Thursday, January 18, 2007

Color on quarter: Apple (NASDAQ:AAPL)

Several firms are commenting on Apple (NASDAQ:AAPL) after the co released its Q4 results last night:

- Morgan Stanley notes that margin leverage from Apple's fixed cost store base is becoming more central to the story, in our minds. They continue to want to own Apple shares ahead of several catalysts later this year and would look to add to positions on any dips near-term.

Revenue, margins and EPS topped firm's model and consensus estimates - though the revenue components came in differently than they expected. Apple shipped 21M iPods (vs. 14.4M est.) and 1.6M Macs (vs. 1.7M) with new products (Shuffle) driving much of the unit upside. Despite an iPod business that the Street generally believes to be lower margin revenue, both gross and operating margins hit Apple's highest levels ever. Positive margin factors include: 1) favorable component pricing across products; 2) incremental revenue leverage; and 3) product mix (e.g. MacBook Pro).

Maintains Overweight and $110 tgt.

- Merrill Lynch says Mac units were a little light at 1.6mn vs ML and consensus at 1.75mn. Bears will attempt to make a case the halo effect is waning; we disagree. Although they concede the Mac result was below their expectation, they still view 28% growth as very solid against a market growing 8% and expect the pace to remain healthy as new Macs are introduced and as pent up demand in the creative professional segment is released this Spring with Adobe creative suite native on Intel/Mac.

They don't think investors should be spooked by the March Q outlook (below Street) given the track record of subsequent upside. Firm's slightly lower March estimates are within the typical excess of actual results over management guidance. For F2007 they're raising estimates from $23.4bn / $2.76 to $23.7bn / $3.07 by rolling through the Q's upside and other tweaks. F2008 EPS nudges up from $4.05 to $4.10. They continue to recommend the stock with a price objective of $113.

- Piper Jaffray believes the Street (they were modeling for 1.6m Macs) got ahead of itself for the December quarter. While the Street will view the Mac number as a negative (reported 1.6m units vs. the Street at 1.75m), they view the Dec-06 Mac unit number (1.61m) as a positive datapoint. Over the last five years Mac units declined by an average of 1% from the September quarter to the December quarter. Therefore, the sequential decline this December (- 0.2%) was essentially in line with the average seasonal downturn when compared to the previous five years.

Firm notes that the quarter-over-quarter data from 2004 is not meaningful due to limited quantities of the G5 chip in the Sep-04 quarter pushing G5 Mac sales into the Dec-04 quarter, and as such they have excluded it from the comparative analysis. In general, the Dec-06 numbers show continued Mac momentum. The Dec-06 quarter marks the eighth quarter out of the last nine that the Mac has outgrown the computer market internationally and in the United States. Moreover, the Dec-05 quarter was a 14 week quarter, so the flat Mac unit results actually represent an uptick quarter over quarter on a normalized basis. According to IDC, Mac worldwide market share in Q4 was 2.4%, down from 2.8% in Q3. Maintains Outperform and ups tgt to $124 from $99.

- JP Morgan is downgrading AAPL to Neutral from Overweight noting that they have had an Overweight rating on Apple since October 2004, and the stock has appreciated strongly. But at current levels, they believe it is time to lighten up on positions.

Upside was significant for the December quarter. EPS exceeded JPM's above-consensus estimate by 39% and revenues topped our views by 8%. The upside was driven by iPod shipments of 21 million units, which substantially exceeded their optimistic 16 million unit estimate.

Unfortunately, JPM's thesis was based on stronger Mac shipments. After a significant run in the stock, their bullish thesis was based primarily on expectations for significant upside in Mac units. In this respect, the company fell short of estimates. With Mac shipments of 1.6 million units,
the company missed firm's above-consensus forecast for 1.9 million units.

As we enter the seasonally weaker period of the year, iPod shipments may disappoint investors' heightened expectations. Firm believes this risk is particularly pronounced given their concerns that some consumers may delay iPod purchases ahead of the iPhone launch.

As a result, they believe it may be difficult for the shares to outperform the peer group average.

Notablecalls: No wonder the stock got sold in after hrs trading. I can't believe how wrong Piper is with their defense on AAPL here. The market will not care about the Mac seasonality for the past 5 yrs! AAPL needs to show they can sell Mac's on top of the huge amount of iPod's they have already sold. AAPL needed to beat that Mac number! The IDC data isn't helping either. AAPL lost mkt share in Q4!? How can that be? JPM is right downgrading the stock here. The stock's a sell here around $94 level.

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