Wednesday, October 22, 2008, 12:00 pm

Wall Street analysts weigh in on Apple's fourth quarter results

By Slash Lane

Several prominent Wall Street analysts issued new research notes following Apple's fourth quarter earnings announcement Tuesday, offering commentary on the company's forward looking prospects, and in some cases making changes to their ratings and price targets.

AppleInsider is offering a roundup of the analysts' reactions while noting any changes to their recommendations. Apple said Tuesday that fourth-quarter profits rose more than 26 percent to $1.14 billion, or $1.26 per diluted share, on revenues of $7.9 billion, driven by sales of 2.61 million Macs, 11 million iPods, and nearly 6.9 million iPhones.

Piper Jaffray analyst Gene Munster
Rating: Buy (no change)
Price Target: $250 (no change)

Munster said: "During the Sept. quarter, iPhone sales of 6.9m were significantly ahead of the Street at 5.0m, iPod sales were in-line, and Mac sales of 2.6m were slightly below expectations of 2.8m ahead of new portables in Oct. While the product cycles make it difficult to determine, we believe that Apple is weathering the economic storm better than expected. With new Macs at lower entry prices ($999), new iPods, and strong iPhone growth, we believe Apple is positioned to exceed Dec. quarter guidance."

He added: "Bottom Line. We remain buyers of AAPL. Based on comments from the conference call, we think the economy has only had a minimal impact on Apple's business, and believe Apple will exceed guidance for the December quarter. 2009 remains a wild card, but should get a boost from a family of iPhones not yet reflected in Street models."

Barclays Capital analyst Ben Reitzes
Rating: Overweight (no change)
Price Target: $125 (reduced from $135)

Reitzes said: "All-in-all, we believe the 4Q08 report will provide much needed relief for shareholders at least short-term for 4 key reasons: 1) sentiment was the most negative we’ve ever seen for Apple shares into any report, 2) while Macs and iPods were light, iPhone exceeded expectations significantly, causing cash flow to surge, 3) we believe investors will view the weak December quarter EPS guidance as conservative given the 30-31% gross margin outlook is hard to get to given component price trends and a mix shift toward iPhones. We believe the significant guide down for the December quarter was already widely expected. We note that Steve Jobs’ presence on the call also likely soothed investors and showed how he is on top of day-to-day issues and personally looking after shareholder money."

He added: "Despite a solid quarter, we want to take this opportunity to lower our estimates for Apple given checks continue to point toward risks around weakening economy. Checks detect more conservative build plans and it is unclear how electronics sales will hold up this holiday season looking at several indicators. As a result, we are lowering our unit estimates across the board, but raising our cash flow figures modestly to reflect higher than expected iPhone ASP’s (was $525 now over $600) and a strong cash conversion cycle. Weighing these factors, we estimate fiscal 1Q EPS of $1.35 (was $1.60), now based on flat y/y revenue growth to $9.6 billion (was $10.3 billion) and gross margin of 31.5% (was 32.9%)."

UBS analyst Maynard J. Um
Rating: Neutral (downgraded from Buy)
Price Target: $115 (reduced from $125)

Um said: "We are downgrading Apple to Neutral from Buy and lowering our price target to $115 from $125. Our downgrade is primarily based on two reasons: 1) macro uncertainty and the impact to consumer spending and 2) sustainability concerns over a surprisingly high iPhone ASP and margin."

He added: "With limited visibility and a lack of visible catalysts near-term, we believe it prudent to step to the sidelines at this time. We note that there should be downside support given the company’s $27/shr in net cash (which investors will eventually want to see better returns on), but do not see any near-term upside in light of uncertainty. Although our adjusted pro forma EPS (what we previously referred to as “peer-adjusted” EPS) reflects 18.8% growth year over year, we believe the potential macro risk warrants a discount to growth."

RBC Capital analyst Mike Abramsky
Rating: Sector Perform (no change)
Price Target: $125 (reduced from $140)

Abramsky commented: "Despite valuation having corrected to 18x FTM P/E and strong fundamentals (compelling products, iPhone upside, PC Share gains), Apple's challenges and thus risks to valuation (disappointing guidance, lower visibility, declining GMs, possible decelerating Mac/iPod growth) have increased, and we see valuation remaining rangebound and volatile pending improving investor visibility to growth and margin trends."

He added: "Ahead of the crucial holiday season, Apple’s Q1 guidance, at $1.06-1.35 EPS and $9-10B revenue came well below typically conservative guidance (10% miss vs. 3% avg) and street ($1.67, $10.7B), on 30-31% GMs (vs. 33% street), affirming slowing momentum and margin risks amidst the uncertain environment. Management acknowledged reduced visibility and forecasting challenges; this is the first time Apple provided a revenue range in almost 2 years (last time was Q2/F07), suggesting unprecedented uncertainty of outlook."

Needham & Co. analyst Charlie Wolf
Rating: Strong Buy (no change)
Price Target: $240 (no change)

Wolf said: "And as usual, fourth quarter earnings guidance was downbeat, anticipating the recession. However, the astonishing news coming out of the release was non-GAAP earnings, which treats the iPhone on a sales rather than amortization basis. On this metric, Apple earned $2.69 in the quarter. We’re maintaining our strong buy rating and our price target of $240. We’re reducing our fiscal 2009 GAAP earnings estimate from $5.95 to $5.65."

He added: "The overriding risk in the Apple story is the economy. If the impending recession is deeper or more prolonged than we anticipate, Apple’s revenues and earnings could fail to meet out estimates."