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Monday, December 17, 2007, 07:00 am PT (10:00 am ET)

UBS ups Apple estimates on new product expectations

Analysts for investment bank UBS on Monday raised their estimates and price target on Apple Inc., citing better than expected sales of Macs this holiday season and upcoming product introductions that could include an ultra-portable notebook and pay-per-view movie service.

"Given general concerns about the economy, we are frankly surprised by the ongoing strength of the Mac franchise right now and the prospects (or 'builds') for new products we are hearing about for next year," analyst Ben Reitzes wrote in a research note. "With regard to the near-term, checks show very solid holiday demand, particularly with Macs, outpacing our prior expectations."

Reitzes, who along with his team recently surveyed over 30 Apple retail stores, said the "Mac phenomenon" should have a positive impact not only on the Cupertino-based company's systems hardware revenue, but also peripherals, software and overall company gross margins.

In the near term, the analyst anticipates that Apple chief executive Steve Jobs will use his January 15th keynote at the Macworld Expo in San Francisco to take the wraps off several new products and technologies which could include a "new iPhone model, an ultra portable PC platform, and even possibly a pay-per-view movie service" among other things.

"We first outlined the possibility of ultraportable devices from Apple in June 2006," he told clients. "However, it is important to note that we think these compelling ultra-portable Macs don’t seem to be adequately reflected in analyst models at this time."

As a result, Reitzes believes this new product category could make his estimates conservative over the long-term and help offset any potential slowdown in the iPod market due to market maturation and potential saturation of the digital media players in the US.

"Regarding features in the ultra-portable, we believe Apple would be looking at integrating the 'touch' capability from its iPhone into the ultra-portable device with Leopard obviously as the OS," the analyst wrote. "We believe Apple would only enter this market if its devices could be priced in the $1,500 range."

Meanwhile, Reitzes also speculates that the company's iPhone announcements next year could see a lower priced iPhone 'for the masses' make its debut alongside updated or 3G flagship models.

"Our checks continue to indicate solid demand in the US following the $200 price cut with significant interest into the holidays," he wrote. "Should Apple introduce another lower-priced iPhone in the $200-$250 range, we believe we could see another significant pop in unit sales not unlike what happened to the iPod when the mini was announced in 2004."

If Apple indeed takes this path, the analyst believes iPhone sales could actually be somewhat similar to the initial iPod pattern in terms of the first product only being one of many with demand stimulated later with follow-on releases at lower prices and with compelling designs.

"Perhaps at Macworld or shortly thereafter, we expect Apple to announce a lower-cost (or 'nano-like' option) along with a 3G option potentially coming later in 2008," he wrote.

Finally, Reitzes advised clients that his current iTunes estimates may prove conservative given the possibility that Apple could introduce a new "pay per view" movie service and additional content partners. His checks indicate that such a service using the company's digital rights management software — with rental fees of around $2.99 to $3.99 — is possible and could also work in helping entice additional movie content providers to join iTunes.

"In terms of new products, we believe Apple is working on improvements for Apple TV, perhaps adapting the concept a bit with the focus on advanced and increased networked storage for the home — accessible by your Mac or PC or TV," the analyst added. "We also believe it is possible at some point for Apple to enter the HDTV flatscreen business, with built- in Apple TV’s and hard drives — but that may be a 2009 or 2010 event."

For the current December quarter — Apple's fiscal first of 2008 — Reitzes now expects the company to earn $1.56 per share on sales growth of 32.5 percent to $9.42 billion, still factoring in iPod unit growth of 17 percent year-over-year and 2.1 million iPhones, but now including increased Mac unit growth of 40 percent yearly to 2.24 million units.

The analyst also raised his 12-month price target on Apple to $235 per share, up from $220.