Apple falls 14 percent on outlook, analysts grim

Apple (Nasdaq: APPL) fell 14 percent Wednesday, after it warned for the second time in less than three months that revenues and earnings would fall short of consensus expections. Analysts lowered their estimates for the stock, and said they saw few near-term catalysts for improvement.

Shares were down 2.31 to 14.69, following Tuesday night's announcement.

Dell (Nasdaq: DELL), down 2.19 to 18.06, and Compaq (NYSE: CPQ), down 3.47 to 20.93, are also victims of weakening demand and the PC price war.

Apple's pre-announcement was no big surprise to analysts. But the magnitude of its shortfall was a bit of a shocker.

In a research note for Bear Stearns entitled "Oops, They Did It Again: Apple Pre-announces Worst Revenues Since 6/88," analyst Andy Neff called the warning "consistent with our industry outlook change for the PC industry."

The magnitude of the company's shortfall was what analysts criticized most. "We feel that the company faces an extremely challenging situation going forward as it remains to be seen whether management can give investors any level of confidence that it can show any signs of sustainable revenue and earnings momentum, much less prevent estimates from dropping further," Neff said in his research note.

Neff added that fourth quarter unit volumes will be flat or down for the industry vs. typical seasonal increases of 15 percent, and said recent visits in Taiwan suggest PC industry volumes will be flat or down quarter over quarter for a while, with catalysts for the sector at least 2 quarters away.

Neff maintained his "neutral" rating, but said that he does not see any catalysts for improvement or "any compelling reason to own the stock."

Gerard Klauer Mattison & Co. analyst David Bailey also maintained a "neutral" rating and reduced earnings estimates to loss forecasts.

Company specific problems and weakness in worldwide consumer demand will result for lower revenues and losses ahead, Bailey said.

Revenue is now expected to be $1.02 billion versus an earlier expectation of $1.62 billion in the first quarter. For the upcoming first quarter and fiscal year 2001 and 2002, results are expected to be a loss of 65 cents a share, a loss of 32 cents a share, and a profit of 50 cents a share, respectively. Previous estimates had been for earnings of 4 cents a share, $1.10 a share and $1.35 a share.

"With several hardware and software product announcements expected early in calendar 2001, we expect demand for Apple's products to moderately improve. However, we believe the company continues to face several challenges going forward," Bailey said.

Apple is not alone. In an attempt to revive demand, more aggressive pricing among all PC vendors is expected, Bailey added. "Sluggish consumer demand caused partially by the slowing US economy and lingering weakness in Europe, will likely cause PC vendors to resort to more desperate pricing actions, hurting margins and diminishing the profit contribution from the consumer segment," he noted.

On an upbeat note, the analyst added that depressed share prices are a buying opportunity, though continued weakness is expected.

Daniel Kunstler of J.P. Morgan Securities lowered his rating to "long-term buy," from a "buy" and lowered earnings and revenue estimates for the year.

"Investor confidence may be shaken, however we would not go so far as to call this franchise a bust. In fact, Apple is choosing to aggressively reduce channel inventories in preparation for a littany of new products this year," Kunstler said.

The analyst found reassurance in Apple's cash position, which he estimates to be about $10 per share, "enough to weather even a more protracted industry or worldwide economic slowdown."

Kimberly Alexy of Prudential Securities also saw a positive in the fact that "Apple is taking the necessary actions required to clear excess channel inventory. However, with continued weakness in sell-through, she questioned the risk for additional second quarter impact.

Alexy added that "while the company did not directly address any share buyback questions on the call, we sense management may be considering a potential buyback." She maintained an "accumulate" rating.