Apple may face first profit drop in decade as iPhone slows

, Bloomberg

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Apple Inc. chief executive officer Tim Cook is feeling the heat.

Eighteen months after taking over from Steve Jobs, Cook is facing rising production costs, competition from Samsung Electronics Co. and slowing growth in smartphones, threatening profits for the world's most valuable company.

An earnings report Thursday may show that fiscal first- quarter net income slipped 2 percent to $12.8 billion, or $13.48 a share, according to analysts' estimates compiled by Bloomberg. That would be the first drop since 2003. In all except one quarter since that same year, profit has jumped more than 10 percent. Analysts project sales will rise 18 percent to $54.8 billion, the slowest growth rate since 2009.

Apple's shares have dropped almost 30 percent since September, erasing about $190 billion in market value, on concern that demand for iPhones and iPads is ebbing. Cook, 52, overhauled most of the company's product line ahead of the holiday shopping season, and results for the period will show for the first time whether the effort paid off.

"Sentiment could not be worse," said Peter Karazeris, an analyst at Thrivent Financial for Lutherans, which owned about 647,000 Apple shares as of September. "It does take something fundamental to turn that, and we'll see if they can deliver."

Apple often reports results that surpass even the most optimistic projections, and it's possible the company will do so again Thursday. The company has exceeded analysts' estimates for earnings in all but three quarters since at least 2006, according to data compiled by Bloomberg.

Parts Purchases

Yet, in a sign that investors are turning more bearish on Apple, the company is trading at a 46 percent discount to the Nasdaq Composite Index on a price-to-earnings basis, a spread that has widened from a 20 percent discount in October. Apple touched a record high of $705.07 on Sept. 21. The stock rose about 1 percent to $504.77 in New York.

Many analysts have reduced their estimates amid signs — such as a drop in component purchases — that demand may be weaker than projected for the iPhone, which accounts for more than half of Apple's sales and profit. In the past three months, analysts' profit prediction for Apple for fiscal 2013 has declined 7.5 percent to $46.3 billion, or $48.84 a share.

"If iPhone 5 sales really are disappointing so soon in the product's refresh, then it seems fair to worry about likely sales volumes in the next few quarters before the iPhone is next refreshed," Stuart Jeffrey, an analyst at Nomura Equity Research, wrote in a note when he lowered his outlook for Apple.

Samsung's Moves

In January 2012, Apple posted record first-quarter results, generating $13.1 billion in profit on sales of $46.3 billion. Last year's first quarter was 14 weeks, while the one to be reported Thursday was 13 weeks.

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