## Kathryn Huberty Predicts Apple Performance

10 months ago Ms. Huberty released her price target for April 2010 (see graph) at between \$100 and \$105. The stock was trading at \$121 then and her forecast was for a 14% decline.

She wrote:

Investment Conclusion: The combination of a March quarter beat and positive management tone is likely to keep AAPL shares in its recent trading range. Valuation is not stretched by any means but at 21x our adjusted C09 EPS, the market already assigns AAPL a 16% premium to RIMM which credits AAPL for lower risk given its large cash balance and a more diversified revenue model. We remain Equal-weight AAPL shares.

We note that the stock is currently trading above \$200 at a P/E of 19x. She had forecast a price of \$100 on a P/E of 21x Calendar 2009 Earnings Per Share. The implication is that EPS would have been \$100/21 or \$4.7 for calendar 2009.

She already had one quarter of data (\$1.79 for CQ1) therefore she forecast \$4.7-\$1.79 = \$2.97 for the remainder of the 2009 calendar year.

In reality, Apple earned \$10.24 for 2009 and \$8.45 for CQ2 through CQ4. That makes her error (\$8.45-\$2.97)/\$2.97 = 184%.

We see today that she has a new forecast for \$225 a share which leads us to conclude that she still has a job.

• M

Ha Ha Ha.

NY was never able to figure out tech stocks.
Of course most industrials don't double in year, so they would not expect it.

Also most NY money managers are not interested in making money for their clients, just preserving the wealth and keeping the commissions coming.

They are not going to get fired for not doubling the client's money, but they will get fired for losing their client's money, so they look for conservative stocks.

• deagol

The 21x multiple seems to be related to how the market was valuing Apple, so it must have been derived from the stock price at the time, which as you say was \$121. Thus Huberty’s CY2009 EPS estimate must have been around \$121/21=\$5.76 and not \$4.76 as you derived from her \$100 target price.

Yet Apple originally reported adjusted EPS of \$1.84 for CQ1 2009 and not the \$1.79 as restated this January, so for the remaining quarters she would be expecting 5.76-1.84=\$3.92. The originally reported numbers by Apple for the remaining of CY2009 were \$2.14 for CQ2, \$3.12 for CQ3, and \$3.67 (under non-subscription accounting) for CQ4, a total of \$8.93 instead of the \$8.45 derived from the restated reports.

So her actual error as you measured it would be 8.93/3.92-1=128%. I would instead measure it the other way, as 3.92/8.93-1=-56%, in other words she was expecting less than half of what was reported.

• http://asymco.wordpress.com asymco

@deagol,

Thanks for your input. The multiple may be what it was, but she wrote specifically about forward EPS, therefore she was making a *forward* P/E judgement for a forward price forecast. So presumably 21x was actually a lower, forward estimate applied to current price. I grant that the multiple was judged on the then current 121 price, but the trailing P/E on restated earnings was actually 16! Picking 21x as a multiplier seems arbitrary in retrospect.

On judging performance, I considered using the pre-adjustment numbers, but if one were getting paid for doing this, one should have had a GAAP/non-GAAP analysis showing both potential values and the (anticipated) re-stated figures. If Huberty is in the business of making these forecasts with "bull/bear and everything-in-between cases" then surely it would make sense to include the potential for non-GAAP valuation.

The impact of deferrals was plain for all to see and easy to compute. A forecast is a forecast and reality is reality and at the end of the day she called for a price of \$100 by April 2010 based on "fair" valuation *taking all known information into account.* As we stand today at twice that price on a lower multiple, it's obvious that her earnings call was off by miles.

Regardless of the various ways of measuring accuracy, the bottom line in both our approaches is that the error was more than 100% (or half). That's astronomical in my opinion. Apple is a company that has an extremely simple business, and a very predictable one. As Cook pointed out, all the products fit on a table, they're mostly made of atoms and are built in factories and sold through narrow channels.

Given that, if an analyst (with a team of staffers) can't put out a 9 month forecast of earnings that is within the ballpark, and repeats the inaccuracy regularly, then one has to question either the judgement or the motive.

• http://aaplmodel.blogspot.com deagol

The originally reported EPS numbers I used there in comparison to her “adjusted EPS estimate” are of course non-GAAP. I was merely pointing out that those were even higher than what Apple has now restated them, giving more support to your conclusion.

As to her picking an arbitrary multiple, she didn’t pick the 21x. She was just reporting that AAPL was trading at 21x her forward estimate. If her target was \$100 or \$105, and her CY2009 EPS was \$5.76, then her fair value multiple was between 17x and 18x, which is of course still arbitrary and low compared to AAPL’s historical average. But it’s not too far off from what we’ve seen recently. So, the problem was not her choice of multiple but her EPS estimate, and since it was off by more than 100% of what actually happened, her target was also off by more than 100%.

Of course I agree that her forecast was terribly off, be it half of actuals, or actuals being more than 100% above her estimate, either way it’s unacceptable. However, she wasn’t alone. I clearly remember the consensus EPS estimate for FY09 at exactly \$5.00 just before the Jan09 report came out.

• M

Yes, that is another problem: consensus. Since when is innovation, genius, invention, brilliance determined by consensus.

Patents are granted to their inventors, not to a consensus.

By a consensus of “consensus analysts” nonetheless. What stupidity NY finance is.

Obviously she’s getting paid to continue and promote this kind of stupidity, and not to look any deeper. And she’s not the only one, that is the consensus.

• M

We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst
commentary are not for us. Instead we want partners who join us at Berkshire because they wish
to make a long-term investment in a business they themselves understand and because it’s one that
follows policies with which they concur.
– from latest letter http://online.wsj.com/public/resources/documents/

• M

A climate of fear is their best friend. Those who invest only when commentators are
upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you
pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns
in the succeeding decade or two.
–latest letter

Buffet looks ahead a long time. In high tech 2-4 years equal Buffet's 10-20 years.

• Pingback: Vakmerő tűzlabda | Somez.hu