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Apple (AAPL) Stock Remains Quite Attractive Currently: FBN Securities

 October 26, 2012 10:05 AM

(By Balaseshan) FBN Securities analyst Shebly Seyrafi said shares of Apple Inc. (NASDAQ: AAPL) are quite attractive currently despite disappointing quarterly results and guidance. The brokerage retained its "Outperform" rating on shares of the tech giant, while cutting price target to $900 from $1,000.

Seyrafi said the bottom line is that the calendar Q3 "throwaway" quarter is now behind, investors should be buying now as and the stronger quarters now begin. He lowered price target primarily to reflect lower gross margin assumptions (due to high costs on newer products, mix to lower-margin iPad Mini, and iPhone pricing).

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However, the analyst is modeling a 5 percentage points sequential decline in the iPhone gross margin (to 46% from 51%) and still obtaining a gross margin for Q1/Dec. of 38% (versus 36% guidance), so he sees upside to his above-guidance estimates.

Shares (off roughly $100 over the past month) are trading at a price-to-earnings of roughly 10 times ex-cash of $128/share, the company has two strong new product cycles currently (iPhone 5, iPad/iPad Mini), and the company continues to gain share (as it outgrows the PC and smartphone markets), the analyst noted.

For the Q4/Sept. quarter, AAPL reported revenue of $36.0 billion (in line with $35.9 billion consensus) and EPS of $8.67 (below consensus of $8.84). Sales in Greater China (includes Hong Kong and Taiwan) were $5.7 billion (up 26% year-over-year; 16% revenue), and the iPhone 5 will be selling there this quarter.

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The analyst said Apple shipped MAC units in line with expectations, shipped iPhone units ahead of expectations by about 1.5 million units, and shipped 14 million iPads which was much lower than published expectations but only slightly below expectations after Tim Cook's recent comment that 100 million iPads were shipped two weeks ago (his estimate were at 15.5 million units after this comment).

For the Q1/Dec. quarter, AAPL is guiding for revenue of $52.0 billion (below consensus of $54.8 billion) and EPS of $11.75 (below consensus of $15.43). The relatively weak revenue guidance is partly explained by the fact that Apple has 13 weeks in this December quarter versus 14 weeks in the December quarter a year ago, Seyrafi noted.

For Q1, gross margin is guided to be only 36% (down from 40% in Q4) in spite of the mix shift to iPhones (which are high margin), the analyst noted.

The analyst said this includes several factors: higher costs associated with newer products (iPhone 5, iPad Mini, new Macs); mix shift to the new iPad Mini (which AAPL admitted has much lower gross margins than the corporate average; he models iPad Mini gross margin at a mid-20s gross margin percentage, which is much lower than the 36% guided); lower prices on iPhone 4 and iPhone 4S products.

Seyrafi said Apple is expanding the number of countries for the sale of iPhone 5 dramatically over the coming months. The iPhone 5 was rolled out in 31 countries in September, and the number of countries selling this product is expected to increase to 100 by the end of the year.

The brokerage reduced its 2013 EPS estimate to $46.10 on revenue of $194.51 billion from $51.81 on revenue of $194.70 billion, while maintaining 2014 estimate of $51.62 on revenue of $216.95 billion.

AAPL is trading up 0.20% at $610.77 on Friday.



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