Apple faces Japan earthquake supply concerns

The Californian company has not spoken about the impact of the earthquake and tsunami in a country which is a hub for key components such as touch-screen glass, batteries and memory sticks. Apple's latest device, the iPad2, came out on the same day the quake struck and analysts believe it is likely to hit sales and margins next quarter.

"The biggest concern at the moment is quite short term in nature and that revolves around the supply chain that is a global issue following the catastrophe in Japan," said Daniel Ernst, an analyst at Hudson Square Research.

Supply constraints are not new to Apple, which as well as the iPad2 introduced a new version of the iPhone 4 for some of its customers in the US last quarter. Apple has historically said little about its supply chain and sourcing of the components that go into its devices.

However, the prices of certain key parts have risen since the earthquake. The cost of a 64-gigabit flash chip has climbed 13pc since Japan's worst earthquake struck on March 11. "They [Apple] are in the best position to manage it but there's virtually no way they won't have some impact," said Mr Ernst.

In the final quarter of 2010, Apple had a gross profit margin of 38.5pc, and analysts say that could decline by up to 3 percentage points in the next three months.

Analysts who track Apple are expecting sales in the company's latest quarter to have climbed 73pc to $23.4bn (￡14.3bn), while profits are forecast to come in at $5.39 per share compared with $3.33 in the same period last year.

"Apple is the company that is best capturing revenues and profits from the mobile revolution, in our opinion," said Colin Gillis, an analyst at BGC Partners.

The company's results have so far seen little disruption from the decision by Steve Jobs, its co-founder and chief executive, to take medical leave in January. Apple have remained tight-lipped on Mr Jobs's decision but he was off for the first six months of 2009 to have a liver transplant.

Though he recommends investors buy Apple shares, Mr Gillis does not expect them to repeat the 50pc gains they enjoyed last year. A combination of higher components prices, uncertainty over the future of Mr Jobs and increasing competition to the iPad will hold back the share price performance, he said.

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Apple Delays iPad2 Launch in Japan

Apple Inc. (AAPL) is postponing the launch of iPad2 in Japan, following the earthquakes and tsunami that hit the north-eastern coast of Japan on March 11. The company has also been forced to close down a retail store in the quake-affected city of Sendai.

Apple had planned to release the tablet computer in Japan and 25 other countries on March 25. Apple did not set any new release date for Japan, but said that it will go ahead with the launch of iPad 2 in other countries like Germany, Belgium and the United Kingdom.

The iPad product line is the fastest-selling technology product in history, in terms of revenue, according to Creative Strategies Inc. Analysts believe that Apple may have sold more than 500,000 iPad2 in its debut weekend, after retail outlets ran out of the tablet-style device since its arrival on March 11.

Apple sold more than 300,000 iPads on the very first day of launch in April, 2010. The company sold more than 15 million units in the first nine months of launch, including 7.3 million units to holiday shoppers during the December quarter.

Apple reported sales of about $4 billion in Japan (6.1% of the total revenue) in 2010. Approximately 5.0% of Apple's revenue came from Japan in the December quarter. Revenue from the country rose 83.0% in the period to $1.4 billion.

According to Piper Jaffray, iPad2 sales are expected to surpass the previous estimate of 5.5 million units for the current quarter, which ends on March 31, 2011. We believe that the iPad2’s international roll out will be equally successful.

Despite the decline in Apple’s market share in tablet computers (down to 73.0% from 93.0% in the September quarter), research firm IDC expects the company to maintain 70%–80% market share through 2011, primarily due to the launch of iPad2. Based on IDC estimates, Apple will ship a minimum of 35 million tablets in 2011.

Piper Jaffray estimates that revenue loss from the Japan crisis will be negligible in this quarter, at less than 1.0% of sales. For the June quarter, the negative impact is expected to be less than 3.0%.

Recommendation

We believe that strong demand for iPad2 will provide Apple a competitive edge, even as competitors, including Motorola Mobility Holdings Inc. (MMI), Samsung Electronics Co., Research In Motion Ltd. (NasdaqGS: RIMM - News) and Hewlett-Packard Co. (HPQ) continue to introduce tablet computers to compete with iPad2.

We continue to believe that Apple will outperform its peers given its strong iPad and iPhone sales and new product launches. With a loyal customer base, international expansion, competitive pricing strategy and solid cash in hand, we remain positive on its long-term growth.

However, a prolonged crisis in Japan, particularly a nuclear catastrophe can affect Apple due to supply shortages, particularly for components like flash memory.

We have an Outperform rating on Apple over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, implying a short-term Buy rating.

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Apple Delays iPad2 Launch in Japan

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