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Prudential upgrade boosts Apple shares

Shares of Apple Inc. rose more than 2 percent in morning trading after analysts at Prudential Equity Group upgraded shares of the company, saying a number of new product catalysts, including an early operating system release, should help drive growth in the near term.

"Based upon recent checks, both Prudential Equity GroupSoftware analyst John McPeake and we believe that Adobe’s CS3 and Apple’s Leopard OS will be released simultaneously at the end of March, about 1-2 months ahead of Street expectations," analyst Jesse Tortora wrote in a note to clients. "We think this powerful one-two punch makes a great deal of sense, as it will likely unleash a flood of pent-up demand for both companies’ products."

Tortora's comments arrive on the heels of several online reports, including one from AppleInsider, which shed strong doubt on Apple's ability to wrap up a robust Leopard release within the next three weeks, given a recent developer release of the system update still laden with issues. The analyst did not cite his sources on a late-March release.

"Consistent with historical patterns, we expect the late March release of Leopard to provide a boost to software revenues for at least the next couple of quarters," he continued. "The last Mac OS (Tiger) was released in April 2005, about 18 months after the previous version release, and resulted in an increase in June quarter software revenue by ~45 percent quarter-over-quarter and ~65 percent year-over-year."

For Leopard, Tortora is modeling for a slightly higher sales boost of 57 percent quarterly and 75 percent yearly, primarily a result of the longer product cycle and larger Mac install based since the Tiger release.

In his note to clients, the Prudential analyst also cited swelling gross margin and impending consumer electronics product launches as near-term positives that should help drive profits and spur growth.

"We view the company’s long-term gross margin model of 28 percent -30 percent as conservative and see margin upside over the next several quarters due to component cost declines and a richer product mix from sales of Leopard, Mac Pro and MacBook Pro, and iPhone," he wrote. "We expect new product ramps including iPhone and a flash-based widescreen video iPod with new functionality (wi-fi, GPS) to drive growth in [the second half of 2007]."

Tortora said Apple's next generation video iPod will be launched later this year and include "flash instead of a hard drive, a wider touch screen similar to that of iPhone, wi-fi to enable the transfer of digital content from Apple TV, and GPS functionality." The new features, he said, will compel the company to introduce the player at at higher price points than its current video iPod ($249 for 30GB and $349 for 80GB), which he believes will help boost to revenue growth.

"Moreover, we see higher unit demand due to the substantial advantages flash memory brings including a thinner and lighter form-factor, longer battery life, and better durability," he continued. "We point to how the introduction of the flash-based iPod nano (replaced HDD based iPod Mini) boosted overall Apple iPod sales in late 2005 as the case study. Moreover, we believe the addition of GPS functionality could position the iPod as the central hub for all digital content (music, movies, GPS) in automobiles, creating yet another market opportunity for Apple."

Tortora upgraded shares of the Cupertino, Calif.-based Apple to Overweight from Neutral weight, with a new price target of $105 per share.