Apple IPhone 4 Recall Odds Increasing

Buy or sell? You gotta ask yourself whether a company that has operating earnings of USD4b per quarter, and generated USD2.3b of operating cashflow per quarter can be hit by any recall.


Apple IPhone 4 Recall Odds Increasing, Irish Bookmaker Says

July 14 (Bloomberg) -- Apple Inc. is increasingly likely to recall its iPhone 4 after complaints about poor reception and a critical review from Consumer Reports, according to a betting company that tracks odds for such events.

Paddy Power Plc, Ireland’s biggest bookmaker, said the chances that Apple will ultimately recall the phone have increased following what it described a “betting frenzy” after the Consumer Reports review. The consumer organization said on July 12 it wouldn’t recommend the phone because of its tendency to lose signal strength when held in a certain way.

“If the current betting trends are to be believed, it now seems certain that a recall is in the cards,” Paddy Power said in a press release. Natalie Kerris, an Apple spokeswoman, didn’t immediately return messages left outside of business hours.

Paddy Power first offered odds of 2-to-1 against a recall, meaning a bet on a recall would pay $2 plus the initial $1 if such an event occurred. Now those odds are 4-to-6, meaning a winning bet of $1 would pay $1.66 if a recall were to occur.

Consumer Reports said it wouldn’t recommend the latest iPhone until the signal problem is fixed, though the device otherwise received high ratings. The test results showed that when a user covers the phone’s lower-left side, where two parts of the antenna meet, the loss of signal strength may lead to dropped calls in areas where AT&T Inc.’s coverage is weak, Consumer Reports said.

On July 2, Apple blamed the problem on software that helps display the phone’s signal strength, and has promised to issue a free fix to iPhone owners. It hasn’t specified when that fix will be available.

Recall Costs

Analysts have started to estimate the impact of an iPhone recall on the company’s earnings. Toni Sacconaghi, an analyst at Sanford Bernstein & Co. in New York, put the price tag at $1.5 billion, though he said a recall is “highly unlikely.” A more likely step would be issuing rubber cases to cover the phone’s bottom-left corner, which would cost Apple $1 or less per phone, he said in a report.

Vijay Rakesh, an analyst with Sterne Agee & Leach in Chicago, estimated that a recall would cost Apple less than $100 million.
Apple rose $2.41 to $254.21 at 11:15 a.m. New York time in Nasdaq Stock Market trading. The stock had risen 19 percent this year before today.

To contact the reporter on this story: Arik Hesseldahl in New York at ahesseldahl@bloomberg.net

Last Updated: July 14, 2010 11:19 EDT