total net cash that you’d have now equals $274.71B.

See that? Company cost you $368B, and you’d already have $275B returned to you in 2.5 years. That leaves $93B left to go. Apple’s FCF last year (FY15) was $69.78B. So you would now be 1 year, 4 months away from getting all your investment cash back. And then you’d still own the whole company continuing to provide that cash flow to you in perpetuity.

An aside: If you add up those time periods, you’ll see that you would have broken even in about 4 years, less than the 5 years predicted. That’s because FCF has grown since 2013, and you’re getting paid back quicker. So that ‘5’ line in 2013 really turned out to be a ‘4’ because of future growth not taken into account.

Now, one might ask how could an investor have confidence in these numbers up to now and moving forward? Easy. Apple has announced it. They announced a $200B capital return program through April 2017 (which just so happens to be the end of my 4 year break even analysis detailed above). It’s all right here, including the cash numbers, in this document of Apple’s Return of Capital Timeline.  In this one document they’re practically spoon feeding us this analysis.

Do you think Apple would have announced such a large capital return program if they didn’t think it would be easy to make those payments and still maintain a healthy net cash position for CapEx growth and operations?  I think not.

Sep 052015
 

Following up on my last post: Not only did we get a slightly lower low, but then the market did fall apart shortly thereafter, taking AAPL into a panic deep dive to 92. That was much lower than I thought possible. The most important aspect of that dive to 92 is how quickly price recovered higher. As I annotated on some of my charts, AAPL spent only 8 minutes under 100. That’s a firm rejection of a share price that low.

So we now have three weeks at these low valuation levels. AAPL is “Finding Valuation Support”. To the extent that the overall market remains under pressure, AAPL will too, in search of reinforcing the valuation support levels being created now. So what can we learn about the level of valuation support that has been created so far over the past three weeks:

First up, let’s look at the CPE Charts. Notice how many days have bottoms near the CPE 12 level. We can ignore the panic bottom day, with the deep dive to 92. More important are the lows under normal market conditions. And we have evidence that CPE 12 is valuation support.

Next let’s look at whether CPE 12 has historical significance by examining the Valuation Range Chart. The answer is yes. I even had CPE 12.2 already drawn in as valuation support from 2014. CPE 12.2 was the lowest valuation level during 2014, twice. Therefore CPE 12 as valuation support now makes sense.

Lastly, a quick look at my AAPL Valuation Model shows that this same valuation support level represents the bottom of my fair value range.

Looking forward: If CPE 12 proves to be support, CPE 14-15 should be reachable in the coming months. A CPE range of about 3 is common. That also represents the size of the fair value range in the Valuation Model.

Aug 052015
 

So here’s my take. I think this morning was the bottom. We may need a retest, and there’s always the possibility we make a slightly lower low, but in this case I don’t think so.

Most of my analysis is based on my continuous valuation charts, CPE and CFCF. There are no weak fundamentals to support intermediate term weakness in AAPL. So I see this decline as short term and technical in nature. AAPL may indeed trade at a lower valuation range now due to this decline, but the ramifications of that are still bullish from here. That’s because my valuation charts show the CPE and CFCF lines sloping upward rather aggressively. Why? Well because Apple’s growth is impressive, of course. The best growth in 3 years. Furthermore, that growth is still increasing. Solid earnings. First derivative, growth, is positive. Second derivative, change in growth, is positive as well. No one can possibly claim the fundamentals are weak with those stats.

So with steeply sloping valuation lines, it means AAPL price needs to aggressively rise from here to maintain a typical valuation trading range. Let’s look at what that means from CPE and CFCF perspective.

From a CPE perspective, today’s low is just below CPE 13. We should be able to make it back up to CPE 15-16. Looking at my chart that means a price of 140-150 should be reached within a few months. My chart (not updated with this week’s action yet):

AAPL Continuous P/E

From a Free Cash Flow (CFCF) perspective, the picture is even better. Today’s low is near FCF multiple of 9. That’s down near the valuation lows of early 2013 when Apple earnings and FCF had negative growth. FCF growth is now better than any time since then. Again, steep valuation lines. If we conservatively expect AAPL to go back to a CFCF multiple of 12 (the middle of the recent range before this week), then a price of 160-170 should be expected before year end. Here’s my FCF chart:

AAPL Continuous Free Cash Flow

So that’s what I’ve got. From a FCF perspective especially, AAPL valuation is crazy crazy low down here. FCF multiple of 9, even before subtracting out cash? That’s just crazy.

Update later that day:  The only way I see AAPL staying at these lower levels, i.e. not put in a bottoming formation near here, is if the whole market is in the process of falling apart. A market meltdown would keep AAPL price under pressure. Absent that, AAPL is just too compelling a valuation to stay at this level for long. It’s like trying to hold a balloon still, partially under water, while the water is rising. AAPL is now near FCF multiple of 9. At the end of the quarter this price level will be an 8 multiple. At the end of the year 7. Subtract out cash and the FCF multiple at the end of the year would be less than 5, maybe even close to 4! It’s an amazing and crazy valuation situation AAPL is in for the latter half of this year.

May 012014
 

Last week’s earnings report was a beat, and confirms the earnings growth picture. AAPL should trade at valuations that assumes stable and growing earnings again, like the trading environment we had just prior to the 2012 large rise and fall.

One of the charts I that is the most important is my Free Cash Flow chart. For several months AAPL has traded in the range of 10x to 12x free cash flow. See what that means for this coming quarter at the link above.

During 2010-2011 AAPL traded mostly in the range of 11x to 13x FCF, dipping to near 10x at the end of 2011. The late 2012 collapse sent prices under 10x for two whole quarters. We’re now back to a more reasonable 10x-12x range now that earnings has stabilized and begun growing again.

The other important valuation chart is the CPE Valuation Range. My next post will address that.

Sep 222013
 

A few months ago I wrote that I expected AAPL to complete its bottoming pattern and breakout from its low valuation and begin trading in a higher valuation range as part of its recovery from negative earnings growth.  I expected that valuation breakout at the end of the last quarter.  Instead we got it this quarter.  However price has recently collapsed back down to the breakout valuation level.  I have changed my view regarding the bottoming process.  I think price has more work to do to complete the valuation bottoming, and there will be price swing overlap.  I have come to that conclusion after developing and publishing my new Valuation Model (see my previous post for the introduction to it).

Let’s consider where earnings and earnings growth are at this time.  After next month’s earnings release AAPL’s TTM earnings will be in the low to mid 39 range.  That will be roughly 11% below the TTM earnings from a year prior, and in line with the earnings from almost two years ago.  As of January 2012 TTM earnings was 35.11 and as of April 2012 it was 41.01, amid earnings growth of 95%.  AAPL went into those two earnings releases at a price of 420 and 560, respectively.  Now we will be in the middle of those earnings values at 39 and change.  The middle of the price range from early 2012 would be 490.  Do we really believe AAPL belongs at 490 now, with -11% TTM growth, when back then it had 95% TTM growth?

On the plus side, this next earnings release should be the nadir of the TTM earnings decline.  Earnings growth will be on the rise again after this and through 2014.  The new Valuation Model takes that into account, and is worth watching.  I’m not putting a ton of confidence in the valuation model yet.  I’m watching it and evaluating its usefulness.  It does hint, however, that we shouldn’t expect AAPL to continue a strong rise in price just yet, and should instead expect backing and filling, testing the lows, producing higher lows as part of a continued valuation basing pattern with typical CPE Trading Ranges.

Sep 212013
 

I’m making public the beta version of my AAPL Valuation Model.  It is my attempt at creating an expected trading range for AAPL based on a valuation model that takes into account many of the well established concepts on my site:  Continuous P/E (CPE), CPE ranges, growth, a PEG type valuation ratio, and the recent change in earnings growth as a type of earnings range accelerator factor.  Click for the full page with chart and explanation:

AAPL Valuation Model

 

Jun 252013
 

Update Fri June 28: The scenario laid out in this post is now unlikely. The market did put in a short term bottom as expected according to item #4, but AAPL did not participate in the ensuing rally this week. So my #5 has been shown to be wrong. That calls into question the scenario in general. I am returning to having an open mind on AAPL. The rest of this post is left unchanged for reference purposes.

Current observations and guiding factors:
(I wanted to get this posted. I’ll pretty it up later and add links)

1) AAPL has an inverted H&S pattern since January earnings. The head is the price low at 485. There are two swing lows before that forming the left shoulder. There should be two price lows to the right side. We are now trying to form that second price low.

2) I measure AAPL valuation with my CPE levels. All the swing highs this year have been very near the same valuation at CPE 11.1. So that’s the ultimately critical valuation level to watch to confirm an eventual breakout to a higher valuation range later this year.

3) The swing low forming the second bottom of the right shoulder of the IHS pattern may occur at the same valuation level as the left shoulder bottoms. If this bottom were to occur at the same CPE level as the March low, it would be expected in the 390s.

4) My favorite market sentiment indicator to predict a general market bottom in an emotional selloff is to watch equity puts to open, and when that peaks. The market tends to bottom 3 days after that peak, +/- one day. Equity puts to open peaked last week Thursday. That means that as of now, I’m expecting a market bottom this week Monday, Tuesday, or Wednesday.

5) This AAPL decline is not from any AAPL specific news or event. It is along with the general market, so I’m expecting AAPL to bottom along with the market this time.

Put all that together and I am watching for AAPL to bottom somewhere in the 390s Monday, Tuesday, or Wednesday, and that will mark the nadir of AAPL valuation weakness and underperformance that started 9 months ago. Recovery from that nadir will be a process, start slowly, and build into later in 2013. The process will not accelerate until there is an AAPL specific catalyst, or an expectation of a time-specific catalyst.

To confirm, I will want to see AAPL outperformance, a big up day at some point, and AAPL price taking out some of the recent down trend lines, and ultimately exceeding the CPE 11.1 valuation resistance. Until that confirmation happens, this is just a roadmap expectation with enough likelihood that it gives me something to watch closely for.

Caveat:

With the recent bond market selloff and higher interest rates, equity fair valuations have been adjusted lower. Therefore taking out CPE 11.1 resistance will be more difficult.

Feb 102013
 

AAPL has begun a rally that should last a few weeks. Let’s look at the evidence. The 2nd and 3rd day after earnings created a 2 day reversal formation. The following week we had another 2 day reversal pattern that formed a successful retest of the first bottom. Price has since broken out above 465 resistance on good volume. AAPL has also closed above the 5 day EMA for 4 days in a row. The last time it did that was during the November rally. This rally can therefore be considered the sister rally to the November rally. Let’s look at how far we may expect this current rally to run. There are several ways to come up with an expectation. The Nov rally was 89 points, so that would mean a target of 524 this time. A Fibonacci 0.50 to 0.618 retracement of the 594 to 435 decline would mean a target of 515 to 533. A Fibonacci .382 of the entire 705 to 435 decline would mean a 538 target. And lastly, there is the chart shown below. I drew the lower trend line connecting the two most significant lows of the past year, and then a parallel line from the Spring 2012 peak at 644. During the week ending March 1 the upper line is at 533. I’ve talked a lot about the AAPL symmetrical time cycle pattern and the expected next significant peak during the week ending March 1. This is a chart representing that analysis. Notice the tops and bottoms that have occurred equidistant from a symmetry line the week AAPL topped at 705.

AAPLsym-130208

So we have price targets in a range from 515 to 538. From the oft mentioned time cycle analysis I have mentioned over the last few posts, that target is expected during the week ending March 1, as represented in the above chart.

Following the next peak, whenever and wherever it actually occurs, I will be expecting a 3rd push lower, contained within the downward sloping red trend channel. The 1st push down was from the all time highs at 705 to the Nov low at 505. The 2nd push down took us to 435 after earnings. The 3rd push down will occur during the Spring, March into April. It will either be a retest of the 435 lows forming a higher low, or make a lower low with bullish divergence. That will complete the full year of AAPL weakness that began in April 2012. We will have had a full year of AAPL correcting the gains from the huge rally at the beginning of 2012. The year long correction was rooted in fundamentals: the large drop in earnings growth, as can be seen in the AAPL Earnings Growth Chart. Another way to look at the fundamental underpinnings of the year long correction can be easily seen in my new chart showing AAPL Continuous Free Cash Flow. That last chart is especially interesting as it shows the one quarter pause in slope of the Free Cash Flow (FCF) lines in 2011, and the resulting price action. And we now have four full quarters of pause in the slope of the FCF lines. The chart includes my projections for the next 3 quarters. The July and October earnings releases have a far easier comparison to 2012, which is why the FCF lines will likely resume a steeper upward slope. My FY2013 earnings estimate is only 12% higher than FY2012. And yet with even that slower earnings growth, the FCF lines still resume a rather steep slope. I will be undertaking some further analysis to fine tune my projections. And the April earnings release will add a lot of additional information as well. Even if I am somewhat optimistic with my estimates for Jul and Oct, the slope will still resume upward, exactly because of the easy comparisons to Jul and Oct 2012 mentioned earlier.

This phenomenon of quarter comparisons of 2013 to 2012 is why the 3 push down price pattern will mark the end of the year long correction in AAPL from April 2012 to April 2013. Following the low expected in the Spring of 2013, I will be expecting AAPL to end the current under-valuation and embark on a long and steady rally to more reasonable valuations both in terms of CPE and CP-FCF. Look at the AAPL CP-FCF Chart again and imagine AAPL heading towards a FCF multiple of 12 or 13 in the latter part of 2013. Even if my lines need to be drawn slightly lower, that will still represent an impressive upward revaluation rally.

I am hopeful that soon AAPL will begin to move more in line with the general market. It is always easier to analyze the AAPL technicals when it is topping and bottoming at about the same time as the general market. If the Dow and S&P can continue its grind higher into the week ending March 1, the expected AAPL price movements will be easier to confirm as they happen.

This entire roadmap expectation for 2013 is what I will be monitoring, fine-tuning, and likely modifying in future posts as I watch this unfold.

Update: Mon Feb 18

The early peak this week at 485 has tempered the upside targets and proven they are too optimistic. I posted this in the Forum after Tuesday’s trading along with the explanation and the chart shown below, which now includes the rest of the week’s trading. The blue up sloping channel is what I think will prove to be a bear flag. The end of week decline has also now overlapped the price range of the day after earnings and fallen back below the 433-465 breakout zone, evidence that this rally off the lows is, as expected, NOT part of a new AAPL bull market.

I continue to believe an important high will come during the week ending Mar 1 (denoted by the vertical blue lines). I expect that high will be within the bear flag channel. Since price has come all the way down to the proposed lower blue trend line (now only a few points below Friday’s close), we should expect that AAPL may not even make it back up to the upper trend line for its peak. This last rally attempt is the most uncertain, as this AAPL upward swing cycle is nearing its end. The pink moving average in the chart is the 45 day EMA, which as you can see has exactly marked the peaks of each significant swing high of the past 4 months. I will be watching that moving average as well as we approach this high we’re looking for.

The rest of the analysis in the original post above still stands. After this upcoming peak, I expect AAPL will begin a multi-week decline and put in a low just below the 435 low. If this whole multi-week rally can’t even make it above some key moving averages (like the 45 day EMA), then we can be reasonably certain new lows are ahead. How far below 435 is hard to predict. That’s because capitulation can take on many forms, and how the general market is behaving (which is due for a correction at some point soon, too) will play a part in how AAPL’s price behaves. There’s also still that previously posted analysis that says that the range for the quarter should be near 110 points, or even more.

AAPLflag-130218

Update: Wed Feb 20

The bear flag scenario has been invalidated. With no short term expectation, I am watching two larger timeframe expectations that have already been covered in previous posts: (1) The range for the quarter should be 2.1 CPE high at a minimum, and 2.5 CPE expected. That would translate to 93 points, and 110 points respectively. (2) The earnings gap down was a revaluation, not capitulation. Capitulation is yet to come.

Jan 272013
 

AAPL suffered a huge gap down after Jan earnings. The gap down was not immediately bought. The AAPL chart was already oversold on an intermediate term basis. Those three things combined means we need to step back a bit, look at the big picture in a holistic manner, reevaluating the landscape of technicals, fundamentals, and valuation. Let’s get started …

Revaluation, Not Capitulation

The gap down reaction to earnings was a sudden revaluation of AAPL, not capitulation. Capitulation is a TA term and comes about with increasing downside momentum as more and more swing traders throw in the towel, which spills over into longer term investors throwing in the towel on their positions, until finally all weak (and some not so weak) hands give up. That’s not what we just had. This huge gap down after earnings was a sudden revaluation of AAPL. It is based on fundamentals, the new earnings growth environment and uncertain growth prospects. It is a sudden and abrupt change in the AAPL valuation equation.

Yes, there will be some sort of technical bounce. AAPL usually trades in a range each quarter that is about 2.5 CPE high. With current earnings that means 110 points as a median expectation. I’ve been using that number a lot recently, talking about the size of the February rally I’m expecting. The problem we have at this point, however, is trying to figure out where that roughly 110 point range will take place. We could have a technical bounce in February and then make a lower low later in the quarter such that we don’t get a 110 point rally right now, but instead get a 110 point range for the quarter with the current price somewhere in the middle of that range.

Realizing this is a sudden revaluation of AAPL results in another important conclusion. In terms of the Valuation Range, we need to ignore the higher CPE levels seen in 2012. I had already come to the conclusion that the 2012 swings indicated a rejection of CPE 16 valuation, and that we would never return to those valuations again, and had included this analysis in some previous posts. The effect of this sudden revaluation means we need to pretty much ignore all previous valuation ranges and concentrate on watching for a new valuation range to be defined. For example, instead of a CPE range of mostly 13-16 in 2011-2012, we may now trade in a CPE range of 10-12.5, or 9.5-12. We should even consider something even lower. That’s because if there’s one thing I’ve learned about AAPL it is that it is common for something more extreme that I am expecting to happen. I do always like to maintain a median expectation, and I will come to a conclusion soon about the rest of this quarter. However I need to see more price movement in the coming days and weeks.

At the top I said this past week was not capitulation, it was revaluation. That means capitulation is yet to come. It could be short term, even this upcoming week, or it could be after a technical bounce in price and subsequent capitulation decline. I did a couple Fibonacci and measured move calculations to see what might be possible. I got 395 and 383. My first reaction to those numbers is to just reject them as too low. But then I take those numbers and add the expected 110 point range for the quarter and I get 505 and 493. Those make some sense as an expected trading range high as those would fill the earnings gap. There would be a lot of long term and intermediate term sellers near that level, and therefore an expected resistance level. So maybe all these numbers do make sense: 383-395 on the low end to 493-505 on the high end (483 area might prove more significant). That would mean we see CPE 9. I still have a really hard time believing that. Maybe as part of a V bottom capitulation selling is how that valuation level would occur. This is meant as speculation, as thinking out loud, if you will, trying to fit together the puzzle pieces we have been dealt and generate some expectations.

It’s worth mentioning the AAPL Time Cycle analysis from recent weeks’ posts. It calls for a bottom of significance during the week of earnings and then a top of significance during the week ending March 1. So far this analysis remains valid. It bears watching for further confirmation from the price action.

Let’s now step back and look at the big picture for some perspective:

The Big Picture: Growth, Free Cash Flow, and Long Term Valuation

Apple’s growth has been strong for several years. And has declined rapidly recently. This wasn’t a surprise. My Earnings Growth Chart projected this drop in earnings growth. Declining growth deserves a lower earnings multiple. A lower P/E multiple combined with flat CPE lines (see CPE Weekly Chart) opens the door for a significant price correction — a revaluation. Declining growth supports the AAPL decline. It is one of the primary reasons for it.

One number in the Jan earnings report that stuck out was the large increase in cash. I dug deeper and noticed the strong cash flow. This convinced me it was worth the time to create an additional Continuous Valuation Chart. Check it out: Continuous Price / Free Cash Flow (CP-FCF). Some things to note: Free Cash Flow remains strong. The occasional quarters with flat or declining FCF lines are those quarters where Apple had especially high CapEx spending. Apple has spent an extraordinary amount on CapEx for the quarters ending Sep 2011 and onward, and it remains high and growing. Tim Cook is an operational savant. We have to assume the continued CapEx spending is in anticipation of continued growth of free cash flow. The CP-CFC Chart is especially useful to illustrate recent over-valuation and under-valuation. What FCF multiple looks to be the most accepted valuation for AAPL over the past two years? My answer would be 10 to 14. Now look at the Aug-Sep 2012 rally. From a FCF multiple standpoint, that rise and fall stands out as an out of the ordinary over-valuation. Similarly, the drop since Jan earnings release stands out as an under-valuation, at least in terms of this valuation metric. The Free Cash Flow chart also includes my forward projection. Even though the earnings projection through the end of the fiscal year is modest, the free cash flow projection remains robust.

Now let’s look at the CPE Valuation Range. AAPL has now dropped below the CPE level seen as the depths of the financial crisis. It is hard to imagine that is a valuation level that makes sense. Nevertheless, the earnings gap down needs to be respected as part of seeking out a new valuation base, even it is under-valuation during a period when Apple’s growth prospects are uncertain.

Lastly, let’s look at the long term quarterly range charts. There are three: CPE Range, PE Range, P/Cash Range. The CPE and PE range charts show well just abruptly AAPL has moved to record lows over the past few years and below the 2009 valuation levels. But the P/Cash Range chart is especially striking. The huge gap down is so severe because priced moved down dramatically while cash jumped up dramatically, all overnight. That made the Price/Cash ratio plummet to financial crisis levels, a valuation level AAPL hadn’t traded anywhere near since early 2009. I see this as another piece of evidence of what I consider the current under-valuation of AAPL shares.

Conclusions

The conviction in AAPL being the safest big cap investment in town is being questioned, rightly or wrongly. Which do I think it is? I think it is wrongly. I respect Tim Cook’s statement “Don’t bet against Apple.” I respect the recent CapEx spending trends, and think it preludes continued growth. Free Cash Flow remains strong and is growing, and that’s even when taking into account the CapEx spending that is part of the FCF equation. I understand the drop off in earnings growth. That’s a valid criticism on the surface. However I chalk that up to the tough comparison of the blowout earnings in the Dec and Apr earnings reports from a year ago. Apple is a victim of its phenomenal success from a year ago.

The big problem is that we have to wait another full quarter to get more information on the fundamental analysis picture, confirmation of the Free Cash Flow trend, and clarification on the earnings growth prospects.

Short term we are in wait and see mode to see where the short term swing low will occur, whether we get capitulation right now or later in the quarter, and where the roughly 110 point range for the quarter will be positioned relative to current price.

Bottom line: AAPL has undergone a sudden revaluation. I consider it to be a temporary under-valuation condition.

Jan 132013
 

Background: If you are unfamiliar with my concept of CPE (Continuous P/E), please read my CPE Explanation Page before continuing with this post.

Let’s review the overall themes of the analysis for this quarter, and the conclusions we have been tracking for this quarter. The analysis for these positions can be found in earlier posts during the past few months.

  1. This is a low valuation quarter. AAPL will be seeking out and confirming a valuation base.
  2. AAPL time cycles are down into mid January. Valuation weakness should continue through to the end of quarter (I measure quarters from earnings release to earnings release).
  3. AAPL will close the quarter near the CPE lows for the quarter. See the analysis “End of Year Valuation Weakness” in the December post.
  4. The final two weeks leading up to earnings should be sideways to down, as has happened for the past 4 quarters.
  5. The bottoming process will be complex.
  6. Whack-a-mole price action will dominate. Every time AAPL price pokes its head above ground, it will be whacked back down. This has proven true on the daily chart, with many gap up opens, strong closes, and many intraday price spikes.

These overall themes have served us well over the past several weeks. And now we are in earnings season, with AAPL reporting in less than 2 weeks. The price action leading into earnings will be dominated by trader actions reflecting the emotions of uncertainty of imminent earnings release. So can we gain an advantage amid that uncertainty? Yes, with my Earnings Beat Analysis:

Earnings Beat Analysis

My Earnings Beat Page analyzes the statistical variance of past earnings releases, and charts the results against my own indicator predicting the likelihood of an earnings beat this time. We have reasonably high confidence level that AAPL will beat current analyst consensus. My own Jan earnings estimate is 15.52 on revenue of 58.5 Billion.

There is also an interesting phenomenon regarding the difference between the Jan/Apr earnings reports and the Jul/Oct earnings reports. Notice on the Earnings Beat data scatter chart, the Jan and Apr earnings data points are all grouped in the upper right, with greater predictability of results and lower variance. The Jul and Oct results are more scattered, less predictable, and have greater variance. AAPL has also never missed in a Jan or Apr earnings report. My guess (and it’s just a guess) as to why this is so is because Jan and Apr are Apple’s stronger quarters and are more supply constrained. Apple is able to run a tighter ship with more predictability during these quarters, therefore the earnings results have less variance and are more predictable.

AAPL Growth

The new AAPL Growth Chart shows the extent to which Apple’s growth has dropped in the recent few quarters. This is what I believe is the reason AAPL price has dropped so much recently. AAPL is about to have the slowest TTM Earnings Growth of the past several years. Everyone knows it, and is anticipating it. The chart shows how quickly AAPL has moved from the area of 95% TTM growth to under 20%.

But there’s an explanation. It’s because last year Jan and Apr were so strong, so they make tough comparisons for this year. If we look even further ahead, the Jul and Oct earnings reports in 2013 will have easy comparisons to 2012. So TTM Growth has a good chance of recovering in the second half of 2013. I believe this phenomenon will dictate the general shape of AAPL intermediate price swings in 2013. This would mean the latter part of 2013 will contain stronger price action with steeper sloped CPE lines and a steeper sloped Valuation Range channel. We will keep an eye on this as our larger picture expectation takes shape over the course of 2013. This hypothesis is also supported by the AAPL time cycles.

AAPL Time Cycles

AAPL price action is tracing out a symmetrical time cycle price pattern centered on the all time high at 705 near the end of September. AAPL spent 8 weeks in a strong rally leading up to that peak, and then spent 8 weeks in a strong decline off that top. Before all that, AAPL spent 10 weeks coming off the May 2012 bottom and before that 8 week acceleration began. We are now within the corresponding 10 weeks of valuation basing action. This is the #2 item listed at the top of this post, indicating that time cycles are down into mid January. The turning point of this time cycle is during the week of earnings. From the bottom that occurs between here and the end of January, we can expect a rally until the end of February or beginning of March. The size of that rally is expected to be in the range of 100-150 points. That represents about 2.5 to 3.0 CPE levels of rise, which is the typical CPE range trading range from 2011, a range I expect AAPL price action to reassert itself during 2013. I will fine tune that projection once earnings are released. The specifics of this new analysis will depend on where the new CPE lines are drawn and the slope of those CPE lines. Lastly, following the valuation high next quarter, the price cycles tell us to expect a drop to retest the valuation lows from this quarter, sometime during the spring. That will complete the year long consolidation of the early 2012 strong rally. That rally was so strong, it is not surprising that we should expect a full year consolidating those gains. The fact that it will likely be a full year of consolidation relates closely to the AAPL Growth analysis in the previous section: One year of predictive time cycle price action. One year to get beyond the tough comparison of the strong Jan and Apr 2012 earnings reports.

Short Term Expectations

Item #4 at the top of the post should continue to control price, and prevent AAPL from going on a big rally leading into earnings. AAPL should be sideways to down during the 2 weeks leading into earnings. That is what has happened the past 4 quarters. With the uncertainty, and the fear of another miss, and a fear of year-on-year earnings decline, price should remain under pressure. That much should be expected. But under how much pressure? Well, I don’t have high confidence in the answer to that. However, I do have some speculation, and an opinion on a what-if scenario:

There is reasonable possibility AAPL will plunge in the final few days before earnings. Many weak hands would be shaken out. There are a lot of new long positions that have been opened during the valuation basing action between CPE 11.1 and 11.4. Those new positions, if held with low conviction, may be shaken out.

If there is a new CPE low in the final days before earnings, I will not put much importance on those lower CPE valuation levels. That’s because a new valuation reality will take hold immediately after earnings. The lower valuation levels below CPE 11.1, should they occur, would be due to valuation uncertainty and fear, and be replaced very soon after with valuation reality. For this reason, the amount of decline that is possible in the final days before earnings could be considerable without doing lasting damage to the valuation floor that has already been created at CPE 11.1-11.4.

Update:  Mon Jan 21

AAPL goes as planned.  We got our plunge during these final two weeks, which surely shook out some weak hands this past week.  The weekly bar is a nicely formed reversal bar that closed almost exactly where the week opened.  The week started with a big gap down.  Wouldn’t it be a beautiful formation if AAPL gapped up this week, leaving all last week’s selling as trapped money.  As mentioned in an intra week update on the AAPL Beat Forum, I’m expecting the day of earnings, this Wednesday, to be a down day.  The day of earnings has been a down day each of the past 4 earnings releases.  I’d like to see Tuesday be an up day, giving room for Wednesday to be down while still staying above last week’s range.  I don’t have any analysis about tomorrow’s trading — just saying what I’d like to see based on how the price patterns are forming in these final days before earnings.

No change to the Earnings Beat analysis.  Still expecting a good beat on earnings.  With AAPL below short and intermediate term moving averages, any earnings release seen as good or better should result in a gap up in price, and kick off the expected multi-week rally.  I added revenue projections to the earnings expectations mentioned higher in this post.

Following earnings, all the current quarter’s CPE lines will be adjusted to reflect reality rather than my projections.  My new projections for next quarter will also adjust the CPE lines going forward.  Lastly, actual earnings results may adjust my targets for the next intermediate term swing high expectation, which currently is for a target near 590 around March 1.  Blowout earnings would adjust that expectation higher in price because the CPE lines would be adjusted higher.

Update: Wed Jan 23 – Earnings Released

Charts have all been updated reflecting the just announced earnings.  A few things in particular I want to note this evening.  I hope to write something longer this weekend.

  • Year on year earnings growth was 0.  That means the CPE line was actually flat for last quarter, not the slightly positive slope I had modeled.  You can see this best in the CPE Weekly Chart.  Also on that chart, note the CPE lines will remain almost flat for this upcoming quarter, according to my preliminary earnings estimates for this quarter.
  • Now, compare the slope of the CPE lines to the lines on the CPCash Chart.  Cash per share jumped a whopping $17 this quarter!  The slope of the CPCash lines are very steep.  Apple is a cash generating machine.  Impressive.  I want to examine this valuation metric in more detail this quarter.  There’s something going on here that most people are missing.
  • The price low last week at 483 occurred at what was thought to be the CPE 10.6 valuation level.  The new CPE 10.6 level (after accounting for actual earnings) is now at 467.
  • There is still a valid Fibonacci target at 471 that we never reached last week.
  • Therefore, considering the above two data points, I will be looking for a low tomorrow near 467-471, marking the cycle low I am looking for.  Yes, I realize price is currently under that price this evening.  The current price this evening is too low.  I’d like to see price be higher tomorrow morning to validate this valuation low analysis.
  • The AAPL time cycles have always been predicting a valuation swing low this week.  We now know the low is after earnings, not before.
  • I am still expecting a multi-week rally of approximately 110 points from whatever low we put in here.  That has not changed.  If the low comes in near 467, that means I will expect a valuation high this quarter near 577 around the end of February.  The time cycle analysis has not changed, and is still entirely valid.  It’s just the price levels for the low and the high that have changed due to the unexpectedly low earnings results.  This will be very interesting to watch for the rest of the week and next week.  (Update Two Days Later:  Read my next post about “revaluation”.  After seeing the trading activity following earnings, I have modified this expectation somewhat).