Wall Street analysts struggle to predict Apple

SAN FRANCISCO Fri Feb 3, 2012 5:51pm EST

Customers visit the Apple Store in New York City's Grand Central Station January 25, 2012. REUTERS/Brendan McDermid

Customers visit the Apple Store in New York City's Grand Central Station January 25, 2012.

Credit: Reuters/Brendan McDermid

SAN FRANCISCO (Reuters) - By day, Robert Leitao manages a Catholic church in Southern California. By night, he indulges his other passion: predicting Apple Inc's (AAPL.O) results.

Leitao is part of a cadre of amateur forecasters, bloggers and hobbyists who sift through reams of data every quarter to guess at Apple's quarterly results - often putting professional analysts to shame by coming up with more accurate predictions.

Co-founder of the Apple Independent Analysts Group, Leitao is ranked seventh for the December quarter out of 50 analysts who cover Apple by Fortune magazine, which found that his estimates turned out to be much closer to the results than those from prestigious banks such as Goldman Sachs (GS.N) and Morgan Stanley (MS.N).

While Wall Street analysts' forecasts for Apple's revenue and earnings per share were off by an average of 21 percent in the latest quarter, amateur analysts missed by just 10 percent, according to the Fortune data.

This raises questions about how good Wall Street is at forecasting Apple, the largest U.S. company by market value, famous for trouncing market forecasts quarter after quarter.

Leitao does not believe he and the more than 100 members of the Apple Independent Analysts Group - which he started as a hobby - are smarter than their professional peers. He suspects Wall Street is more inclined to play it safe.

It does not help that Apple itself tends to lowball its guidance. "In their work, there is a greater risk in coming out with aggressive estimates that are too high," Leitao said of analysts at top-tier brokerage firms.

In the last couple of years, Apple's earnings have exceeded Wall Street expectations tracked by Thomson Reuters I/B/E/S by at least 13 percent, and often a lot more. The exception was the September quarter of 2011, when they fell short.

Technology analysts say Apple is particularly tough to predict because of its secretive nature, and because it has a hand in everything from hardware (iPhones, iPads, Macs and iPods) to digital distribution (iTunes and its emerging iCloud remote storage service).

They also point to a lack of historical data on the tablet market, and Apple's fast expansion into more than 100 countries as challenges. Yet another blind spot is sales from Apple's own retail stores and apple.com - data that only the company has.

"If you're talking about Apple where you're trying to model Macs and phones and new markets like tablets, that's obviously more challenging than making assumptions around Intel where you're only modeling PCs," said JMP analyst Alex Gauna.

WALL OF SILENCE

Analysts refine their financial models by studying Asian companies that supply components to Apple, surveying retail executives, and extrapolating from sales of previous generations of iPhones and iPads.

Their counterparts covering Intel Corp (INTC.O) and other big tech companies regularly visit PC manufacturers in Asia to take the industry's temperature. But attempts to talk to Apple's more than 100 suppliers, including Foxconn or Hon Hai Precision Industry Co Ltd (2317.TW), often run into a wall of silence.

Beyond normal U.S. Regulation Fair Disclosure rules governing the disclosure of material information, companies working for Apple are required to sign strict confidentiality agreements and risk losing Apple's business if they break them.

That rigor stems from the era of Steve Jobs, who kept an iron grip on his team and refused to release products until they were perfected for prime-time - a discipline that endures past his death last October.

"They have built reg-FD discipline into their channel beyond anything I have ever seen before," Gauna said. "If you don't happen to have a cousin who works on the assembly line at Foxconn, then everybody has an equal playing field."

Looking for an edge, analysts resort to visiting Apple stores on important product-launch dates to count heads and conduct surveys. But they acknowledge the data is not enough to draw firm conclusions.

"You try to build a mosaic," said Sterne Agee analyst Shaw Wu. "That's the best you can do."

Another problem is the growing impact from Apple's new product launches, which can skew sales as consumers hold off on purchasing older products in anticipation of newer models. That happened in the September quarter, when Apple's results missed for the first time in four years due to slower-than-expected smartphone sales ahead of the iPhone 4S launch.

The company then saw a huge spurt in iPhone sales in the December quarter.

Apple has historically been very conservative in giving guidance, usually handing out estimates far below Street projections. In 2011, Apple underestimated its own revenue by an average of 16 percent each quarter.

"The company wants to keep expectations low and outperform as the quarter goes out," said Brian Marshall, analyst with ISI Group.

There are signs of change, however. In the past two quarters, Chief Executive Tim Cook actually forecast revenue and earnings per share at or above Wall Street estimates. Analysts hope this heralds a more predictable era under Cook.

"They're becoming a little more transparent. It'll make it easier for people to understand the story," said Sterne Agee's Wu. "But to be frank, the element of surprise, it's part of their mystique."

(Reporting by Poornima Gupta and Noel Randewich in San Francisco and Edwin Chan in Los Angeles, editing by Matthew Lewis)

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Comments (5)
ChKen wrote:
“”If you’re talking about Apple where you’re trying to model Macs and phones and new markets like tablets, that’s obviously more challenging than making assumptions around Intel where you’re only modeling PCs,” said JMP analyst Alex Gauna.”

Of course Gauna would say that considering he has one of the worst track records of Apple estimates.

“The company wants to keep expectations low and outperform as the quarter goes out,” said Brian Marshall, analyst with ISI Group.”

The usual nonsense. Apple has been guiding 40 to 65% higher year-over-year. That’s what he is characterizing as low expectations, 40 to 65% growth? As the article notes, Apple has been underestimating actual revenue results by only about 16% on average, which given the amount of growth and the fact that Apple predicts early in the quarter, it’s not that bad.

I suppose the story is not that bad as, Leitao, the independent analyst is excellent, but the three professionals you chose to quote are particularly bad when it comes to their Apple predictions.

Feb 03, 2012 7:09pm EST  --  Report as abuse
Radical_1 wrote:
>>>Leitao does not believe he and the more than 100 members of the Apple Independent Analysts Group – which he started as a hobby – are smarter than their professional peers. He suspects Wall Street is more inclined to play it safe. / / / OH YES THEY ARE. The Wall Street analysts are IDIOTS to say the least and heres why. These people had class after class in economics and yet they couldn’t figure out that home prices CAN’T GO UP by double digit percentages year after year and in some places month after month when the wages don’t follow which is the only thing that would’ve made the ridiculous price increases sustainable. And that’s the one thing that wasn’t there to support these now over-priced houses, the increase in wages so the price increases were unsustainable, elementry my dear Watson! To bad these so-called “EXPERTS” could never figure that out!!! It’s don’t take no Rocket Scientist.

Feb 04, 2012 9:08am EST  --  Report as abuse
TedCranmore wrote:
I actually think Um and Marshall are pretty good analysts. Gauna, well, just let’s say ‘not so much’ and keep the language clean.

There were secondary questions that begged to be asked.

If Robert is correct, and Wall Street just has to be low ball vs overestimate. Why is this an “Apple only” behavior? With other companies they cover, this doesn’t seem to be the case. Not only are the consistently low estimates a question, but it’s the magnitude the Apple beats those analysts estimates that is astounding. Apple is not some upstart that requires darts to estimate, we are talking the #1 public company by market capitalization in the world here. Analysts miss up or down with other companies, but they are often within pennies either way. With Apple, there are professional that underestimated Apple’s revenue by huge amounts (Mr. Gauna was under by about NINE BILLION DOLLARS).

Yes, Apple is secretive and yes they have very conservative guidance. But, how could you not get a quote from the Wall Street boys on why the Independent Analysts consistently are so much closer in their estimates? Only the pros have links to the supply chain, only the pros have the resources to do in-store surveys with sufficient numbers to gain insight. The key question missing that would have made this a great article is the answer from the pros, “Why do the independents consistently produce better estimates than you with far fewer resources?”

Feb 04, 2012 9:41am EST  --  Report as abuse
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