Pacific Crest’s Apple analyst, Andy Hargreaves, reiterated his September 2nd (Apple was at $103) and 9th (downgraded the shares from Out Perform to Sector Perform when Apple was at $98) positions that Apple shareholders should reduce their exposure to the shares. In early September Hargreaves had a $100 price target on the shares, which has decreased to $96. (Note that I own Apple shares).
Believes the upside in iPhone unit sales is baked into the stock
Hargreaves believes December quarter iPhone sales will exceed current sell-side estimates and that while Apple may sell 70 million iPhones in the quarter (6.6 million above his estimate) that the positive affect is already in the stock price. Hargreaves believes the demand is being pulled forward, is being driven by replacements, not stronger than expected new iPhone users and that iPhone unit growth will slow dramatically in 2015 due to market saturation.
By having such a strong 2015 he believes revenue and EPS growth will dramatically slow if not turn negative in fiscal 2016. He also believes that the financial impact from Apple’s Watch is already being taken into account and there is little potential upside to expectations of 20 to 30 million units in 2015 (probably calendar vs. fiscal). One area I would agree with Hargreaves is that Apple’s Watch is coming close to being fully valued in the shares, which could lead to disappointment if sales are soft. However, since Apple won’t be breaking out Watch units it could be a bit hard to get a handle on how well it does in the early quarters.
He has not changed his revenue or EPS estimates from early September
For fiscal 2015 Hargreaves is projecting Apple to generate $210.7 billion in revenue (exactly matching the average sell-side analyst estimate) and $7.89 in EPS (which is higher than the Street’s $7.73 but lower then the analysts who have been raising their target prices recently). For fiscal 2016 his revenue estimate is down 1% to $207.7 billion (significantly below the Street’s average of $223 billion) with essentially flat EPS of $7.92 (also much below the average of $8.52).
Hargreaves’ $96 fair value for Apple shares is based on 6.5 times Enterprise Value or EV (market cap minus cash and investments plus debt) divided by EBITDA or Earnings Before Interest Taxes Depreciation and Amortization with fully taxed international cash. He calculates that the shares currently trade at 9.0x EV/EBITDA and an 18x PE multiple. Due to the slower or in his estimate non-existent growth he believes the multiple should contract.
His bull case increases the multiple to 7.5x for a $115 target price and his bear case is 5.0x for an $80 target price.
Many other Apple analysts are raising target prices
Hargreaves is swimming against the tide compared to other Apple sell-side analysts who have been raising their target prices the past month as the iPhone 6 and 6 Plus have done well. These analysts have Buy or Outperform ratings and below is a list of who has raised their target prices, what the previous and new prices are and the date they published the higher target.
- Steve Milunovich at UBS from $115 to $125 on November 12
- Andrew Uerkwitz at Oppenheimer from $115 to $130 on November 18
- Walter Piecyk at BTIG from $128 to $135 on November 18
- Gene Munster at Piper Jaffray from $120 to $135 on November 19
- Katy Huberty at Morgan Stanley from $115 to $126 on November 20
- Chris Caso at Susquehanna from $120 to $135 on November 24
- Aaron Rakers at Stifel from $115 to $130 on November 25
- Bill Power at Baird from $112 to $129 on November 26
- Ben Reitzes at Barclay’s from $120 to $140 on December 1
- Andy Hargreaves at Pacific Crest has fair value of $96 on December 2
