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Wednesday, September 13, 2006, 02:30 pm PT (05:30 pm ET)

Merrill Lynch ups Apple target to $88

Based on rising estimates and a view that existing and forthcoming products are likely to create earnings power in excess of $4, Merrill Lynch has increased its price target on shares of Apple Computer from $72 to $88.

"We think the improvements to the iPod line, though incremental, are enough to keep Apple's devices ahead of competitors in feature-adjusted price/performance in the intermediate term," analyst Rich Farmer wrote in a brief research note Wednesday morning.

"Apple did not announce a full-screen touchless interface iPod, nor WiFi support for iPods, which may be disappointing to some investors with more aggressive expectations, though we expect these innovations to emerge in coming quarters."

Although there was no iPhone announcement made during Apple's special media event on Tuesday, Farmer said he continues to expect that such a product will be introduced prior to the second half of 2007.

"If Apple were to achieve mobile phone share equal to its PC share, it could eventually add more than $0.90 to the run-rate of consensus estimates of approximately $3.09 in [fiscal year] 2008," he wrote. "In the long run we see fewer structural constraints on share gains in mobile devices (including phones) than exist for Apple versus Windows in the PC market."

Farmer also thinks that Mac share gain assumptions are currently conservative. For the aforementioned reasons, the analyst raised his fiscal year 2008 earnings-per-share estimate from $3.17 to $3.54 to reflect one point of share in mobile phones, net of iPod cannibalization.

Merrill Lynch maintains a "Buy" rating on Apple shares.