Apple’s financial results were worse than you think

Apple CEO Tim Cook

(Updates story originally published Feb. 1 to add weekly EPS and revenue numbers for easy comparison.)

After Apple released financial results Tuesday, the headlines were clearly bullish.

The iPhone maker had resumed growing after three straight quarters of sales declines; earnings beat analysts’ estimates; and the outlook, while modest, is at least looking brighter.

Not so fast.

In the fourth quarter of 2015 (what the company calls its fiscal first quarter), there were 13 weeks in which revenue and earnings were generated, one less than in the most recently reported period. See this table and this story.

On a prorated basis, Apple AAPL, -0.43% would have needed to report earnings per share of about $3.53, higher than its reported EPS of $3.38 a share, to account for the extra week of business. (Analysts surveyed by Thomson Reuters had expected $3.22.) Likewise, revenue would have to have come in at about $81 billion versus the reported $78.4 billion, which was a meager 3% increase anyway.

Here are the facts, broken down so they’re easy to read:

During 14 weeks in Q4 2016, Apple earned $3.36/share on $78.351 billion in revenue.

During 13 weeks in Q4 2015, Apple earned $3.28/share on $75.872 billion in revenue.

The weekly EPS calculations:

Q4 2016 EPS weekly results EPS/14 = $3.36/14 = $0.24 per week.

Q4 2015 EPS weekly results EPS/13 = $3.28/13 = $0.252 per week.

The mathematical conclusion, given this weekly EPS comparison, is that Apple grew at a 4.76% slower rate in Q4 2016 than in Q4 2015. ((0.24 - 0.252)/0.252)

And the weekly revenue calculations:

Q4 2016 revenue weekly results: Revenue/14 = $78.351/14 = $5.5965 billion per week.

Q4 2015 revenue weekly results: Revenue/13 = $75.872/13 = $5.8363 billion per week.

The mathematical conclusion: Apple grew at a 4.11% slower rate in Q4 2016 than in Q4 2015. ((5.5965 - 5.8363)/5.8363)

Admittedly, Apple’s weekly revenue run rate dwarfs the annual run rates for most companies. But the same valuation metrics still apply, and we need to ask ourselves if the company is growing. The issue here is the confusing headlines.

Conclusion: Apple did not grow in Q4 2016 versus Q4 2015. In fact, the rate contracted.

The only reason it seems as if Apple grew is that there was an extra week added to Q4 2016 results that was not there in Q4 2015. So the company had 7.6% more time to add to revenue and EPS, but instead the net result was a weekly run rate contraction of 4.11% and 4.76%, respectively.

In addition, the company had lower guidance.

Turning to opinion: This was a reporting period in which archrival Samsung suffered greatly, and Apple had the chance to reap the rewards. But it didn’t. Total iPhone shipments climbed only 5% in the three months through December as Samsung issued a recall for its flagship Galaxy Note 7. It turns out that Samsung shipped 77.5 million smartphones in the period, almost the same as Apple.

That’s a concern for us.

Still, Apple adds massive amounts of cash to the balance sheet every quarter, which is obviously a good thing. But as long as the company cranks out cash instead of using it effectively, earnings growth will be discounted. Alas, the stock trades near 15 times earnings, less than the S&P 500 Index SPX, -0.06%

Finally, from a technical perspective, Apple’s stock is close to our stated longer-term resistance level. The company’s shares rose 6.1% to $128.75 on Wednesday, the biggest gain since July. On Thursday, the stock fell about 0.4%.

Accordingly, we believe that the giddy reaction to the earnings results are overblown, investors are not looking at the situation properly and, although the cash generated by the company is solid, we do not believe a multiple of near 15 times earnings is justified given little to no EPS growth.

The multiple, in our estimation, should be closer to 10 times earnings. And with that, we believe Apple is a better candidate for a short sale.