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Apple's Taiwanese Connections -- Supplier Data Forebodes Weak June Quarter

AAPL, DIOD, GOOG, APH, VSH, ON | June 13, 2017

Apple Inc. (NASDAQ: AAPL)'s fiscal year third-quarter results could leave investors with a sour taste, going by predictions of Longbow Research. The firm indicated that Apple's Taiwan supplier sales through May indicate a weaker-than-seasonal fiscal year third quarter/calendar year second quarter.

Sour June Quarter Seen

Analysts Shawn Harrison and Frank Carson said the muted outlook suggested by supplier data supports Apple's June quarter guidance. Additionally, the analysts noted that their channel checks showed June quarter iPhone production of flat to a 3-percent year-over-year decline.

On May 2, Apple released its March quarter results, where it guided its June quarter sales to $43.5 billion to $45.5 billion, below the then-consensus estimate of $45.6 billion.

The Math Behind Weak Forecasts

Elaborating on supplier performance, Longbow noted sales of 35 of Apple's Taiwanese suppliers fell 0.7 percent sequentially in May. This, however, was better than the three-year average of a 3-percent drop and a five-year average of a 1.2-percent drop.

Meanwhile, the firm noted that April sales, though up 5.2 percent year over year, declined 9.3 percent sequentially. The firm clarified that this was worse than the three-year average of a 5.7-percent sequential decline and the five-year average of a 4.8-percent drop.

If Apple had followed seasonal patterns in April, the firm indicated that May would have been 150–330 basis point worse than the seasonal. The firm highlighted the fact that sales of Apple's Taiwanese suppliers and Apple's quarterly sales, excluding services, have a strong correlation.

Assuming a seasonally normal June, the firm expects June quarter sales growth of 4.7 percent for Apple's Taiwanese suppliers, which would mean a 1.5-percent sequential drop. This, according to the firm, would be 160–230 basis points worse than the 0.7-percent three-year average, and the 0.1-percent five-year average.

Supporting its muted outlook further, the firm noted Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG)'s Google Trend analysis suggested iPhone 7 searches remained relatively constant versus the iPhone 6S and the iPhone 6.

Be Wary Of These Apple Suppliers

Furthermore, Longbow also compiled the list of companies having more than 10 percent exposure to Apple:

Amphenol Corporation (NYSE: APH).
ON Semiconductor Corp (NASDAQ: ON).
Diodes Incorporated (NASDAQ: DIOD).
Vishay Intertechnology (NYSE: VSH).

Estimates, Rating

For Apple, Longbow estimates 2017 earnings per share of $8.72, iPhone shipments of 223 million, 2018 earnings per share of $10.24 and iPhone shipments of 243 million.

Notwithstanding the lukewarm forecasts for the June quarter, Longbow maintains its Buy rating on Apple, with a $173 price target.

The Rationale Behind The Rating

The recent sell-off in Apple shares felt like noise during a lull period ahead of the next-gen iPhone. Since June 7, over three trading sessions, the stock shed 6.4 percent.
No earth-shattering announcements made during the WWDC. All the same, there were no notable negatives.
Worries regarding the next-gen iPhone's inability to support 1GB download speeds doesn't matter as 5G is not a 2018 event.
Robust services growth.
Continued expansion in cash return.
Pauses in iPhone purchases could be indicating pent-up iPhone demand, which could lead to upside to consensus forecasts for iPhone shipments and ASPs.

Concluding, Longbow said, "We forecast accelerating EPS growth into FY18 that aids AAPL's shares as it continues to narrow its typical valuation gap to the S&P 500."

Apple's Services Growth Thesis Remain Intact