Will Apple Earnings Feel Aftershock from Japan's Earthquake?


Apple (AAPL) is gearing up to report its quarterly results after the markets close Wednesday, and both investors and consumers are wondering if it'll take a hit from Japan's massive earthquake and tsunami, which have already rocked the earnings results of some other tech titans.

Toshiba (TOSBF), for example, issued a warning Tuesday that it will fall short of the consolidated sales and operating income forecast it made in late January because of the disaster in Japan. And Sony Ericsson on Tuesday issued a quarterly report that noted the Japanese earthquake has created some disruptions to its supply chain.

But despite the bite other companies are feeling following the tsunami, Wall Street analysts say Apple is likely to weather the aftermath better than its competitors.

For example, even before the tragedy struck, Apple had paid a sizable sum up front to its component suppliers -- roughly half a billion dollars -- to make sure it gets the parts it needs, note analysts. For Apple and a number of other companies, the problem is not so much that their suppliers have been directly affected by the quake and tsunami, but rather that their suppliers' suppliers that have suffered directly, note analysts.

The popular hardware maker -- and indeed, the tech industry as a whole -- should take a cautious approach when providing forecasts for future quarters, given that there is no firm answer yet about how extensive the damage in Japan is.

"[Apple's] guidance should be more conservative than usual, especially on the gross margin line due to component shortages in Japan," says Brian Marshall, an analyst with the Gleacher & Co. "Investors will likely look through this."

Apple is expected to report quarterly earnings of $5.37 a share on revenues of nearly $23.4 billion, according to Thomson Reuters.

Tech Sector Acknowledges the Disaster's Impact

With the earnings season just kicking off, 26 S&P 500 companies have already referred to the Japan quake and tsunami in their earnings calls and reports, according to FactSet Research Systems. So far, the technology sector is feeling the most pain, followed by consumer discretionary companies, says John Butters, senior earnings analyst with FactSet Research Systems.

Texas Instruments (TXN), for example, reported earlier this week its first quarter revenues and operating profit took a hit as a result of the disaster.

Rich Templeton, Texas Instruments CEO, said in a statement:

2011 started strong, with customer demand in January and February tracking our expectations for a first quarter of above-seasonal growth ... But the Japan earthquake that's taken such a heartbreaking human toll in the country also disrupted local demand starting in mid-March and impaired operations at two of our factories there. This impact and substantially weaker demand for Wireless baseband chips resulted in revenue that was below the middle of our expected range. The lower revenue combined with expenses resulting from the earthquake affected earnings per share. New orders, however, were strong through the quarter, indicative of the underlying strength in our markets.

Recovery of our operations in Japan is progressing well. One of our factories will soon be resuming full production, and the other has restarted initial processing of wafers and is on schedule for full loadings in mid-July. Nonetheless, many of our Japanese customers remain in the early stages of reopening their own factories, and we and our customers face potential supply chain disruptions. We expect growth in the second quarter, though it will be pressured by the situation in Japan. Provided consumer and enterprise demand remain strong, we expect a good second half of the year.

Butters notes it's still early in the earnings season: Only 60 of the 500 S&P companies had reported their quarterly results as of Tuesday.

Diving deeper into the data, only 10 of the 26 companies that made reference to the disaster said that it had caused a negative impact in the last quarter or was expected to in the future, while 16 said that it had had no significant impact in the quarter just completed, or that its impact on their profits was not yet known.

In slicing the data based on industry, eight of the 16 consumer discretionary companies that have reported to date have referenced the Japanese earthquake and tsunami, while seven out of nine technology companies have done likewise.

Japan earthquake earnings
Japan earthquake earnings

"We only have just over 10% of the S&P companies reporting so far, but I wouldn't be surprised to see the tech sector as the one taking the greatest hit," Butters said.

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Insurance companies in the U.S. and abroad are also expected to feel some fiscal pain from the catastrophe in Japan, which is expected to generate economic losses of a whopping $150 billion, according to a report put out by James Shuck and Nick Pope, analysts with Jefferies International.

"Domestic [Japanese] insurers, individuals, corporates and the Japanese state are likely to absorb most of the cost," they noted in their report, estimating that the cost to international insurers could be in the range of $10 billion to $20 billion. However, they pointed out that the situation is still unfolding, and added, "it is likely to take some time before formal industry loss estimates emerge."

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