Wednesday, February 21, 2007

Apple (NASDAQ:AAPL) - positive comments from two tier-1 firms

Two tier-1 firms are out positive on Apple (NASDAQ:AAPL) this AM:

- Bear Stearns notes the pending launch of Apple TV in February and iPhone in June has changed the Apple story for the better. Before, Apple launched "insanely great" products, but investors had no idea what, if anything, would come next and when it might happen, resulting in a "hit-driven" story that often pulled back as investors pondered timing and parameters of the next move.

In contrast, we now have some more visibility about where Apple is going with four "spheres" -- PCs, music, phones soon, and video next year (they think). And each of these spheres has four vectors of expansion -- platforms, wireless, storage, software -- although these spheres overlap with consistent software and user interfaces.

Another challenge is that one must view AAPL "non-linearly," e.g., successor to iPod mini was not a smaller mini but flash-based nano; iPhone was not just an iPod with a phone inside. AAPL leverages curves in technology trends, e.g., music, video. Also, one should not apply "Old Steve" behavior to AAPL today -- think "New Steve." The philosophy seems to be "say little, but do a lot." Steve Jobs, in firm's view, is the heart and soul of Apple, which is simultaneously its greatest opportunity and risk -- and not just relative to the option probe.

They are maintaining post-option EPS for FY07 at $3.25 and for FY08 at $4.10. The firm is also maintaining 2Q07 EPS of $0.65 on revs of $5.2bn, reflecting a 47% seq decline in iPod to 11.1mm and 13% seq unit drop in Mac to 1.4mm -- guidance is EPS of $0.54-$0.56 on revs of $4.8-$4.9bn.

Bear Stearns is maintaining their Outperform rating and $130 tgt.

- Prudential is also positive on Apple after meeting with co's senior management and completing a round of checks with industry contacts in the Mac and iPod supply chains.

iPods - Apple believes 4-6 weeks of iPod channel inventory is the appropriate level (excluding product transitions) and that it maintains control of inventory levels by receiving channel partner feedback on a weekly or bi- weekly basis. On the topic of NAND flash price declines, management stated that its supplier contracts extend through 2010 and that the contracts are structured in such a way that Apple is able to participate in the full extent of price declines.

Macs - Apple noted that its Education segment has been growing faster than its Consumer segment in recent quarters. The company believes that Adobe's launch of Creative Suite 3 in Q2 will help its Consumer segment, spurring higher sales of both MacPro and MacBook Pro, as the Creative market goes

Management said that it doesn't expect to broadly proliferate into any new product categories for a while outside the ones already announced.

Also, firm's recent checks with industry contacts suggest a solid MarQ with seasonal iPod unit weakness being more than offset by stronger Mac sales and higher margins due to a favorable component cost environment. They have reduced their MarQ iPod estimate to 9.9M from 10.4M, far
below the 21M units shipped in the DecQ.

Despite the introduction of Vista this quarter, firm' checks suggest that Mac sales are tracking ahead of company expectations led by strength in the Macbook and iMac lines. They believe Macs would even be stronger in the quarter, but sales of MacPro and MacBook Pro are weaker due to a pause ahead of Adobe's Creative Suite 3 release, expected in the JunQ. They are increasing Mac estimate to 1.6M from 1.45M for the MarQ, in line with DecQ results of 1.6M.

Pru thinks Apple is set to benefit this quarter due to significant declines in component costs. Net, they are increasing MarQ EPS estimates by $0.04 to $0.68, $0.07 ahead of the Street on stronger Mac sales and higher gross margin assumptions (31.5% vs. prior est. of 30.5%). This compares against Apple's MarQ guidance for $0.54-$0.56 and 29.5% gross margin. Maintains Neutral Weight and $100 tgt.

Notablecalls: The news from Sandisk (SNDK) sure backs Pru's view of reduced component costs. Also, I'm somewhat surprised by the checks showing Mac's are selling well. Provided Pru's checks are the real deal, I think the stock may have some upside from current levels. (Remember Piper saying Vista may hurt Mac sales?). I expect to see a positive reaction in the stock today. Actionable call alert.

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Tommo_UK said...
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