Predicting Apple EPS Value for 2018 Q2
Executive Summary:
Utilizing Apple, Inc. (“Apple”) earnings per share (“EPS”) from Q1 2005 through Q1 2018, our best prediction of the second fiscal quarter of 2018 (“Q2 2018”) earnings is $2.75.
Utilizing eight models from Business Forecasting (ITOM6222), we determined the forecasting model that best predicts Apple’s earnings per share is the ARIMA model, which gave us a Q2 2018 prediction of $2.70, which we then adjusted to $2.75 to reflect various industry and market trends not reflected in the forecasting model.
Forecasting Methods:
The forecasting analysts utilized eight forecasting models outlined in Table 1. Forecasting Methods and Outcomes. The Mean Square Error (“MSE”) associated with each forecast method was utilized to measure the accuracy and fit of the model.
Table 1. Forecasting Methods and Outcomes
Method
|
Q2 2018 Forecasted EPS
|
MSE
|
Naïve
|
$3.89
|
5.52362
|
Moving Average (K=4)
|
$2.43
|
6.19939
|
Exponential Smoothing
|
$3.29
|
5.41860
|
Holts
|
$3.36
|
5.41184
|
Winter’s
|
$2.86
|
2.71674
|
Multiplicative
|
$5.95
|
13.07106
|
Additive
|
$6.42
|
16.22042
|
ARIMA
|
$2.70
|
3.50343
|
Based on the data presented above, the lowest MSEs and best fitting model were determined to be Winter’s Method and the Auto Regressive Integrated Moving Average Model (“ARIMA”) Method; See Figure 1 below for a comparison of the ARIMA and Winter’s Method model versus the actual earnings per share. As ARIMA has more parameters that provide better insight into future behavior and the ARIMA squared errors for a smaller data series - from Q4 2014 to Q1 2018 - has a very low MSE (0.17); as such – we determine ARIMA is the best fit for forecasting the Q2 2018 earnings per share.
Figure 1. ARIMA and Winters Forecasting versus Actual Earnings per Share
Model Assumptions:
Naïve Method: Prior quarter’s actual earnings per share is this quarters forecasted earnings per share
Moving Average: Based on quarterly data utilized for forecasting, assumed moving average of prior four quarters (K=4)
Exponential Smoothing: Used Solver to determine α = 0.68074 minimizes MSE
Holts: Used Solver to determine α = 0. 67825 minimizes MSE
Winters: Used Solver to determine parameters to minimize MSE
Multiplicative (Decomposition): Assumed quarterly index
Additive (Decomposition): Assumed quarterly index
ARIMA: The data does not appear stationary in the beginning because the time plot shows the data is not scattered horizontally around a constant mean. We assumed that the data has some seasonal component because it’s quarterly data. Then, we proved the assumption by looking at the ACF chart which shows the autocorrelation is significant at the fourth lag.
Next, we differenced the data by four to reduce the seasonal effect (because the autocorrelation is significant at lag 4). We still found the data not stationary, so we know there’s a trend. We then differenced the data again by 1 to make it stationary. Also, when lag at four, the autocorrelation is negative, therefore we include SMA term in our model, which makes the seasonal component to be (0,1,1).
When looking at the ACF chart, we find the autocorrelation neither decays exponentially nor it spikes at lag 1. As a result, the data fits none of the models (MA, AR, ARMA). We ended up using (0,1,0) for our non-seasonal component of the model.
Figure 2 shows our model after applying (0,1,0) (0,1,1). The model has an AIC of only 46.5 and a SBC of 48.5. The R square is 0.826 meaning that the model explains 82.6% of the variations in the data. The ACF and PACF of the residuals show almost no autocorrelations and the time series of errors is stationary with a zero mean. As a result, we think our model is significant. The forecasting of the model gives us 2.7 for 2018 Q2 2018’s earnings per share.
Before adjustments, our forecasted earnings per share for Q2 2018 is $2.70.
Adjustments:
Apple
While our forecasted value incorporates trends and seasonality, there are additional notable factors that impact Apple’s earnings for Q2 2018.
Apple makes smartphones, tablet devices, computers and portable digital media players, and sells a variety of related software, services, and accessories. In Q1 2018, Apple reported a record revenue of $88.3 billion, even after a decrease in the volume of iPhones, Apple’s primary revenue driver, revenue increased 13% year-over-year due to an increase in the product’s average selling price to an all-time high of $796.42, primarily due to the iPhone X model released November 2017.[1]
While iPhones make up over 60% of Apple’s revenue, there is prominent increase in other revenue streams; including Services (App Store and iCloud), Hardware Offerings (HomePods and Watches) and Mac and iPad which has repeatedly increased year-over-year.[2]
Apple has a history of exceeding the forecasted earnings per share estimates; See details in Figure 3 below.
Figure 3. Apple Historical Earnings Estimates vs. Actuals3
Industry
The computer hardware industry and technology sector are expected to rapidly grow in the near future; see forecasted industry growth in Table 2. below. However, the industry can be quite risky. With many competitors in the smartphone industry – notably Samsung, HUAWEI, and OPPO – Apple faces ever increasing competition in the mature market and is subject to rapid technology changes; any lag may lead to Apple losing market share and decreased profits. Apple must frequently release new products and/or updates to stimulate customer demand – new market share and encouraging current customers to upgrade to newer products.
Table 2. Industry Growth Forecasts[3]
Industry
|
1-year EPS Growth Rate
|
3-5 Year Growth Rate
|
Computer Hardware Industry
|
24.8%
|
9.4%
|
Technology Sector
|
20.8%
|
|
S&P 500
|
25.2%
|
16.3%
|
Based on the details of Apple and Industry trends, we judgmentally increased the forecasted ARIMA predicted value of $2.70 by $0.05 to come up with a final predicted value of $2.75 for Q2 2018. Actual earnings per share will be released by Apple on May 1, 2018 at 2 p.m. PT / 5 p.m. ET.
[1] Apple to Report Fiscal Q2 2018 Earnings on May 1. https://appleinsider.com/articles/18/04/02/apple-to-report-fiscal-q2-2018-earnings-on-may-1
[2] CFRA. As of April 25, 2018. https://newpublic.cfraresearch.com/
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