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Apple Reliance on Japan Puts Sales at Risk as Part Prices Climb

The Japanese earthquake and tsunami will probably weigh on Apple Inc. (AAPL)’s forecasts for third-quarter profit, sales and gross margin because of higher component prices and disrupted manufacturing, analysts said.

At least seven analysts expect the disaster to affect the company’s outlook later today. Japan is a hub for several Apple components, including flash memory, batteries, touch-screen glass and resin used to attach chips. The company, which makes the iPhone, iPad and Macintosh computer, hasn’t yet discussed the effects of the 9-magnitude quake on March 11.

Apple, the largest technology company by market value, was already grappling with supply shortages when the earthquake struck. The iPad 2, which debuted on the day of the quake, sold out at many stores. Apple also introduced a version of its iPhone 4 for Verizon Wireless customers last quarter, triggering another surge in demand. Investors are looking to today’s second-quarter earnings report and forecast for help gauging whether the shortages are putting a dent in sales.

“People want to know how strong the supply chain is and how much backup supplies they have,” said Giri Cherukuri, lead trader and portfolio manager for Lisle, Illinois-based Oakbrook Investments, which manages about $2.7 billion, including Apple shares. “You want to know if it’s temporary or how long it’s going to affect things.”

Flash Prices

The price of flash memory, which serves as the main source of storage for Apple’s iPhone, iPad, Macbook Air and other devices, has climbed since the earthquake. On the spot market, the cost of a 64-gigabit flash chip has risen 13 percent to $12.92 since the day of the quake.

Apple’s leadership in mobile devices makes it the biggest buyer of flash in the world. The company has been paying suppliers more to secure access to the parts, said Rhoda Alexander, an analyst at El Segundo, California-based IHS ISuppli.

The challenges follow what may be Apple’s biggest second- quarter growth in years. When the company releases results today, analysts are predicting a sales gain of 73 percent to $23.4 billion on average, according to data compiled by Bloomberg. Analysts estimate that earnings will increase to $5.39 a share in the period, which ended March 26.

The earnings report is the second since Chief Executive Officer Steve Jobs stepped aside to take medical leave in January. Chief Operating Officer Tim Cook has assumed control over day-to-day responsibilities.

Pinching Margins

To account for rising costs of components such as flash memory, Apple may project profit margins of 35 percent in the third quarter, said Brian Marshall, an analyst at Gleacher & Co. in San Francisco. In the quarter ended in December, Apple had a gross margin of 38.5 percent.

Marshall joins analysts from Deutsche Bank AG, Piper Jaffray Cos., JPMorgan Chase & Co., Rodman & Renshaw LLC, Pacific Crest Securities and RBC Capital Markets in predicting that Apple’s outlook will be affected by the quake.

Apple advanced $6.01 to $337.86 yesterday in Nasdaq Stock Market trading. Shares of the Cupertino, California-based company have climbed 37 percent in the past year.

Apple is usually tight-lipped about how it obtains components and manufactures its products, so any commentary will be valuable to investors, Cherukuri said. It also may underscore the challenges facing other computer makers. Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL) report their quarterly results next month.

Japanese Companies

The quake is crimping growth at Japanese technology businesses. At seven of the country’s largest consumer- electronics companies, including Sony Corp. (SNE) and Panasonic Corp., operating profit — sales minus the cost of goods sold and administrative expenses — will decline 31 percent in the six- month period ending Sept. 30, according to Barclays Plc estimates this month.

The impact of the quake is still too early to determine for the technology industry, said Gleacher’s Marshall.

“We’ll get some answers with respect to near-term issues, but I’m more worried about what’s going to happen a couple of months or quarters down the road,” said Marshall, who recommends buying Apple shares.

Even so, with $59.7 billion in cash and investments, Apple is better positioned than other companies to pay more for parts and handle the disruptions, Marshall said.

“There will be companies that will be worse off than Apple,” said Marshall.