MSCO believes Apple's operating margin will continue to improve from two factors:
1) Apple's operating expenses grow at 1/2 the rate of revenues. If this relationship holds going forward, every $1bn of incremental CY08 revenue drives 30 bps operating margin; and
2) Product sold through Apple's retail stores earns as much as 14 points incremental profit. All else equal, a 5 point increase in the mix of revenues through Apple stores adds 50 bps operating margin.
Firm's CY08 operating margin increases to 19.8% (from 16.7%) and CY08 EPS shifts to $5 (from $4.29). They continue to believe earnings and stock revisions are heavily weighted to the upside and think that even $7 in EPS may be doable in CY08. New tgt stands at $150. Maintains Overweight.
Notablecalls: New 52 wk high coming for AAPL today. Expect to see at least couple of points of immediate upside. Actionable call!
AAPL 1-yr chart