Thursday, July 20, 2006

Color on Apple (NASDAQ:AAPL)'s results

Apple Computer (NASDAQ:AAPL) is likely going to be the highlight of the day with at least one tier-1 firm upgrading the shares and several others issuing positive comments:

- Merrill Lynch upgrades their rating to Buy from Neutral saying they believe risk/reward in shares of Apple has improved. Firm highlights 8 reasons for the upgrade:

1) increased confidence in Mac share gains, causing firm's LT estimates to rise; 2) firm's top concern (iPod deceleration) is waning as monthly growth rates are stabilizing and the problem of slowing iPod sales is now well understood by investors (has become part of the consensus view); 3) the overhang from the stock option timing investigation is diminishing with management saying it does not expect restatements; 4) June Q's operating leverage suggests margin expansion ahead; 5) most of the Intel transition risk is past now that 75% of units are Intel-based; 6) although the potential for iPod phone is not news, its financial impact is not in consensus estimates and the fact that management publicly alluded to it (albeit indirectly) on the conference call reinforces the possibility that its introduction could be near enough to influence consensus estimates within the next 12 months (hecks suggest not earlier than C1Q07); 7) the company is entering the seasonally strong back to school and holiday retail selling periods which should contain product refreshes; 8) firm expects the Street to switch from a focus on F2007 estimates (ending September) to F2008 over the next 6 months, supporting valuation.

- Piper Jaffray note the better-than-expected Mac number (1.33m vs. Street at 1.25m) is evidence that Apple is exiting the turbulence of the Intel transition. Firm expects over the next several quarters Mac market share will inch upward driven by the full availability of Intel-based Macs, a renewed Mac ad campaign and the halo effect.

Pod units were in line with firm's 8.0m preview at 8.1m. While iPod units were down from 8.5m in March, they view the iPod number as stable. Firm believes the market for MP3 players remains under-penetrated and they estimate approximately 12% of people in the U.S. have an iPod. Expects to see the iPod numbers reaccelerate with new products and seasonality in the back half of 2006.

According to the firm, the Street should not be surprised by the revenue guide-down, which we believe is largely related to timing of new iPods. They believe Apple's guidance suggests a new iPod late in the September quarter or in October. The Street had been mixed on whether a new iPod would make it out in the September quarter. The Street was looking for $5.0b in revenue for September, while guidance calls for $4.55b. Firm attributes $200m of the lowered estimates to timing of the new iPod and the balance to Apple's conservatism.
Maintains Outperform and $99 tgt.

- JP Morgan notes Apple's Mac shipments of 1.33 million for the June quarter were above firm's recently raised 1.27 million unit estimate. The upside was driven by the new MacBook, which contributed to annual notebook growth of 61%.

Apple managed to ship 8.11 million iPod units in the quarter, versus o8.01 million estimate. They continue to believe iPod shipments will remain somewhat subdued in the September quarter, as Apple reduces channel sell-in ahead of its nano and video iPod refreshes in September/October. As a result they are forecasting iPod units of 8.45 million for the quarter, representing a fairly modest sequential growth rate of 4%.

Firm continues to believe that the company will introduce new nanos in the September quarter, followed by a video iPod refresh shortly after. They have not yet determined if the next video iPod refresh will be the long-awaited wide screen version of the product, as the initial refresh may simply be a capacity upgrade. Nevertheless, they suspect the widescreen version will be launched shortly thereafter in any case.

Speculation has begun to swirl that not only will Apple introduce new nanos but also feature film content at the WWDC on August 7. This would be significantly earlier than they are expecting and would alleviate concerns regarding Apple's ability to ramp new products in time for the holiday season.

Overall, Apple's earnings report should come as welcomed relief to investors. The stock is currently trading at 22x calendar 2006 EPS ex-options estimate. Firm expects the iPod's momentum to resume as we enter the seasonally stronger months with new products, and they believe the company's Mac share gains are set to accelerate rapidly over the same time period. Reiterates Overweight rating.

Notablecalls: Nice squeeze in after mkt trading. I fully expect the shares to top out around the $60 level. Yes, AAPL did manage to beat the Mac sales ests. But only by about 50,000. We need more than that to call it an Halo effect.

No comments: