Apple Facing Serious Downside Risk - Morgan Keegan

Morgan Keegan, one of the best research houses on the Street, is downgrading Apple (NASDAQ:AAPL) to Underperform from Market Perform.

The wording is very strong:

We are downgrading our rating on AAPL shares from Market Perform to Underperform based on mounting evidence of broad-based weakness in consumer technology spending in the U.S. and Europe.

We also expect that Apple's education vertical will be more challenged this year given state and local budget issues, which combined with what appears to be a more stable component pricing environment, we believe will lead to a deceleration in growth over the next 2-3 quarters.

We are maintaining our March estimates for Apple, but slightly lowering June, Sept., and Dec. quarter expectations for both iPods and Macs based on a difficult economic environment. We are now projecting Y/Y EPS growth to slow substantially over the next few quarters. We believe the upside potential in the shares if the Mac biz continues to outperform is outweighed by the downside risk if growth begins to slow, and are therefore downgrading to Underperform.

Notablecalls: About time! I was all over AAPL when the stock was 35 pts lower. I now feel it has gone too far too fast. Needs to be at least 10 pts lower. The problems with iPhone in Europe should be weighing on the stock. Read what uber-analyst Tero Kuittinen had to say about European iPhone demand over at Realmoney ($$).

Disclosure: No position

Comments

[curiousone:]

Given that McCourt does not downgrade the entire sector, his call seems dubious. The latest data indicate the Apple continues to grow market share in a challenging macroeconomic environment. Iphone demand will accelerate once 3G is introduced in a couple of months, particularly in Europe. "We are now projecting Y/Y EPS growth to slow substantially over the next few quarters" is an unsubstantiated claim given McCourt's own reasoning unless he is projecting a protracted economic slump. In that case, an insightful and scrupulous analyst would downgrade the entire sector, not merely the fastest growing company in it.

2008 Apr 08 10:07 AM

[Anthony Dad...:]

I strongly disagree with this call. Mac share is growing leaps and bounds. Just ask how many of your friends are switching. Anyone ever walk into an Apple store and find it empty ?

2008 Apr 08 10:12 AM

[AJ, Washing...:]

I prefer a pullback now to realistic levels, and let the analysts re-set the expectations of ALL stocks to achievable levels given this downturn in the economic macro climate. It's far more preferable than having a run up until the earnings call, and then going down steeply on rumors and innuendo. Apple has great fundamentals, a ton of money, great products and although there is demand out there, it is natural that people would rethink spending priorities for the next few months. Apple will grow, and keep growing, but a little slower than before. All companies are in the same situation, so its not unique.

thanks for the straight talk.

2008 Apr 08 10:15 AM

[AJ, Washing...:]

PS. I am an Apple Perma-Long, and have held their shares through good times and bad for the better part of a decade.

2008 Apr 08 10:18 AM

[digivision:]

It's a good perspective but Keegan is not taking into consideration the June conference which is most likely going to bring a 3G Phone with many juicy updates. If this should happen any negative thought should dissipate and soon they will raise target.
45 mil iPhones sold is not an outrageous number, if and when Apple enters .. South america, China, India, Australia, Canada and the rest of Europe . The catalyst is certainly a 3g phone.
I could see some downside 25-30% if Apple misses estimates or ipod sales are lower than estimated but no serious downturn for the next 6-8 months

2008 Apr 08 10:35 AM

[wall street...:]

"uber-analyst Tero Kuittinen".....give me a break, more like uber-ass. This guy has been wrong about Apple and the iPhone for over a year. He is just part of the telcom establishment threatened by an industry shakeout prompted by Apple. His prediction was that it would be an huge failure (what ? , no 4 MP camera !) and he is flat out wrong. Now all he does is try to justify his position.

And "Morgan Keegan, one of the best research houses on the Street"....says who ? I've worked on Wall Street for over 20 years, Morgan Keegan is not top tier anything.

I would welcome a pull back in the stock though...i want to buy in here.

2008 Apr 08 10:46 AM

[pabs:]

what a light weight downgrade and lightweight report on a report, taking into account only half the factors to paint an innacurate picture
simple price supression to buy into earnings and sell before the call

my sense is aapl overall undertimated sales in this past quarter and the call will be a suprise on the + side, we'll see

2008 Apr 08 10:49 AM

[okomoto:]

Just walk into the local (San Diego) Apple store on a weekend. It is wall-to-wall customers, either buying or learning about Macs and iPhones or sampling iPods. On the other hand rising energy costs could crimp the entire economy including high-end brands like AAPL

2008 Apr 08 10:57 AM

[SchraderTrader:]

AAPL had almost two months of consolidation on a nice round bottom and had GRADUALLY risen, not rapidly. That's because the institutional guys need a place to put cash and AAPL is as good as any when trading at a P/E < 40. This is a solid growth story.

2008 Apr 08 11:20 AM

[samij:]

iphone has been huge failure in europe. enough so that it's on sale at t-mobile in germany, down from €399 to €99.

2008 Apr 08 11:29 AM

[Jon T:]

This was posted on another thread:

"Mark & Associates, P.C. is representing investors who lost money investing in two Regions Morgan Keegan open end bond mutual funds, the Morgan Keegan Select Intermediate Bond Fund (RIBCX) and the Morgan Keegan Select High Income Fund (MKHIX). Year to date, the Morgan Select Intermediate Bond Fund is down 50.5 percent and the Morgan Keegan Select High Income Fund is down 59.7 percent. Mark & Associates, P.C. is also representing investors in several Morgan Keegan closed end funds: RMK High Income Fund (RMH), RMK Strategic Income Fund (RSF), MK Multi Sector High Income Fund (RHY) and RMK Advantage Income Fund (RMA). These closed end funds have lost a tremendous amount of value, with some trading 75% below their 52 week highs."

Rubbish or what? And shame on Notable Calls.

2008 Apr 08 12:02 PM

[jswede:]

>>"And "Morgan Keegan, one of the best research houses on the Street"....says who ? I've worked on Wall Street for over 20 years, Morgan Keegan is not top tier anything."<<

Morgan Keegan was Barron's #1 three times 2003-2006, and Barron's #1 "Overall Last 3yrs" in 2006.

Your problem is you only looked on Wall Street.

2008 Apr 08 12:14 PM

[Dan Poarch:]

Regardless of Morgen Keegan's reputation, none of the things mentioned here are bad news for just Apple, they are bad news for the whole industry. Apple still remains one of the very few growing companies in the sector, thus, AAPL would still be the place to put your money... No?

2008 Apr 08 12:39 PM

[Zobby:]

During the Apple Sdk presentation John Doerr brilliant hard-nosed startup financier of Google and Amazon put up 100m to fund iPhone iPod Touch application development. He said "Today we're witnessing history, the launching of the SDK, the creation of the third great platform—the iPhone and iPod Touch" and added "A really big deal. It's bigger than the personal computer."

If years ago before anyone used PCs at home and someone invented the PC platform would you buy the stock recession or not?

MacOsX took something like 20 years to develop, the other handset players will never be able to match it, Apple "iDevices" are going to have a clear run, this is the stock buying opportunity of the decade. I bought more Aapl at 118, I'll buy more if it gets knocked down again by 'analysts'.

2008 Apr 08 01:07 PM

[mrtaxx:]

MacDailyNews Response to the downgrade
MacDailyNews Take: April 8, 2008: Poor Tavis of Morgan Keegan obviously couldn't analyze his way out of a wet paper bag. The real risk here is in listening to analysts employed by second-tier regional firms who fall hook, line, and sinker for ginned up election year efforts to talk down the economy* while ignoring and/or not comprehending what's really happening at Apple Inc.

*Which, of course, can become self-fulfilling prophesies. Still, we require proof that any weakness in consumer technology spending is actually impacting Apple negatively rather than positively. For example, perhaps any threat of "recession" will cause people to spend their technology dollars much more wisely, thereby getting themselves Macs which run all of the world's software and also retain their value far better than run-of-the-mill PCs? There are a lot of variables in play here and McCourt is out of touch with, frankly, better analysts who cover Apple.

Of the 28 analyst firms making recommendations on Apple Inc (AAPL) stock today, as covered by NASDAQ:
• 8 - Strong Buy
• 16 - Buy
• 3 - Hold

And only one, little ol' Morgan Keegan, says "Underperform."

2008 Apr 08 01:26 PM

[Mike M:]

To all you guys over the pond, Europe is going Apple mad. Everyone I know, when updating their computers is switching over to Apple. iPhone not selling? Rubbish, we can't get enough of them, that's why they aren't selling. Everywhere I travel, everybody wants one but half the Countries over here still don't supply them.

And....what about when we start movie rentals in Europe, how big is that going to be!! These idiots who do their research look in all the wrong places and are out of touch !!

2008 Apr 08 01:27 PM

[Michael Eis...:]

and what happens if Steve Jobs retires?

2008 Apr 08 02:01 PM

[haywoodu:]

Please know that Tero Kuittinen hasn't written a single positive piece about the iPhone. Know your sources.

2008 Apr 08 02:46 PM

[hardmanb:]

"and what happens if Steve Jobs retires?'

He's not the type to retire, and he is having more fun, and breaking down more fences than ever before. Besides, he has developed and trained a unique culture, innovative approach and marketing expertise into Apple's employees and leaders. Apple would probably keep doing things "Steve's way" for at least ten years.

2008 Apr 08 03:29 PM

[Mac Daddy:]

"and what if Steve Jobs retires?" What kind of an inane comment is that? Steve Jobs will die in his office at Apple before he retires. Yes, Apple's value is tied to Steve Jobs health and presence, much the same that way Berkshire Hathaway is tied to Warren Buffet. However, there has been no-absolutely none-discussion of Jobs stepping down from Apple. This Morgan Keegan guy is another pundit who misses the point completely. I am beginning to believe that unless you have "embraced" Apple's culture, you cannot begin to understand the power of the brand. I try to be unemotional about my Apple shares, but I also own the products and know what a fulfilling experience it is to own a superior product that performs as it is designed to work.

2008 Apr 08 03:36 PM

[mike sanders:]

listening to analysts is a bit like reading alice in wonderland, all of you without exception have got it wrong about aapl. no other company in the world unless they are taking stuff out of the ground duh! is any where near. aapl will out perform and make you guys look like the clowns you really are, thank god i never listened to you.

2008 Apr 09 08:54 AM

[mike sanders:]

sorry mac daddy i didn't read your post before sounding off I totally agree 20 years a user and a shareholder, never been let down in either role.

2008 Apr 09 08:56 AM

[Mac'em X:]

Funny that this analysis of Apple comes at the same time other voices are calling for a $350 or $300 target. Such are the perils of prognostication...

I scratch my head over what to do – until I take another look at the latest Macs, and the wall-to-wall throngs at the Apple Store here in Tokyo...

And then I go buy more Apple shares. Come on, $300!

2008 Apr 09 09:18 AM

[Mac'em X:]

Funny that this analysis of Apple comes at the same time other voices are calling for a $350 or $300 target. Such are the perils of prognostication...

I scratch my head over what to do – until I take another look at the latest Macs, and the wall-to-wall throngs at the Apple Store here in Tokyo...

And then I go buy more Apple shares. Come on, $300!

2008 Apr 09 09:18 AM

[montag:]

Just bought two Macbook Pros, one for me one for my wife. Tossed our desktop and windows laptops. Even tossed our junky corner desk. Already saving $120 a year on Norton antivirus on all our computers...think Ill snag another Ipod with that savings for her as well.

PS I bought Apple shares for $13.75 when they made neon laptops that looked like toilet seats, these 2 laptops and an 80gb Ipod are my first products, they make $155 a share look a lot more attractive then those older products made $13 look!

2008 Apr 09 09:39 AM

[jonreagan:]

Morgan Keegan did a similar downgrade on RIMM last November, about 4 weeks before they announced earnings on 12/22. It send the stock on a downward spiral, which continued until the earnings announcement. As usual, RIMM announced record earnings, and beat the street estimates in revenue, earnings and new subscribers. Needless to say, the "downgrade" was way off the mark, if not highly suspect.

Morgan Keegan pulls lots of these stunts, you have to wonder about their motivation.

2008 Apr 09 02:28 PM

[simonsays:]

Agree on the warning !
Although iPhone had an initial successful boom in US and some countries, it will be difficult for iPhone to boost big in China for the reasons of business model, competition and customer acceptance.

please check more comments on simonsays.blogbus.com/
"iDoubt: Could iPhone be sucessful in China?"

2008 Apr 10 04:09 AM

[obama is a ...:]

Hey Simon,

iPhone is already hugely successful in China, in Shanghai you see more iPhones than any other phone now, it's true the SMS functionality is total crap (no SMS forwarding alone renders the phone useless for most Chinese users) but give Apple time to upgrade the functionality. Don't expect a huge sales increase when the phone is officially released, anyone who wants one can buy one easily. Chinese consumers love the iPhone for the design and look. Apple is building a serious brand in China, where people love luxury goods - the functionality needs to get a lot better though, in the area of texting, music sharing, ringtones. Chinese use their phones quite differently

2008 Apr 10 03:15 PM