Analysts on Apple: Weakness Is a Buying Opportunity

Despite a weak economy that could lead to soft iPhone shipments in the final three months of 2008, conservative guidance and continued pressure on Apple Inc. (AAPL) shares, analysts continue to consider the weakness as a buying opportunity.

The company has about $27 per share in cash and prospects for $9 per share in free cash flow for fiscal 2009, Barclays Capital analyst Ben Reitzes said in a research note. He expects “very muted” near-term guidance but continues to believe that Apple is the best long-term growth story in the IT hardware space.

Apple reports first quarter results on January 21 and Mr. Reitzes estimates earnings per share (EPS) of $1.31 on a year-over-year revenue decline of 2% to $9.4-billion.

“We are not expecting top-line upside but we do believe Apple will get bottom line support from margins,” he said, adding that second quarter guidance will be “very conservative” with an EPS outlook in the range of $0.80-$0.90.

Citigroup’s (C) Richard Gardner said December quarter revenue could be several hundred million below consensus of $9.9-billion. However, he still expects EPS of $1.42 versus the Street at $1.39 on better-than-expected gross margins.

Given the lack of visibility heading into the first half of 2009, he also expects conservative guidance for the March quarter, as much as $0.15 below the current consensus.

However, with Apple trading at nine times forward free cash flow (or six to seven times excluding net cash), Mr. Gardner said the stock is compelling at current levels. He rates Apple a “buy” with a new target price of $132 per share (down from $153), but said if the shares pull back seven or eight dollars around earnings, as the options imply, he would be an aggressive buyer.

Barclays rates Apple “overweight” with a $113 price target, adding that Apple may attend the CES tradeshow in Las Vegas next year.

Comments

[Timeline St...:]

So many questions!

What's the basis for these analyst's ability to predict soft iPhone sales? Did either of them correctly predict 6.9 million in the last quarter?

What did they predict for previous years or even upon the announcement of the original?

Why do their numbers contradict the sharp Web OS share numbers seen in the iPod Touch and iPhone platforms? (iPhone here: marketshare.hitslink.c...)

How can EPS figures be so low at the point that the full extent deferred iPhone EPS is coming into play (from trailing 2-year iPhone sales)?

Do their EPS figures account for a shift to the higher revenue iPod Touch within the iPod category, even if overall iPod numbers are down? How many iPod Touches did Apple sell at an average selling price of $280? 5 million? 6 million? 8 million? Again, look at OS Web Market share and AdMob figures indicating that iPod Touches in use roughly doubled on 25-Dec and the days afterward.

With flash memory costs falling by 80%, and an increasing amount of Apple products using them, doesn't this increase the margins significantly? Also, haven't the costs of many components fallen by double-digit %'s?

I will also point out one example from their spotty records. On 26-Apr-07, as AAPL was just below $100, Mr. Gardner projected a 12-month AAPL target of $105 with a 'Hold' recommendation. Within 8 months, it was at $207. Google 'Richard Gardner' and 'Business Week' to see the original article.

EPS will be close to $2.

Jan 14 12:29 PM

[iNeal:]

Citigroup wants to buy a lot of AAPL at around $80, so they try to send it there. They aren't wrong, just crooked. Happens all the time.

Jan 14 12:54 PM

[jenny:]

I could see this weakness as a buying opportunity. Sentiment has been shifting pretty heavily for them lately. Monday it was really bearish and is bearish again today(www.predictwallstreet....) but I think these are only temporary dips as the rest of the month investors were feeling pretty optimistic. Apple is weighed down by the general market like any other stock, but I think they have more of a chance of recovering than some other companies in this environment.

Jan 14 01:36 PM

[aapladay:]

At this price it is a pretty safe bet right now. I made some money on riskier stocks so I could buy more Apple. The holidays looks like it did not turn out to be Armageddon for Apple at all. The iPhone shock wave is spreading and even though it is deferred revenue. At this rate it will only take a year to show up in the balance sheets. I can wait that long and will buy more if the market continues to not have faith.
Oh and about Steve Jobs? Please, worst case scenario is that he gets the best cancer treatment a man can get, best is the usual crooked market manipulation. Either way Apple has had a plan for life after Steve for quite some time now. It would be tragic for the stock if something happens to him for awhile, but the current management has already had a lot more to do with Apple's success than anybody gives them credit for. Plus anybody who followed Steve Walsh's subordinates would realize the impact a guy like that can have.

Jan 14 02:45 PM

[iNeal:]

I really believe Apple has the largest potential upside of any stock I follow. It may be awhile before it takes off again, but think about all the market share to be gained. They are doing well with only a tiny share of the computer market. The iPods and iPhones are a gateway to their computers. I see it all the time. Anyone who uses an Apple product for the first time is amazed by the experience. They must be thinking, Maybe those computers ARE worth the money.

Jan 14 04:04 PM