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Citigroup’s Richard Gardner this morning upgraded his rating on Apple (AAPL) to Buy from Hold, while maintaining his $105 price target on the stock. He also maintained his current EPS estimates of $3.46 a share for the September 2007 fiscal year and $3.88 for fiscal 2008.

Gardner notes that there are several key product catalysts “around the corner,” including AppleTV, Mac OSX Leopard and the iPhone, as well as Adobe’s (ADBE) Creative Suite 3. He notes that the AppleTV should start shipping before the end of this month; he expects revenue of about $500 million in calendar 2007 and $1 billion in calendar 2008. The Leopard launch, he calculates, should add “several pennies” to EPS in the June and September quarters. On the iPhone, he sees limited volumes for the first 5-6 months, but sees revenues of about $2 billion in calendar 2007 and $5 billion in calendar 2008.

Meanwhile, Gardner asserts that the company could see “significant gross margin upside” in the March quarter due to rapid price declines for both DRAMs and flash. (Note that he is not the first person to make this point.) “We do not believe the Street fully appreciates the positive margin impact of recent declines in component pricing,” he wrote this morning. “Barring product price cuts - which we view as unlikely - Apple should significantly exceed consensus EPS during the March quarter on higher-than-expected gross margin.”

Gardner says that headline risk from the company’s back-dating probe remains, but that “risk/reward appears compelling following a pullback from $98 to $83.” He says investors “should begin building positions at current prices,” and says “any first-half weakness would simply represent an enhanced opportunity to increase positions.”

Apple this morning is up 98 cents at $84.25.

Previously:

  • Micron: Report Management Warns DRAM, NAND, Image Sensor Pricing Coming Under Pressure (February 9, 2007)
  • Apple: Falling Flash Memory Prices Should Boost FY Q2 Gross Margins (February 6, 2007)
  • Source: Apple: Gross Margin Upside From Falling Flash, DRAM Pricing