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Thursday, December 07, 2006, 05:00 pm PT (08:00 pm ET)

Caris praises Apple but shares slide on iPhone rumors

Caris & Company on Thursday initiated coverage of Apple Computer with an "Above Average" rating and $100 price target, calling the company a clear "winner in the consumer electronics space."

Shares of the Cupertino, Calif.-based iPod maker reacted favorably to the news in early morning trading but were subsequently dragged down some 3.1 percent to close at $87.04 after an analyst at CIBC speculated that the company's iPhone device would launch later than some had anticipated.

In initiating coverage for Caris, analyst Shebly Seyrafi noted that Apple has two key catalysts for the 2007 fiscal year that are exciting investors and likely to help the company maintain its growth rate over the next few years — the iPhone and a widescreen iPod. However he also acknowledged some key short-term issues.

Based on a series of checks, the analyst said he does not expect Apple to meet bullish iPod shipment expectations of over 20 million units for the current holiday quarter and is instead modeling for around 16.5 million. He also told clients that he is modeling in front of the seasonally weak first calendar quarter, noting that the company's share price has appreciated by over 80 percent since July — or more than four times the approximate 20 percent increase in the NASDAQ.

Still, and in support of his Above Average rating, Seyrafi said Apple has "too many positives" going for it long term. Specifically, he pointed out the company's iPod unit share growth — projected at 41 percent for fiscal 2007 — and the potential for the iPhone initiative to account for 20 percent or more of the company's revenue within a few years if it can capture 4 percent of the worldwide cell phone market.

Other "positives" cited by Seyrafi include Apple's strong Mac sales and share gains as a result of the iPod "halo effect" as well as its extremely successful retail efforts.

Going forward, the analyst said Apple will need to meet some challenges in order to maintain its success. As some examples, he cited the need to work out acceptable arrangements with wireless carriers for the iPhones, continue its Mac growth in the face of a large Wintel install base and maintain its strong growth rate.

Seyrafi is modeling Apple to become a $38 billion dollar company in fiscal 2008, up nearly fivefold from the $8 billion in sales it generated during 2004.