Monday, February 12, 2007

Calls of Note Part 5

- Citigroup is upgrading shares of Apple (NASDAQ:AAPL) from Hold to Buy on compelling risk/reward. This is consistent with firm's January 18 note in which they said they would likely become more positive on the shares and reconsider their Hold rating on any pullbacks to the mid-$80s. They are not changing teir above- consensus EPS estimates, but note that FY07 estimate of $3.46 is a penny below the Street high. Firm also maintains prior 12-month price target of $105.

There are several meaningful product catalysts around the corner, including AppleTV, Adobe Create Suite 3, Mac OS X Leopard and iPhone.

They expect significant gross margin upside during 1CQ07 due to rapid declines in flash memory and DRAM pricing. Firm's estimates are also well above consensus for the full years FY07 and FY08.

While there could be "headline" risk associated with the options back-dating investigation and digital rights management posturing, risk/reward appears compelling following a pullback from $98 to $83. Citi believes clients should begin building positions at current prices, while any first-half weakness would simply represent an enhanced opportunity to increase positions.

Notablecalls: Gutsy call from Citi considering the loud chatter over the past couple of weeks that Steve Jobs' option related problems run far deeper than most think.

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