Apple (AAPL): Buy Apple for Summer Rally – Morgan Stanley

By Jun 27, 2011, 7:34 AM Author's Blog  

Morgan Stanley is making positive Research Tactical Idea call on Apple (NASDAQ:AAPL) this morning calling for a summer rally in the name.

- Deutsche analyst Chris Whitmore is also very positive this morning raising his #’s on AAPL.

Recent dip a buying opportunity. After meetings in Taiwan last week, they expect Apple order cuts to ease and iPhone / iPad production to begin ramping aggressively from August through year-end. Firm views the recent valuation pullback as a buying opportunity in light of the following factors, and issued a Research Tactical Idea on AAPL along with this note.

1) Post-Japan earthquake production constraints have eased, putting upward pressure on iPad shipments.

2) With improved component supply, Apple is negotiating price cuts with some suppliers, potentially boosting margins modestly in the June quarter and more in September.

3) Apple’s next iPhone will begin production in mid to late August and ramp aggressively into C4Q.

Shifting iPhone units into C4Q; CY11 estimates unchanged: To reflect a late C3Q iPhone launch, the firm shifts 2 million units from the September quarter to the December quarter but their full year estimate of 72 million units remain unchanged. An early September iPhone launch would drive upside to their lowered September quarter estimates, in their view.

Lower priced iPhones and TV are additional mid-term catalysts: Apple is forecasting a large iPhone unit increase in CY12 on the back of new products and potentially lower price points. Morgan Stanley also believes Apple is in the early design stages for a TV, which could add $19 billion and $4.50 of annual revenue and EPS longer-term.

- Deutsche Bank is also out positive on Apple this morning saying they expect the co to refresh the iPhone in September with two SKUs; namely the iPhone 5 and a lower-end iPhone 4S handset. With Nokia and RIMM struggling, the time is right for Apple to aggressively penetrate the mid range smart-phone market (i.e. $300-500 category) to dramatically expand its addressable TAM and market share.

Deutsche believes Apple could offer an unlocked iPhone 4S with a prepaid voice offering (parallels the 3G data plan vs. WiFi for iPad) which would drive significantly greater penetration into its 1.5B+ subscriber reach (2/3 are pre-paid) through 200+ carriers in 98 countries. They estimate an iPhone 4S model priced at $349 would likely be incremental to Apple’s corporate gross margin suggesting it can push down-market without negatively impacting profitability. The firm also believes near term iPhone 4 demand is tracking ahead of their previous expectation due to: the addition of 20+ new carriers in the Q, strong white iPhone uptake and wider global distribution.

Deutsche believes Apple’s international channel and related penetration opportunities are under appreciated and are raising iPhone and EPS estimates (DB at 74M iPhones in CY11 and 90M in CY12 vs. prior 71M and 85M, respectively). Although they expect Apple to move more aggressively into the midrange smartphone market, it is not currently captured in these estimates. Looking forward, they expect the upcoming iPhone / iOS upgrade and channel/carrier expansion to support strong iPhone demand over multiple quarters. Firm reiterates their Buy rating and $450 PT.

Notablecalls: It is certainly interesting to see two tier-1 firms out quite positive on Apple after a period of cautious-sounding data points. Needless to say, both are known bulls in the name.

Morgan Stanley has given their analyst teams a way to make shorter-term calls, called Research Tactical Ideas (RTI). For example, in AAPL’s case they are calling for the stock to trade up in the next 60 days, giving this view a 70-80% or very likely probability of happening. That’s a fairly bold statement & should generate some interest.

Also notice how the analyst is embracing the possibility of an Apple TV.

There are two interesting bits of info in the Deutsche call:

1) DBAB is calling for both unlocked iPhone 4S & a brand new iPhone 5. Lately, the consensus has shifted towards the view that there will be no lower-end iPhone. So there could be some upside there.

2) The firm is raising their iPhone ests for 2011 to 74M, which is actually above Morgan Stanley. I’m sure many of you know Morgan Stanley has been THE iPhone bull.

I think there could be some n-t upside in AAPL. RTI’s usually generate immediate buy interest, so barring a market crash, the stock could be on the way up today.

I’m thinking $332+

Feedback appreciated.

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