Friday, January 27, 2012

ITZ Raises Price Target On Apple

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    Apple Inc. shattered expectations for fiscal 1Q12, as revenue topped the consensus estimate by $10 billion and net income exceeded $13 billion - in just 90 days. Gross margins, which a year ago were in the high 30s, came in above 44%, unheard of for a hardware company catering to consumers. Apple ended the quarter, its first full reporting period post-Steve Jobs, with about $98 billion in cash. 

The unbelieveable thing about AAPL stock is that it is not particularly expensive, even though the share price has more than doubled in recent years; that is because earnings and cash flow are growing so much faster. ITZ believes that AAPL shares are trading at reasonable multiples on estimates that now better capture Apple's earnings power.

The shares trade at 9.9xs ITZ FY12 forecast and at 9.3xs ITZ FY13 projection, compared to an average P/E of 19.6 over the past five years (FY07-FY11). This is actually a discount to the peer group as well as the broad market. ITZ believes a much higher peer-group premium is justified given Apple's ability to generate healthy demand for its products even in a feeble economy.

The fundamental valuation model points to a price above $700.

Appreciation to ITZ's target of $625 (raised from $555) LINK implies a risk-adjusted return of more than 40% from current levels.


Apple carries no debt.
Cash & short- and long-term investments totaled $98 billion at the end of 1Q12, up from $81 billion at the end of fiscal 2011, $65.8 billion at the end of 2Q11, $51 billion at the end of fiscal 2010, and $33.9 billion at the end of 2009.

Cash flow from operations was $17.5 billion for 1Q12, compared with $9.8 billlion a year earlier. Cash flow from operations was $37.5 billion in FY11, compared with $18.6 billion in FY10 and $10.2 billion in FY09.

For the first quarter of the September 2012 fiscal year, Apple recorded revenue of $46.3 billion, up 73% year-over-year and 64% sequentially. Gross margin expanded sequentially to 44.7% in 1Q12 from 40.3% in 4Q11 and was well above the 38.5% recorded a year earlier. Operating income exploded to $17.34 billion in 1Q12, up from $8.7 billion in fiscal 4Q11 and $7.83 billion a year earlier. 

Net income was $13.06 billion in 1Q12, for a 28.2% net margin. That compares with net income of $6.6 billion in 4Q11 and $6.0 billion a year earlier. GAAP earnings totaled $13.87 per diluted share in fiscal 1Q12, compared with $7.05 per diluted share in 4Q11 and $6.43 in 1Q11.

Management is projecting revenue of $32.5 billion in the post-holiday quarter, as well as earnings of $8.50 per diluted share.
Applying the 1.15 multiplier to revenue (without even considering market fundamentals), suggests revenue about $5 billion higher than management's current guidance, i.e., in the $38 billion range. ITZ expects the consensus to coalesce around this number, triggering an EPS consensus between $10 and $11 for fiscal 2Q12.
Given the huge start to the fiscal year, and even without making significant changes to the quarterly outlooks for 2Q through 4Q.

ITZ is raising FY12 forecast to $45 per diluted share with a 14 pe and a price objective of $625. ITZ is also raising the forecast for FY13 to $48. ITZ long-term EPS growth rate forecast for AAPL is 15%.

Tara Hedlund, Turner Investments, weighs in on the Apple phenomenon.

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