Merrill
Reiterate Buy and raise PO to $186
We are reiterating our Buy opinion on Apple’s shares and are raising our price
objective from $180 to $186 based on a 27x multiple on our revised FY09 NOPAT
estimate of $5.94 plus $27 in net cash. 1Q08 EPS of $1.16 was above our $1.05
estimate with $0.04 upside from lower tax and $0.01 from lower shares. We
remain positive on Apple’s growth potential given its opportunity to gain market
share in large addressable markets, especially in PCs and mobile handsets.
Quarter reflects continued momentum in Macs and iPhones
Macs continue to gain share, estimated at 5.3% of global PC revenue in FY08.
iPhone units of 1.7mn beat our estimate of 1.6mn, although the unlocked
component remained “significant”. We are increasing our estimate of unlocked
phones to average 25% in FY09 and anticipate the iPhone business model to
evolve as the company enters new markets. iPod unit growth decelerated to up
1% YoY, but have become less relevant to the overall growth contribution.
Gross margins caught the street by surprise
Gross margin of 32.9% was below consensus of 34.1% (33.4% MLe). Puts and
takes for gross margin change sequentially included lower mix of software
(Leopard), increased mix of lower ASP shuffle, higher mix of iTunes, favorable
component pricing environment and a weaker dollar.
Revising EPS estimates
We are maintaining our F3Q08 EPS estimate of $1.07, and raising our FY08 EPS
from $5.11 to $5.20. We are decreasing our FY09 and FY10 EPS slightly from
$6.42 and $8.10, to $6.40 and $8.00, respectively given lower interest income and slightly lower gross margin estimates offsetting a benefit from lower tax.
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