UBS Wealth Management maintains cautious outlook on Apple shares

Operating independent of their investment banking counterparts, wealth management experts for UBS maintained a 'Hold' rating on shares of Apple Inc. this week, explaining that share pricing trends remain strong but present a less compelling opportunity from a risk reward standpoint.

"We have missed the rally in Apple shares but cannot justify a long position at current levels," lead analyst Tony Andersson wrote in a corporate update issued to clients on Tuesday. However, the analyst added that he sees no fundamental reason to short shares of the electronics maker despite their rich valuations and an unfavorable risk reward.

Andersson expects that Apple's strong share price momentum will continue for the foreseeable future but advised clients that his "fair value" for the stock currently falls within the $111 to $145 range.

"We are increasing our iPhone sales figures to 15 million units in calendar 2008. These iPhone sales carry higher gross margins, leading us to also increase our 2008 [estimated per-share earnings] to $4.50 from $4.06," he explained. "However, rich valuations coupled with an uninspiring technical picture makes us cautious on the shares and hence we reiterate our Hold rating."

Given the "huge number of articles written and more than 100 million hits on the web," the UBS analyst said it's unlikely many people have missed the launch of Apple's new handset, the iPhone. The free marketing, he added, has massively helped kick-start the launch and he expects the Cupertino-based company to significantly beat its 10 million phone target by calendar 2008.

"We also think Apple could launch a smaller form-factor phone in early 2008 but note that the cannibalization rates of the iPods would mitigate some of that potential upside," he wrote. "All the nice-to-have features aside, its hefty price tag and mandatory data plan are likely to keep the iPhone from reaching mass markets."

In general, UBS Wealth Management Research is recommending 'a marketweight stance' on the overall U.S. Technology Hardware sector to its clients.

"New product life cycles and redeployment of excess cash could lead to positive EPS surprises for the sector in 2007," wrote Andersson. "We view two new operating system launches as incrementally positive for PC manufacturers."