Apple Slowdown, Macro Weakness - Morgan Keegan

Apple (AAPL) shares are trading lower this morning after Morgan Keegan analyst Tavis McCourt cut his rating on the stock to Underperform from Market Perform. He also reduced estimates for the company, citing “mounting evidence of broad-based weakness in consumer technology spending the U.S. and Europe.”

McCourt also thinks Apple’s education sales “will be more challenged this year given state and and local budget issues,” and he says the company is likely to see “a more stable component pricing environment.” The result, he says, will be “a deceleration in growth over the next 2-3 quarters.”

McCourt maintained his March quarter estimates, but trimmed his expectations for the June, September and December quarters. He now sees EPS for the September 2008 fiscal year of $4.94 a share, down from $5, and below the Street consensus of $5.13. For FY ‘09, he sees $5.67, down from $5.95, and well below the Street at $6.27.

“The upside potential in the shares if the Mac biz continues to outperform is outweighed by the downside risk if growth begins to slow,” he writes.

McCourt lists nine points of concern about Apple:

• Numerous data points suggest consumer tech spending is deteriorating rapidly in the U.S. and Europe. (And I would note that he wrote that before this morning’s warning from TomTom on the soft GPS market.) He lists Sony Ericsson (SNE)(ERIC), SiRF (SIRF), Texas Instruments (TXN), National Semi (NSM), Jabil (JBL), Best Buy (BBY), Radio Shack (RSH) and Synaptics (SYNA) as companies that have noted weakness in handsets, GPS devices, MP3 players, and other consumer electronics products.
• The 2001 PC slowdown occurred very rapidly, with forecasted growth from 16% to negative in 2 quarters.
• The 2001 PC slowdown happened when U.S. employment began to decline.
• Best Buy mentioned no plans to expand beyond 600 stores with the Mac this year.
• State/local budgets getting squeezed, which could impact education vertical.
• Component prices stabilizing, making gross margin expansion difficult.
• iPhone news flow likely to improve, but financial impact “still minimal.”
• Increased DRM-free MP3 could somewhat erode “the unique iPod/iTunes relationship.”
• Comp store sales at high-end retailers weakening.

McCourt goes through three scenarios on the value of Apple’s shares. The pessimistic view, he says, would be FY 2008 EPS of $4.61, cash EPS of $5.01, a 20x earnings on cash EPS, and a $100 stock. (Remember that Apple is recognizing iPhone revenues over a two-year period, reducing reported earnings; his cash earnings calculation adds back deferred revenues.) The “realistic” view, he says is $4.94 in EPS, $5.33 in cash earnings, a 25x multiple on cash EPS, and a $133 stock. The optimistic view, he says, would be $5.52 in EPS, $5.92 in cash earnings, a 30x multiple and a stock at $177.

Apple shares so far today are down $0.29, to $155.60, as of 11:40 a.m. EDT, after a morning drop of more than $1.

Comments

[AJ, Washing...:]

McCourt's taking the broader market view, and although I am an Apple long, I welcome the stock taking a breather and dropping a few points - Apple is widely expected to meet or exceed street expectations this quarter, so there's a lot of upside to look forward to. I assume McCourt is looking ahead at the 3rd and 4th quarters when the macro conditions will really be felt. Apple will probably fill their product channel with all sort of irresistible (to folks with strong currencies, that is) goodies, and make up for weak lower markets. State and Muncipal budgets may be squeezed, and they may go for the cheaper computers, but the college market is likely to hold up well. Hoping that AAPL will hold in the $150-175 range for the next few months, until the macro-economic situation improves.

2008 Apr 08 01:49 PM

[hollowman:]

My first reaction when I hear about ratings is "just how good is this analyst?" Is there actually a place I can see a rating of how well this guy has performed in the past?

Some analysts are good, but many (Toni Sacconaghi comes to mind in this case) seem to prove the adage that an economists job is to make psychics look good.

2008 Apr 08 04:52 PM