Is CPQ like AAPL 2 yrs ago ?
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We've been bullish and bearish on Apple Computer (NYSE:AAPL - news) at different times this year. Fortunately for investors who listened to us -- we've been right in our previous two calls. In this latest update on Apple, we are bullish on the company.
First, a quick review of our analysis. In January we recommended investors avoid Apple at $43.38. Come April, the stock had dropped to $35.88. At that point we felt Apple stock was attractive and recommended purchase. Since our last update, the shares have gained 32%.
On Tuesday, Salomon Smith Barney analyst Richard Gardner raised his rating on Apple to 'buy' from 'neutral.' He also raised his estimates for this year and next year's numbers. The biggest catalyst for the upgrade is the appearance of Apple's iMacs at 800 Sears (NYSE:S - news) stores this past Memorial Day weekend. With that in mind, Gardner believes that Apple can now exceed his June quarter estimate of 450,000 units sold.
Apple getting its iMac into Sears stores is significant. According to Sears spokesperson Peggy Palter, most Sears shoppers tend to be first time buyers. 'The iMac is a great computer for the first time buyer,' said Palter. She noted that the iMac will be sold in all Sears stores that have computer sales, which is almost every Sears store. She also pointed out that Sears sells some IBMs, but they 'don't sell a large assortment.'
Apple also plans to launch a portable product, probably something similar to the PalmPilot by 3Com (NASDAQ:COMS - news) . Gardner is betting that Steve Jobs, interim CEO at Apple, might take the opportunity to unveil the new product at MacWorld Expo, in New York, on July 21.
Gardner could be right, as Apple's third quarter earnings are expected to be announced July 15. The consensus estimate for the third quarter, according to I/B/E/S, is $0.64 a share. Gardner anticipates $0.66 a share, up from his previous estimate of $0.63 a share. Gardner raised his fiscal 1999 estimates to $2.82 a share from $2.76 a share, and raised fiscal 2000 estimates to $3 a share, up from $2.90 a share. His new price target is $55. The stock closed Thursday at $47.44.
Apple, which beat estimates last quarter by a margin of 5%, trades for 16.8 times Gardner's 1999 estimate. Apple has over $2.9 billion in cash, or about 40% of its market cap. That money is being put to use by buying back stock, which could be up to 1 million shares per quarter, according to Gardner.
This Apple does seem shiny on the outside, and sweet on the inside, but investors should be aware of some bruises. One is that the company is not paying full taxes. Last quarter the company's tax rate was 12%, and there still is $154 million in deferred tax credits on the balance sheet. Also, 24% of the earnings before taxes (EBT) was from net interest. That figure could rise, as Apple announced last quarter that it would redeem its convertible debentures, saving around $11 million in interest expense. For example, without the interest expense, interest income would represent 38% of EBT.
But, one wild card that Jobs still has up his sleeve, is the Internet. Apple has yet to convert its website to have e-commerce capabilities, unlike most competitors who already sell their boxes on the net. Gardner believes that function will be up and running in the next 6-12 months, as the demographics for Mac users are perfect for the web. According to Gardner, 'one-third of all iMac buyers in the U.S. are first-time PC buyers.'
Bottom Line:
Gardner recommends investors start building positions in Apple now, before the MacWorld Expo. If there is any catalyst that is of significance here, it is the addition of the 800 Sears doors that Apple has entered with its iMac computer, which could lean toward another earnings surprise in a couple of weeks.
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