Option Trade
Apple Inc. (NASDAQ:AAPL) Calls
Monday, April 27, 2015

**OPTION TRADE: Buy the AAPL Jun 2015 140.000 call (AAPL150619C00140000) at or under $2.60. Place a protective stop limit at $1.05 and a pre-determined sell at $5.00.

by Ian Harvey

April 27, 2015

Introduction

Apple Inc. (NASDAQ: AAPL), a company that designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications, is slated to report fiscal second-quarter results after the bell on Monday. The Street expects Apple to deliver earnings of $2.16 per share on revenue of $56.06 billion, according to analysts' estimates from Thomson Reuters.

Shares of the $756.27 billion market cap company are up 76.26% year-over-year and 17.94% year-to-date.

Since 2012, when the company launched the largest share repurchase program ever, Apple has returned a little more than $100 billion to shareholders in stock buybacks and dividends. It will return a total of $130 billion to shareholders by the end of 2015.

Apple still has loads of cash on hand, about $178 billion, according to the company's fiscal first-quarter earnings. But of that, about $157.8 billion is overseas where it is shielded from U.S. taxes.

As for iPhone sales, some analysts are predicting the company will soar past expectations thanks in large part to huge demand in China.

While the Street is estimating Apple sold about 55 million iPhones, Stifel Nicolaus increased its estimates earlier this week from 53.6 million to 59.6 million units.

Apple's deal with China Mobile and growing wireless infrastructure in China are the big factors positively impacting iPhone sales.

Technical Outlook

Apple has a 52 week low of $81.79 and a 52 week high of $133.60. The stock has a 50-day moving average of $126.00 and a 200-day moving average of $116.00.

The company has a market cap of $758.85 billion and a price-to-earnings ratio of 17.64.

Apple currently has a median Wall Street price target of $145.00 and a high target of $185.00.

Shares of Apple finished Friday's regular session higher by 0.48% to $130.29.

Earnings

Apple last posted its quarterly earnings results on Tuesday, January 27th. The company reported $3.06 earnings per share (EPS) for the quarter, beating the consensus estimate of $2.54 by $0.52. The company had revenue of $74.60 billion for the quarter, compared to the consensus estimate of $66.42 billion.

During the same quarter in the previous year, the company posted $14.50 earnings per share. The company’s revenue for the quarter was up 29.5% on a year-over-year basis. Analysts expect that Apple will post $8.70 EPS for the current fiscal year.

A Look at the Fundamentals

In addition to those solid numbers, Apple still trades with a P/E ratio of 17, which makes it significantly cheaper than the S&P 500 and the NASDAQ 100, which trade at 21 and 23 times earnings, respectively.

Apple's dividend yield of 1.5% is slightly lower than the S&P 500's average yield of 1.9%. However, that's still a decent yield for a stock that has already rallied 70% over the past 12 months. During that period, the S&P 500 only rose 13% as the NASDAQ gained 23%.

In addition to being a fairly cheap stock, Apple's margins are tough to match.

Also, Apple's top line growth flattens both direct competitors and indirect rivals.

Analysts had this to say about Apple’s earnings report:-

• Bernstein expects Apple to report revenue of $56.5 billion for the March quarter, ahead of the Street’s consensus estimate of $56 billion and Apple’s own guidance of $53.5 billion. Bernstein’s EPS estimate for the upcoming results is $2.17 per share, almost in line with the Street’s consensus projection of $2.16. The iPhone-maker itself had projected to report earnings of $2 (at midpoint) for its second fiscal quarter of 2015 (2QFY15).

Apple’s quarterly numbers rely heavily on its iPhone sales. For the March quarter, Bernstein projects the company to have shipped a solid 59.6 million iPhones. The sell-side firm expects iPad and Mac unit sales to total 15 million and 4.7 million, respectively.

According to the estimates provided by Bernstein analysts, Apple is on track to report 23% top-line growth, year-over-year (YoY), while the EPS is expected to expand around 30%. In the prior year quarter (2QFY14), the corporate giant reported earnings of $1.66 per share, from sales of $45.6 billion.

The December quarter proved to be a blockbuster one for Apple. The company sold 74.5 million iPhones, which contributed for over two-thirds of Apple’s $74.6 billion revenue – 30% higher than the same quarter last year (1QFY14). Apple’s net profits also soared to new heights, coming in at $18 billion for the three-month period.

• Citi technology analyst Jim Suva, forecasts Apple revenues and expectations and the companies leg up on money making opportunities.

Investors should expect a dividend increase and a bigger stock buyback when Apple reports earnings next week, Citi technology analyst Jim Suva said last Monday.

He projects the tech giant will raise its dividend by a minimum of 10 percent and boost the buyback from $90 billion to $120 billion.

"Apple is a cash flow machine," Suva said. "They have too much cash, that's a good problem. They can give more back to shareholders."

Despite a recent downgrade by Raymond James, Apple's stock has been doing well. It was up 2.4 percent to $127.80 in midday trading Monday.

Apple Continues to Innovate

The iPhone is the focus today but new products are continually rolling out -- Apple phone, Apple Pay – and more new products to come - whether it's advertising, TV broadcasting, Apple Passbook.

Apple is showing that it is not only in the phone-making business by adding products such as the Apple Watch and services such as Apple Pay but the company is looking at increasing its available market by focusing on growth opportunities.

The launch of the Apple Watch also highlights the popularity of Apple products. Demand has highly exceeded supply which has led to shipments of some watches being pushed back to June and July.

There is also some talk about the possibility of Apple acquiring carmaker Tesla, and Apple certainly has the means to do so financially. The company currently has a market cap of $740.7 billion compared to Tesla with $25.9 billion.

Further Impact

Patently Apple reveals that Apple may be gearing towards a future where almost all iDevices will come fitted with force touch and haptic technology. The United States Patent & Trademark Office published a new patent for the iPhone maker, pointing out that the company seems to have advanced in haptic technology, which can change the user experience for years to come.

Hedge Fund Popularity

Glaxis Capital Management, a fund with $142 million in regulatory AUM, has recently disclosed its equity portfolio as of the end of the first quarter of 2015, which showed a focus on financial, services, technology, and transportation sectors.

Glaxis Capital Management acquired a stake in Apple Inc. during the January-March period. According to its latest 13F filing, the fund holds 29,250 shares, which represent 6.77% of the fund’s portfolio, the value of the stake amounting to $3.64 million.

Carl Icahn, David Einhorn and Daniel Benton are also among the shareholders with significant positions in Apple.

Analysts Opinions

Stifel Nicolaus reiterated their buy rating on shares of Apple in a research report sent to investors last Friday morning. The firm currently has a $150.00 price target on the stock.

“Apple reported a 2x yr/yr increase in iPhone sales in China during the December quarter. Gartner and IDC estimated Apple’s iPhone shipments at ~13.5M and ~13.2M iPhones in C4Q14, respectively. Apple had reported it did not attain supply/demand balance until January, we believe leaving us to consider channel fill impacts during the March qtr, especially within China as we continue to see strong 4G TD-LTE adoption.,” Stifel Nicolaus’ analyst commented.

Separately, TheStreet Ratings team rates Apple Inc as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate Apple Inc (AAPL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

A number of other research reports have been presented recently, these are as follows:-

• Analysts at Cowen and Company set a $135.00 price target on shares of Apple and gave the company a buy rating in a research note on Friday.

• Analysts at Deutsche Bank raised their price target on shares of Apple from $110.00 to $125.00 and gave the company a hold rating in a research note on Friday.

• Analysts at Morgan Stanley set a $160.00 price target on shares of Apple and gave the company a buy rating in a research note on Thursday.

• Finally, analysts at FBR & Co. initiated coverage on shares of Apple in a research note on Friday, April 17th. They set an outperform rating and a $185.00 price target on the stock.

Of the analysts covering the stock, 37 make a Buy call, 17 recommend a Hold, and two advocate a Sell. The 12-month consensus target price on the stock stands at $142.35.

Conclusion

Apple stock is cheap, its top and bottom line growth remain healthy, and the company will likely boost dividends and buybacks in the near future.

The acceleration in the year-over-year growth seems to imply that analysts expect the blended year-over-year growth of Apple's core products -- iPhone, iPad, Mac, etc. -- to remain healthy, with the additional boost coming from Apple Watch sales.

Apple certainly has a track record of making even frothy-looking estimates look extremely tame in hindsight, which is great for this option trade.

Therefore, based on the facts above the following option trade is recommended…..


**OPTION TRADE: Buy the AAPL Jun 2015 140.000 call (AAPL150619C00140000) at or under $2.60. Place a protective stop limit at $1.05 and a pre-determined sell at $5.00.



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Options traders win because they are successful.



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