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Apple may have to ‘run that much faster to stand still’

These are stories Report on Business is following Thursday, Jan. 24, 2013.

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Apple sinks
Shares of Apple Inc. tumbled by about 12 per cent today after the king of technology and consumer electronics disappointed investors with its first-quarter results, and as analysts slash their price targets on the stock.

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Now, remember we're talking about Apple here, so sometimes good just ain't good enough.

As The Globe and Mail's Omar El Akkad reports, investors are worried that wildly popular Apple products such as the iPhone and iPad are losing some of their allure in a fiercely competitive market.

Samsung Electronics Co., for example, is coming on strong with its Galaxy offerings, while others also seek to grab market share from the company at the top.

"Apple bulls will be licking their wounds this morning before making a difficult decision as to whether the fall is an over-reaction, or represents the next stage of a downtrend that has been in place since September of last year," said senior sales trader Matt Basi of CMC Markets in London.

"On a valuation basis the stock trades at less than half the average P.E of the rest of the Nasdaq, but concern over their diminishing market share and the likely squeeze on margins in 2013 appear to be taking precedent in traders' calculations."

Apple still posted record results after markets closed yesterday, earning $13.1-billion (U.S.) or $13.81 a share, on revenue of $54.5-billion.

But its growth slowed, and its gross margin slipped markedly, to 38.6 per cent from 44.7 per cent a year earlier.

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This, as Apple sold a record 47.8 million iPhones in the latest quarter, up from 37 million a year earlier, and 22.9 million iPads, up from 15.4 million.

"The growing competitive pressures Apple is facing in the smartphone market means that the average revenue per iPhone will come under increasing scrutiny as the company expands its business in China and other growth markets where demand for lower-priced models is expected to outstrip iPhone 5 sales," said analyst Andy Castonguay of Informa Telecoms and Media.

"Apple's 4Q performance was not only hampered by supply-chain restraints, but also by increasing competition from Samsung and other manufacturers vying for the premium consumer market," he added.

"With modest but growing sales of Windows Phone devices as well as a revived product line expected from BlackBerry, Apple's products have begun to lose their 'innovative' top luster, even while still representing the competitive standard in the industry. Apple's next generation of devices and iOS will need to push into new, exciting design territory to firmly reestablish its claim as the industry's innovation bellwether or risk continued declines in stock value and position in the vanguard of mobile device design."

It also forecast revenue of between $41-billion and $43 billion for the second quarter, and gross margin of between 37.5 per cent and 38.5 per cent.

Samsung's Galaxy has been a clear winner, while Research In Motion Ltd., while wounded, is preparing to launch its key BlackBerry 10 models next week. Analysts have been particularly keen on RIM of late as its shares rally and carriers pledge strong support for the BB10 devices.

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"While that doesn't for one moment suggest that the success story is over, it is likely that Apple will have to run that much faster to stand still and justify its valuation in the face of increasing competition from rivals like Samsung, Nokia and Research In Motion," said senior analyst Michael Hewson at CMC Markets in London.

At least one analyst questioned the market reaction today, noting how shares of Netflix Inc. surged more than 40 per cent as it boasted more than 2 million new subscribers.

"Looking at the market reaction to its numbers, you would think that Apple had announced that global demand for iPhones had been completely satisfied," said Chris Beauchamp, also of IG in London.

"Nothing could be further from the truth. Any company that can make $54-billion in revenue in one quarter is still very much in rude health. When combined with the euphoric reaction to Netflix's modest profits last night, the compelling but frustrating nature of global markets becomes abundantly clear."

Primaris battle escalates
The consortium that sparked a battle for Primaris Retail REIT by launching a hostile bid in December is not giving up, even though Primaris has struck a deal with a white knight, The Globe and Mail's Tara Perkins reports.

A group led by KingSett Capital pushed Primaris, which owns dozens of malls and shopping centres in Canada, into play last month when it surprised it with an all-cash $26 a share takeover offer. Primaris rebuffed the offer, and then struck a deal with H&R Real Estate Investment Trust.

If another bidder tops H&R's cash-and-share offer, which is worth roughly $27 according to RBC analyst Neil Downey, then H&R could be entitled to a $106.6-million break fee that includes $70-million in cash as well as the chance to buy Toronto's Dufferin Mall and other downtown properties at a discount.

KingSett disclosed today that it intends to buy up to 5 per cent of Primaris's units – the maximum amount that it's currently allowed to buy under securities laws – in a possible signal that it would be willing to pay more for Primaris if it could do so without triggering the break fee.

Agrium boosts forecast
Canada's Agrium Inc. today boosted its outlook for fourth-quarter results, citing a "strong finish" in its retail operations.

The agribusiness giant now says it expects to earn $2 (U.S.) a share, up from its earlier projection of $1.50 to $1.90.

"The increase in our estimated financial results is due to a very strong finish to the fall application season in our North American Retail operations, supported by an extended fall season in the U.S. and continued strength in grain and oilseed prices," said chief executive officer Mike Wilson.

"Going forward, continued strength in crop prices and low global grain inventories are anticipated to support a strong spring application season in 2013."

Talisman to cut
Talisman Energy Inc. is preparing to cut its work force as it works to substantially reduce office costs amid a broader push toward higher profitability, The Globe and Mail's Nathan VanderKlippe reports.

Talisman expects to slash its general and administrative costs by "at least 20 per cent over all," Helen Wesley, the company's executive vice-president of corporate services, told a conference today. "And that's a combination of both people and indirect costs."

An ugly statistic
Spain now represents almost one-quarter of the European Union's unemployed.

Its national statistics agency said today that the number of people who can't find work has climbed to about 6 million – that's 23 per cent of Europe's unemployed - with a jobless rate just above 26 per cent.

For young people, the jobless rate has surged to an unbelievable 60 per cent, raising further concern over a lost generation.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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