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Monday, April 25, 2005, 10:00 am PT (01:00 pm ET)

CSFB upgrades Apple, says company now catering to 100% of PC market

Credit Suisse First Boston this morning upgraded Apple from "neutral" to "outperform" on the belief that the company's next major boost will come from its success in the PC market, having just completed its second consecutive quarter of share gain.

In a report released to clients today, the research and investment firm said it expects the iPod to continue to deliver strong growth, but its position as the leader in both flash and drive-based digital music players will eventually be limited by the growth of the music player market.

However, analyst Robert Semple noted that in the PC market Apple’s 2% share has significant upside opportunity regardless of market growth. "Until the Jan 11th release of Mac mini, we estimate Apple only addressed 22% of the desktop PC market excluding its niche-focused eMac," the analyst said. "Today, Apple’s portfolio reaches almost 100% of the market."

While the iPod has enjoyed 486% growth over the past twelve months, generating gross margin of approximately 20%, Semple believes Apple's iTunes and iPod accessories businesses, despite generating lower revenue figures than the iPod hardware, will also help to drive Apple's future profits. He believes this dynamic will offset lower gross margins associated with Apple's shift to consumer products including iMac, Mac mini, and iPod.

Semple also expects Mac OS X 10.4 Tiger will be Apple's most popular OS X iteration to date. "Apple has broken records with each of its two previous updates (Jaguar and Panther), with Panther recording revenue of $60+ million in its first quarter, which we expect Tiger to easily surpass," the analyst wrote in his report.

CSFB upgraded Apple to "Outperform" and raised its price target from $40 to $45. The firm also raised its fiscal year (FY) '05 and FY06 earnings-per-share (EPS) estimates to $1.36 and $1.61, respectively, from $1.32 and $1.52.

"Apple is currently trading at 22x our FY06 EPS estimate, its lowest multiple on forward earnings estimates since its earnings miss in June 2002," the firm said. "Alternatively, after eliminating net cash per share of $8.23, Apple is trading at 19x our FY06 NOPAT estimate of $1.47 with a 6.2% free cash flow yield." The firms new $45 target assumes a 25x multiple on its FY06 net operating profit after tax estimate.

"Dare we say it...Apple is cheap," Semple said.