Apple’s stock was up over $6 to $115 on Wednesday. It was a nice move but it would not surprise me to see the shares work their higher over the next month or two as analysts and portfolio managers update their models and compare owning Apple’s shares vs. other companies, especially other large tech companies. (Note that I own Apple shares).
Many investment firms investment process is to decide to overweight, equal-weight or underweight a sector and then make determinations on which stocks to own. Given Apple’s financial outperformance, increasing estimates and very reasonable valuation I expect many firms to increase their holdings of the shares.
The bulk of Apple’s sell-side analysts are positive on the shares. I have compiled nine of them with some of their revenue and EPS estimates, how they calculate their price targets and some of their overall views. It is interesting to compare them to analysts who are bearish on the stock, which is available via this link.
Baird’s Power has an Outperform rating and increased his target from $129 to $134
Baird’s Bill Power increased his fiscal 2015 revenue estimate from $211.6 to $221.3 billion and his EPS from $7.60 to $8.28. His fiscal 2016 EPS estimate is $8.70. Power’s $134 price target is based on 13x his calendar 2015 EPS estimate ($8.44) plus current net cash per share of $24.07.
I believe it is aggressive to use all the net cash per share since the international cash would have about a 30% tax haircut and I assume Apple needs to keep $10 billion to run the business. This drops the cash that could be used for share buybacks to $14.50 per share so I’d drop Power’s price target to $124 (but I could see a PE multiple that is 1 to 2 multiples higher than his 13x estimate and make up for this adjustment).
Baird expects “several updates in April, including the Watch launch, March quarter earnings and the capital return update, to support shares during the seasonally weaker spring period.” He is projecting that Apple could sell 16.9 million Watches in calendar 2015.
Barclay’s Reitzes has an Overweight rating and raised his target from $140 to $150
Barclay’s Ben Reitzes raised his fiscal 2015 revenue estimate from $215 to $225 billion and EPS from $7.76 to $8.56. He is projecting fiscal 2016 revenue of $236 billion and EPS of $9.37. Reitzes is using a 16x PE multiple on fiscal 2016 EPS of $9.37 to arrive at his target of $150.
Reitzes wrote “While respecting seasonality, we believe that iPhone momentum could continue into other new product launches like the Apple Watch which is slated to come in April, during a typical “quiet” quarter. We are impressed by the gross margin performance into 2015, given a volatile currency environment.”
He added “Looking forward we see the Apple Watch as a potential catalyst into the 2015 year-end holidays with prospects for increased cash returns a more immediate catalyst in April. With currency and mature categories hurting so much of the large cap tech peer group, we believe Apple should be rewarded with at least a market multiple or higher.”
Bernstein’s Sacconaghi has an Outperform rating and raised his target from $122 to $135
Bernstein’s Toni Sacconaghi increased his fiscal 2015 revenue estimate from $203.5 to $221.8 billion and his EPS estimate from $7.53 to $8.58 which included estimates for Apple’s Watch for the first time (7.5 million units generating $3.3 billion in revenue in fiscal 2015). His $135 price target is 15.7x his fiscal 2015 EPS estimate of $8.58 and is 14.6x his fiscal 2016 $9.26 EPS estimate.
Sacconaghi is one of the best analysts on Apple and his companies. I believe he has a very accurate and balanced view on the stock. He says that in the near-term estimates are likely to meaningfully increase which enhances the shares already attractive valuation, that March quarter guidance looks to have limited risk, excitement about the Watch is likely to increase (my comment: Apple may be the best on how to build excitement on a new product) and increased buybacks could ratchet up EPS growth by 300 to 400 basis points per year.
However he believes Apple’s shares are a tougher call in the long-term. Sacconaghi is cognizant of the bear case that the high-end smartphone market is fairly mature with little to no growth, replacement cycles are likely to elongate and that the company’s size limits its ability to deliver operating profit growth. These are partially offset by strong iPhone results in emerging markets and those potential customers should move into higher income brackets over time.
Cowen’s Arcuri has an Outperform rating and raised his target from $113 to $115
Cowen’s Timothy Arcuri increased his fiscal 2015 revenue estimate from $221 billion to $229.5 billion and increased his EPS estimate from $8.31 to $8.84. Note that with an Outperform rating his fiscal 2016 revenue is up less than 1% year over year and his EPS projection actually decreases to $8.81.
Since the shares are at $115 at some point, sooner rather than later, he will have to increase his price target (but he had his chance yesterday) or lower his rating. His $115 price target is based on an average of his calendar 2015 and 2016 EPS estimates of $8.61 and $8.81, respectively, with a 10x PE multiple after subtracting net cash. Similar to Baird’s Bill Power I believe Arcuri is being too aggressive with using all of Apple’s net cash in his valuation analysis but that is overcome by increasing his PE multiple assumption to 12x.
Arcuri wrote “At the end of the day, we do see potential for a longer 6/6+ tail than prior product cycles and a new 4" 6S ("6C"?) should "refresh" the low-end of the product line as well. From here, capital return is the next catalyst and we are optimistic about the Watch, but more so the 2.0 version this fall. Apple Pay is a great new piece of the narrative, but it will probably take another 12-24mos for the use case to start impacting hardware sales.”
Below is a chart of Apple’s forward PE multiple over the past five years. While the current multiple is slightly above the 5 year average given the December quarter results and outlook it deserves to be above the average.
Source: Capital IQ, Cowen and Company
Goldman Sachs’ Shope has a Buy rating and a $130 target
Goldman Sachs’ Bill Shope increased his fiscal 2015 revenue estimate from $208.6 to $223.8 billion and his EPS from $7.85 to $8.52. His $130 price target is based on a 15x PE multiple on his calendar 2015 EPS projection of $8.64.
Regarding the bear case on Apple Shope wrote “A key bear argument for Apple’s stock in recent years has been that its product momentum would not easily translate to emerging regions due to its premium price points, aggressive local competitors, and limited iOS ecosystem value in foreign markets. These debates won’t go away, but this quarter’s performance certainly put a dent in the bear case. For instance, consider the following data from the quarter: 1) iPhone sales doubled versus the prior year in China, despite only being available since mid-October, 2) unit sales were up 97% in the BRIC countries, and 3) online sales in China for the quarter were greater than the past five years combined.”
He added “All of this occurred in a quarter where the average selling price for the iPhone reached a new record. Overall, we think the arguments that Apple will need to lower its prices dramatically to effectively compete in emerging markets misses the fact that phablets represent the highest growing category in these countries. Indeed, Apple’s iPhone 6 plus has put the company in a leadership position here.”
Morgan Stanley’s Huberty has an Overweight rating and increased her target from $126 to $133
Morgan Stanley’s Katy Huberty projects fiscal 2015 revenue of $222.3 billion and increased her EPS estimate from $7.89 to $8.58. Her $135 target is 15x her calendar 2015 EPS projection of $8.86.
Huberty wrote “We point to the following as evidence that the December quarter fundamentals will continue into 2015, pushing the stock higher. 1) iPhone and Mac channel inventory fell Q/Q and ended the quarter below target levels, leaving room for channel build during 2015. We estimate 4 weeks of iPhone channel inventory at the end of December versus a target of 5-7 weeks. 2) March quarter revenue guidance beat our model despite incremental FX headwind and no Watch contribution (we previously modeled 3 million units). 3) Apple's Other Current Assets line, which includes Inventory Component Prepayments increased at above seasonal rates for the second quarter in a row and supports management's bullish forward looking comments. 4) Management noted low-teens upgrade rate of the current iPhone installed base, which is consistent with data from our December AlphaWise US smartphone survey, and points to the current upgrade cycle to larger screen iPhones lasting through 2016.”
Oppenheimer’s Uerkwitz has an Outperform rating and a $130 target
Oppenheimer’s Andrew Uerkwitz increased his fiscal 2015 revenue from $226.7 to $230.9 billion and his EPS from $8.13 to $8.67. His $130 price target is a 15x multiple on his 2015 EPS estimate.
Uerkwitz wrote “Judging from results and management comments, we believe that our thesis on Apple is playing out, that Apple’s ecosystem will drive share gain over OEMs focusing on specs. We see record level new customers, Android switchers and growth in China as strong support for our thesis. We expect Apple to keep beating expectations in coming quarters as new products and services grow in 2015 to strengthen its ecosystem.”
Piper Jaffray’s Munster has an Overweight rating and a $135 target
Piper Jaffray’s Gene Munster increased his fiscal 2015 revenue from $211.2 to 220.9 billion and EPS from $7.52 to $8.23. His $135 target is 16x his calendar 2015 EPS estimate of $8.42.
Munster wrote “Looking into the iPhone 6S cycle (fiscal year 2016), we are modeling for iPhone units to be down 2% year over year, which leads to increased investor focus on the tough comps. We believe what gets lost in that focus is the longer term importance of a 74.5 million unit iPhone quarter. We expect over the next few months a second group of investors will emerge that believes in the power of the platform that Apple is building and creating an annuity (90% plus iPhone re-buy rates) with customers that upgrade multiple devices over many years. Looking longer-term into the iPhone 7, which is likely to be a bigger product cycle than the 6S, we could see a case for even higher numbers for Apple.”
Munster is projecting Apple will sell 8 million Watches in calendar 2015 with an average selling price (ASP) of $500.
UBS’ Milunovich has a Buy rating and raised his target price from $125 to $130
UBS’ Steve Milunovich increased his fiscal 2015 revenue from $224.5 to $230.1 billion and his EPS from $8.46 to $9.00. His $130 price target is a 15x PE multiple on his $9 in EPS or 12x when you exclude $25 in net cash per share (which is too high of a net cash number to subtract in my opinion).
Milunovich wrote “The iPhone 6 upgrade cycle is turning out to be even greater than expected. A low-teens portion of the installed base is upgrading and Android switchers are at a high. The gross margin is being buoyed by improved costs and the iPhone 6 Plus, which we estimate at 30% of units. The phone cycle should carry the stock through the Mar/June quarters with the Apple Watch then kicking in. We do worry about phone comparisons late this year but think it premature at this time and price to prevent investors from owning the stock. While Apple primarily monetizes through hardware, its ecosystem and brand value make a sudden fall from grace unlikely.”
