Apple results still seen sweet despite recession

By Scott Hillis

SAN FRANCISCO (Reuters) - Anyone looking for evidence that the U.S. economy is headed for recession probably isn't going to find it in Apple Inc's (AAPL.O) quarterly results this week.

Apple is thought to be shrugging off the miasma that is smothering the financial and housing industries, thanks to robust sales of its Macintosh computers and renewed enthusiasm over the iPhone.

Shares of the iPod maker, which touched $200 in late December only to fall a dizzying 40 percent over the following two months, have clawed back 20 percent since late March.

"While vulnerable to consumer slowdown, Apple's momentum may be recession-resistant," RBC Capital Markets analyst Mike Abramsky wrote in a recent note. "Although economic slowdown remains a risk, Apple's fundamentals remain healthy, and earnings power and cash flow remains strong."

Wall Street analysts are fond of saying the Apple story always boils down to Mac shipments, which are expected to have been between 2.04 million and 2.2 million units in the March quarter, according to estimates from four analysts.

But while Apple's fiscal second quarter results on Wednesday are expected to be strong -- with Reuters Estimates seeing a 25 percent jump in profit excluding special items -- questions remain about how badly the company would suffer if the U.S. economy worsened.

Apple famously gives very conservative financial forecasts that it usually ends up easily beating. Still, some have a sneaking fear that, this time, low-balling executives will turn out to mean what they say.

"While we believe Apple will report a strong quarter relative to guidance ... we are concerned whether it will be good enough and whether investors will be as forgiving with conservative guidance," wrote American Technology Research analyst Shaw Wu.

Wu downgraded Apple shares to "neutral" from "buy" on Tuesday, saying the shares, which now trade at 32 times expected 2008 profit, were too expensive.

The stock was down 4 percent in afternoon Nasdaq trade.

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U.S. personal computer market figures from research firm IDC last week showed Apple's share in the first three months of 2008 jumped to 6 percent from 4.9 percent a year earlier.

The gain may seem small, but each quarter-point of global share that Apple picks up means it pockets $700 million in new revenue and 11 cents per share of profit, RBC said.

Analysts chalk up the high Mac demand to sexy new designs, consumer complaints about Microsoft Corp's (MSFT.O) rival Windows Vista operating system, and the halo effect from iPods and the iPhone.

"Apple has hit a tipping point in terms of Macs. For kids and adults it is the cool thing to have," said Lehman Bros analyst Ben Reitzes. "It's the right product at the right time."

Wall Street is looking for revenue to have risen 32 percent from a year earlier to $6.95 billion in the March quarter, with earnings after special items of $1.07 per share, according to Reuters Estimates.

On the iPhone front, concern early in the year over slowing sales is evaporating under new confidence radiating from Wall Street that Apple will launch a faster model in a few months.

That would address a major complaint about the iPhone, especially in Europe, and bolster confidence that Apple can meet its target of selling 10 million of the multifunction devices by the end of the year.

Sales estimates for the iPhone range from 1.4 million to 1.8 million, according to four analysts.

Even stalling iPod sales are getting a second look from analysts. It's not that nobody wants the iconic digital media players anymore, but with more than 130 million already sold globally, almost everyone who wants one already has one.

Still, recent price cuts at the low end and more features at the high end could start luring new buyers again.

Cupertino, California-based Apple hopes its newer touch-screen iPod -- essentially an iPhone minus the phone -- will encourage people to upgrade.

"The touch has a lot of potential because of the new movie rental service. People are going to start realizing that you can get a lot of great movies on (Apple's online music store) iTunes and take them on the train or plane or whatever," said Reitzes, the Lehman analyst.

IPod sales estimates for the second quarter range from 9.5 million to 11 million units, according to figures from five analysts.

(Reporting by Scott Hillis, editing by Gerald E. McCormick)