Apple: Expecting 1Q08 Upside

Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients today regarding Apple's holiday sales. Key excerpts:

MULTIPLE POSITIVE DATA POINTS. Based on favorable feedback from retail channel checks (strength in notebooks, higher iPod sales), feedback from Asia checks (which indicate seq uptick in Mac units vs. guidance for seq decline) and strong acceptance of new Leopard OS, we're raising our rev/EPS estimates and CY08 target from $243 to $249. We continue to see AAPL well positioned for the holidays given the confluence of product cycles for Mac (new iMac, low channel inventory, Leopard OS, BBY store expansion) and iPod (strong new product acceptance).

EXPECT 1Q08 UPSIDE. Despite AAPL's uncharacteristically strong Dec-qtr guidance, we still expect strong upside and are raising 1Q08 EPS from $1.65 to $1.75 (guidance is $1.42; Street at $1.54) on revs of $9.67bn (guidance is $9.2bn; Street at $9.33bn) based on Mac units of 2.2mm (up 1% seq vs. prior est. of flat seq) and iPod units of 25.0mm (up 145% seq and above our prior est. of 24.3mm).

STORY IMPROVING, FOCUS SHIFTS TO MACWORLD. Though we remain optimistic on AAPL's ability to capture holiday demand, our sense is investors will focus on Macworld (1/15/08) to assess AAPL's growth potential in '08. While we're encouraged by AAPL's evolution into a company w/ multiple growth engines -- incl. our thesis that iPhone is emerging as a personal digital lifestyle device and view that video could be the next big driver -- we note that AAPL will need incremental products (e.g., 3G iPhone, ultra-portable Mac, other products "tba") in early '08 to buck seasonality issues.

RAISING ESTS. Given product cycles for Mac/iPod and Leopard OS uptake, we're raising EPS for FY08 from $5.25 to $5.40 and for FY09 from $6.90 to $7.00.

RAISING CY08 TARGET. We're raising our CY08 target from $243 to $249 (price of an 80GB iPod classic) using a P/E of 31x on CY09 oper EPS of $7.30 (on a reported basis) and adding projected cash/sh of $22 (or ~29x CY09 oper EPS of $7.85 on a cash basis, i.e., assuming iPhone revs recognized upfront).

Comments

[raylo]

Apple rocks

[Tom B]

Life is very short; nobody should have to work with MS Windows.

Apple Rocks, indeed!