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Wednesday, July 22, 2009

Apple's Q3 2009: Analyzing the analysts

[Originally posted July 22, 2009 on Fortune.com]

Tuesday was not a good day for professional analysts as a class -- and Merrill Lynch's in particular.

Not only were most caught off guard by the strength of Apple's (AAPL) record third-quarter results -- see here -- but the men and women who track the company for banks and brokerage houses were bested once again by a bunch of bloggers, day traders and amateurs analysts.

In the color-coded chart excerpted above -- and pasted in full below the fold -- the estimates that were closest to the mark are highlighted in green and the worst highlighted in red.

The first thing to note is the number of green rectangles at the top, in the amateur's portion of the chart, and the number of reds scattered below, among the pros.



All three of our "unaffiliated" analysts did well. Deagol, a pseudonymous indie who has developed almost a cult following on the Apple investor boards, came closest on the big $8.34 billion revenue number. Andy Zaky, a day-trader who writes the Bullish Cross blog, was within a penny on EPS and on the money for the number of iPhones sold -- along with several of the analysts he berates as "clueless."

But the prize this year goes to Financial Alchemist's Turley Muller, a former mortgage trading analyst who is currently unemployed and has plenty of time on his hands to create complex spreadsheets that model company performances.

Over the previous three quarters, Muller missed Apple's earnings per share number by 4 cents, 2 cents and then a penny. This quarter he hit Apple's $1.35 EPS right on the nose to score the first of his four greens.

Turley Muller on how to predict Apple's gross margins

The other three came for correctly predicting iPhone unit sales (5.2 million) and making the best estimate of both Apple's non-GAAP revenue ($9.78 billion) and non-GAAP earnings per share ($2.14), pro-forma numbers that take into account deferred revenue and costs on sales of iPhones and Apple TVs.

(GAAP stands for generally accepted accounting principles, something Apple must follow in order to comply with SEC regulations. They provide non-GAAP numbers to give analysts a better feel for what's really going on in their accounting books.)

Spotlight on Apple’s hidden revenue stream

Among the pros, Piper Jaffray's Gene Munster was a bit of a puzzle. A favorite among Apple bulls for his enthusiastic support of the company, he took at face value Apple's gross margin guidance -- even though he regularly warns clients that Apple always guides conservatively -- and missed the earnings number by a full 32 cents a share. He's particularly good at counting iPod sales, however, and his estimate came within 30,000 units of the number Apple reported (10.2 million).

Otherwise there is not much to praise in the work of the professional analysts. Several came within 100,000 units on the Mac sales number (2.6 million units) -- but in the case of Morgan Stanley's Katy Huberty and Bernstein Research's Toni Sacconaghi that was only because they revised their estimates after Monday afternoon, when NPD reported surprisingly strong June Mac sales.

MacBooks flew off the shelves in June

Broadpoint.AmTech's Brian Marshall, inexplicably, estimated highest on iPod unit sales and lowest on Macs and was proved wrong on both counts.

But the booby prize this quarter goes to Merrill Lynch's Scott Craig, who scored a record four reds, missing Apple's GAAP revenue by $380 million and its non-GAAP revenue by nearly $1 billion. Two of his bad calls, surprisingly, came in categories he correctly predicted in January: iPhone sales and non-GAAP revenue.

In Craig's defense, he published his estimates six weeks ago, on June 8, before the launch of the iPhone and the flood of MacBook sales triggered by Apple's price cuts. He did issue a report to clients Monday after the NPD data came out noting that Mac sales seemed to have grown 5% for the quarter, as opposed to the -7% his model predicted. But he never got around to publishing revised estimates before the actual results were released.

Better luck next time.

UPDATE: With bit of 20-20 hindsight, a bunch of banks and brockerages raised their Apple price targets on Wednesday, including Morgan Stanley, Kaufman Bros., Caris & Co., UBS, Pacific Crest, AmTech, BMO Capital, Susquehanna Financial and FTN Equity Capital. Tiernan Ray has a rundown of the upgrades, with price targets, at Barron's Tech Trader Daily.

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[Follow Philip Elmer-DeWitt on Twitter @philiped]

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