Apple Inc (AAPL)

[roni]

May 30, 2007, 10:41 am
Could Apple Shares Double in 2008?
Posted by Tiernan Ray

That’s question this morning posed by Morgan Stanley analyst Kathryn Huberty in one of two upgrades of Apple (AAPL) stock, the other one from W.R. Hambrecht’s Matthew H. Kather. Huberty actually says her formal target is $150 for the shares by next May, while Kather says they’re worth $125. Both analysts are raising their price targets after Apple stock blew past their prior targets.

* Huberty’s $150 is a compromise between a worst-case scenario — shares fall 28% to $80 — and the best case, in which Apple sells dramatically more Mac computers, raising its computer market share to 6% next year, while the company’s forthcoming cell phone, iPhone, sells far more units than expected in its first year out of the chute — 24 million in the hypothetical scenario, with those developments boosting Apple shares to $225 by May ‘08.

In fact, Huberty says the more likely scenario is that the Macs sell faster than has historically been the case and that operating margins at Apple improve by 1.5 percentage points, which would give Apple $5 per share in profit in the fiscal year ending September, 2008, not the $4 per share consensus estimate of analysts at present. Huberty suggests plenty of things Apple chief executive Steve Jobs may have up his sleeve that could deliver upside, including an “ultra-portable” Mac that might sell 3 million units in its first year of release. But Huberty’s main point is that Apple may sell more and more goods through its retail stores, and that that business can be highly profitable:

Apple’s fixed cost retail stores offer an incremental leverage factor. Over the past 12-months, products sold through the company’s retail stores earned 14 points higher operating margin, on average, relative to products sold through partners. Because the iPhone will only sell through Apple and Cingular stores (roughly 2,300 points of distribution compared to 8,000 for Mac and 20,000+ for iPod), we believe it could drive a higher % of revenues through direct distribution.

As Apple introduces new products and new revenue streams, it all flows more easily to the bottom line the more it moves through Apple stores. In the best-case, $225 scenario, the percentage of goods moved through Apple’s retail outlets rises from 17% annually to 25%. Huberty’s prior price target was $110. She rates Apple shares “overweight.”
* Kather, on the other hand, is simply expecting prices of some computer parts, such as DRAM and NAND memory chips, to continue to fall and thereby boost Apple’s gross profit for the June-ending quarter after the cost of goods to 33% of sales from his previoulsy expected 32.5%. Kather is projecting a 50% drop in DRAM memory prices, with NAND prices perhaps flat.

In addition, Kather says he surveyed AT&T’s (T) Cingular stores “this week” in advance of the iPhone introduction, and says — Surprise! — the stores don’t know exactly when they’ll receive units (like they were going to tell him!), but about one fifth of the stores contacted have compiled waiting lists of customers who want to be notified when the phone comes in.

Bottom line, however, Kather says the iPhone will be a “catalyst” for the stock over the summer, and he thinks it will expand Apple’s valuation multiple from a 30x historical forward P/E to 33x. That would make the stock worth $125, based on his 2008 estimate of $4.12 in profit per share, after factoring in about $14 in cash per share and backing out options and interest expenses, writes Kather. Kather’s argument is in part based on the fact that Apple will account for iPhone sales differently than typical Mac hardware sales, using a deferred revenue component. Eric has noted in past that the new accounting has had the Street unusually excited. Kather, who rates Apple shares “Buy,” previously had a $115 price target for the stock.

Meanwhile, Maestro Savitz is reporting throughout the day at the D: All Things Digital Conference, where Steve Jobs is to appear, and so perhaps we’ll hear a thing or two about what he has up his sleave.


http://blogs.barrons.com/techtraderdaily/2007/05/30/could-apple-shares-double-in-2008/