Tuesday, April 08, 2008, 08:25 am PT (11:25 am ET)
Apple shares slip, regroup following Morgan Keegan downgradeShares of Apple Inc. briefly surrendered most of Monday's gains but then battled back in early afternoon trading after Morgan Keegan downgraded its rating on the company from Market Perform to Underperform, citing weakness in consumer technology spending both stateside and abroad.
Analyst Tavis McCourt said that although his firm is a long-term believer the Apple growth strategy, reductions in consumer spending across the United States and Europe are likely to dampen the company's Mac growth and share price as the year progresses, which should yield a "more attractive entry point" for long-term investors.
Specifically, McCourt zeroed in on Education, where he said state and local budget constraints suggest a slowdown in spending is likely this year, lasting for as long as two years if the previous recession is of any indication.
"During the last economic slowdown, Apple's conference calls were full of commentary around a weak spending environment in the education vertical due to state and local budget constraints," he wrote. " However, higher than expected sales in the education vertical was mentioned as part of the reason for Apple's strong performance last summer and, at the very least, we suspect growth in this vertical will not be as high as 2007, which has its biggest impact on the June and September quarters."
The analyst also highlighted a number of recent reports that suggest a rapid deterioration in technology spending on the part of consumers, such as poor handset sales from Sony Ericsson in Europe, weak handset trends at Sprint, and slower sales of home theaters, MP3 players, and televisions at Best Buy.
"In any event, we believe that growth is likely still robust in Apple's Mac business," he advised clients. "However, with demonstrable slowdowns in MP3 players, PNDs, wireless handsets, LCD TVs, and almost every other consumer technology category we can think of, we believe that PC and Mac growth will slow substantially from the levels exiting 2007."
McCourt also acknowledged Apple shares are disproportionately impacted by ongoing iPhone rumors, but noted that the handset is likely to account for less than 10 percent of the company's total sales for fiscal year 2008. However, he sees Apple emerging as "a significant niche player in the mobile handset space over the long term," and as such has factored the iPhone into his model as becoming a $10 billion+ annual business over the next five years.
"This is no small feat when one considers that [BlackBerry maker] Research In Motion only just surpassed $6 billion in revenues in its most recent fiscal year, despite experiencing substantial success in the consumer market and having much broader distribution than Apple," he noted. "In the near term, however, any weakness in the Mac and/or iPod lines would financially dwarf iPhone successes."
The Morgan Keegan analyst in his report Tuesday outlined three scenarios for Apple shares through fiscal 2008, with the "Realistic" scenario pegging the Cupertino-based company's share price at $133, based on 33 percent Mac growth, 10 percent iPod growth, and a gross margin of 34 percent.
"Our conclusion is that with any decrease in Mac unit growth or gross margins, [per-share earnings] at Apple is negatively impacted," he added. "Given the macroeconomic environment, we believe it is more likely that Mac growth trends slow down throughout the year rather than continue at a 40 percent-ish pace (although we believe March is fine)."
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