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Wednesday, February 21, 2007, 08:00 am PT (11:00 am ET)

Apple shares move higher as Prudential lifts earnings outlook

Shares of Mac maker Apple Inc. rose over 3 percent in morning trading on the Nasdaq stock market following a report from Prudential, which offered a rosy outlook on the company's March fiscal quarter.

"Our recent checks with industry contacts suggest a solid March quarter with seasonal iPod unit weakness being more than offset by stronger Mac sales and higher margins due to a favorable component cost environment," analyst Jesse Tortora told his clients.

The analyst, who just returned from a meeting with members of Apple's leadership, said he's seeing "a big drop" in sales of the company's video iPod and iPod post holidays, but that those weaker sales have been partially offset by stronger sales of the new color iPod shuffles.

Tortora's bullish outlook for Apple was similarly fortified by flowing Mac sales, which are reportedly tracking ahead of company expectations despite the recent introduction of rival Microsoft's Windows Vista operating system.

"We believe Macs would even be stronger in the quarter, but sales of Mac Pro and MacBook Pro are weaker due to a pause ahead of Adobe’s Creative Suite 3 release, expected in the June quarter," he wrote.

For the three-month period ending March, Tortora reduced his iPod estimate to 9.9 million units from 10.4 million, but bumped his Mac estimate to 1.6 million units from 1.45 million.

"Fundamentals at Apple appear sound," the analyst wrote. "We believe that margins will continue to benefit from a favorable component cost environment; Mac share gains will continue; and that the iPod weakness is explained by normal consumer seasonality."

Although Tortora maintained his his 'Neutral Weight' rating on the company, he increased his March quarter per-share earnings estimates by $0.04 to $0.68, or about $0.07 ahead of Street consensus to reflect stronger Mac sales and higher gross margins. Apple has been guiding earnings for the quarter of about $0.54 to $0.56 per share.

Shares of the Cupertino-based company were trading up $2.80, or 3.26 percent, just before noon eastern time.