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AAPL ($395) upgraded by BGC Partners (4/22) -

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researcher59 Member Level  Monday, 04/22/13 12:07:48 PM
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AAPL ($395) upgraded by BGC Partners (4/22) -

APPLE: UPGRADE TO BUY FROM HOLD IN FRONT OF THE NEXT PRODUCT CYCLE. $500 PRICE TARGET

Haiku: Jump in the fire, as any Apple good news, could boost up the stock.

UPGRADE: We are taking advantage of the weakness in AAPL shares to upgrade our rating to BUY from HOLD. The total return on Apple is a decline of 5.6% since our downgrade on October 17, 2011 compared to a total return from the S&P500 index of +16.4% (both returns assume dividends reinvested). In conjunction with our upgrade we are doing a reset by lowering our estimates and price target. Our price target goes to $500 from $550, and we reduce our outlook in the March quarter to the low end of the guidance range. We also reduce June quarter estimates to 28M iPhones and 16.5M iPads. That said, the market appears to have already priced a slowdown in demand for iPhones and iPads in front of the next product cycle, and any positive news could be a catalyst to move the stock up closer to $500. We are not saying that the challenges facing Apple as the tablet and smartphone markets evolve are going away (declining ASPs, saturation of developed economies, lackluster innovation), but it is possible that the pessimism surrounding the stock could lift as we approach the next product refresh cycle. If our thesis materializes as we expect, shares may approach our price target as soon as this fall (around the iPhone 5S release). If shares approach our target we expect we would review our rating. We do not expect that shares of Apple return to its lifetime high of $705.07 this year, and it is possible that Apple may never again revisit those levels. Our upgrade is based on the following:

1) The company has not negatively preannounced March quarter results so we expect revenue and earnings in the guidance range provided on January 23.
2) June quarter guidance is likely to be tepid, but we believe this is already widely expected. We model 3% YoY revenue growth for the June quarter.
3) There could be upside to earnings if the company is able to produce leverage on its gross margin. Our March quarter EPS is above consensus.
4) A revamp of the iOS operating system by designer Jony Ive may drive interest in an iPhone 5S by providing a fresh look to the software even though the hardware may retain the same form factor.
5) A dividend increase may serve to draw in new investors seeking yield.
6) The smart phone market, while showing signs of slowing growth, remains one of the most lucrative markets with close to 1 billion units expected to ship in 2013.

WHERE WE COULD BE WRONG:

1) Channel inventory likely a negative impact. We estimate 34.5M iPhones sold in the March quarter, below consensus estimates (~36M) but a number that may be factored into the stock particularly if gross margins improve. While the Verizon report of 4M iPhones sold could translate to 36M phones sold using historical percentages, the issue with that math is historically the company has also increased channel inventory. Inventory at the end of December quarter was a peak level of 10.6M units. We expect that this level may decline by 2 to 2.5M units as the company prepares for a new phone and slower demand.
2) A weak June quarter may not be fully priced in and the stock could leg lower again on earnings this Tuesday.

March Quarter Metrics Estimate:

Revenue of $41.2M (+5.2% YoY), $10.25 EPS. iPhones: 34.5M, $620 ASP. iPads: 19M, $435 ASP. Macs: 4.05M, ASP $1,350. iPods: 5.7M, ASP $165. Gross margin of 39.8%. AAPL has $137.1B in cash ($145 / share) and no long term debt as of December 31, 2012. The company generated $23.4B in cash from operations in the December quarter.

We upgrade Apple Inc. to BUY from HOLD with a $500 target.

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