Japan woes force scrutiny of Apple's margins

SAN FRANCISCO Tue Apr 19, 2011 7:26am EDT

A staff member holds the new Apple iPad2 at the Apple store in London March 25, 2011. REUTERS/Luke MacGregor

A staff member holds the new Apple iPad2 at the Apple store in London March 25, 2011.

Credit: Reuters/Luke MacGregor

SAN FRANCISCO (Reuters) - Apple Inc may provide the first signs this week that the Japanese crisis is pressuring margins, clouding what should otherwise be another dazzling second quarter for the makers of the iPad and iPhone.

Wall Street has been afire with speculation of how a shortage of crucial components from Japan, which provides more than a 10th of global electronics components, might swell costs and constrain supply -- particularly of the marquee iPad 2 launched in March.

With Silicon Valley magician Steve Jobs, a pancreatic cancer survivor, still sidelined indefinitely on medical leave, some analysts warn the Japanese disruption will shave points off Apple's gross margins for the rest of this year.

"The earnings are going to be really great. We are looking to see how they address the supply chain issues in Japan," said Wedbush Securities analyst Scott Sutherland. "They are getting the components, but at higher prices."

Apple could see its margins decline by 200-300 basis points in the June quarter, Sutherland said, adding the pressure could continue into the September quarter as well.

"They do have the margins to absorb it whereas a lot of their competitors don't," he said.

Investors are also curious to see whether the faster, thinner iPad 2 can outpace sales of the original, of about 1 million units in 30 days.

Analysts expect second-quarter earnings to showcase Apple's domination of the rapidly growing tablet market.

The main drivers of growth, apart from the iPad, include the ever-popular iPhone, which was also available on the Verizon network during the past quarter, and the refreshed MacBook Pro computer that began shipping in February.

Analysts are estimating sales of about 6 million iPads in the fiscal second quarter, alongside about 16 million iPhones and 3-4 million Macs.

But the biggest question for Chief Operating Officer Tim Cook and other executives on Wednesday would be how much Japan would affect sales for the rest of the year. Apple is a voracious consumer of touchscreen displays and flash memory, among other components most heavily affected by the Japanese tsunami.

Apple's weak spot in recent months has been gross margin. And Wall Street is forecasting a gross margin of just over 39 percent, down from 41.67 percent from the previous period.

Apple is famously conservative with its forecasts, but investors will pick apart executives' comments this week for their views on Japan, plus seek answers to persistent questions over Jobs' continued absence and his role now.

They would also seek any indications of timing for the return of Jobs, who had led Apple from near-bankruptcy to become the world's most valuable technology company.

TABLET MARKET UP FOR GRABS

The battle for bragging rights in the booming tablet computing market is heating up, bolstered by IDC's estimate that personal computer sales had fallen for the first time in two years because consumers were eschewing laptops.

People still line up outside Apple stores daily, hoping to lay their hands on the minuscule stocks of iPad 2 that make it onto shelves. The only one available at an Apple store in Silicon Valley on Sunday was the costly 64 GB version tethered to the Verizon network, for $829.

"The two things that will deliver the upside will be iPad and the Mac business," said Shaw Wu, analyst with Sterne Agee. "Even with the tough (supply) constraints, they are likely to beat on the iPad2."

But problems in the logistics chain would come at a time when a spate of products -- from Motorola Inc's Xoom to Samsung Electronic's Galaxy, both powered by Google Inc's Android software -- are gaining traction. Research in Motion's PlayBook, though poorly reviewed, hits store shelves on Tuesday with an existing corporate customer base.

Another area of concern is Apple's next iPhone, which it typically introduces in the summer. Some see that pushed to the fall, and investors will want clues on its timing.

Apple's shares have slipped since Nasdaq said early this month it would rebalance the Nasdaq 100, slashing Apple's out-sized weighting. They have fallen in six of the last nine sessions since, and are down nearly 8 percent after scaling a peak of $359.90 in February.

Still, Apple is in an enviable place with its well-designed products, market dominance, and its cash-rich and debt-free balance sheet. The stock -- which trades at roughly 18 times forward earnings, versus 19 times for Google and 10 times for Microsoft Corp -- is considered a must-have in any technology portfolio.

On Monday, shares of Apple touch panel supplier TPK rose 6 percent, reflecting investor optimism about prospects of Apple's iPads and iPhones.

Blowing away estimates has become commonplace for Apple, which is expected to report earnings of $5.35 a share on revenue of $23.3 billion according to Thomson Reuters I/B/E/S.

According to StarMine SmartEstimates, which places more weight on timelier forecasts by top-rated analysts, Apple could report EPS 2.2 percent above Wall Street's average target.

"If people want growth and growth at a reasonable price, there's Apple," said BGC Partners analyst Colin Gillis. "Apple is the best growth stock out there in the tech universe."

(Editing by Edwin Chan and Richard Chang)

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