Citigroup lifts Apple with new product predictions

"We are upgrading shares of Apple this morning from Hold to Buy with a twelve-month price target of $82," wrote analyst Rich Gardner in a note to clients. The upgrade helped Apple shares gain nearly 5 percent in early morning trading.

Predicting a "slue of new products" will be introduction within the next six months, Gardner recommended clients begin to build positions in Apple shares.

"We expect a fairly eventful announcement around the date of the company's 30th anniversary on April 1," the analyst wrote. "Our checks suggest an Intel-based iBook and a refreshed iPod video with a larger screen and/or more storage capacity."

Gardner also believes the company could use its anniversary to announce that all Apple-branded software has been ported to run natively on Intel Macs, or roll out iTunes service enhancements.

In August, the analyst sees Apple wrapping up its Intel transition with new dual-core Power Macs based on Intel's Conroe desktop processor. The Power Mac announcement, which the analyst predicts will take place at company's annual World Wide Developers Conference, would also coincide with the first public demonstrations of Mac OS X 10.5 Leopard — the company's next generation operating system due by 2007.

Looking even further in the Cupertino, Calif.-based company's future, Gardner predicts a redesigned iPod nano in the third calendar quarter of the year. "In addition to a new exterior, the industry transition to higher flash densities in [the third calendar quarter] should allow Apple to reduce iPod nano prices by roughly $50," he wrote. "A price reduction at the 4GB capacity sweet spot could drive a meaningful uplift in demand for the product."

Meanwhile, Gardner is just the latest of several analysts providing coverage on Apple who believe the company has revolutionary cellphone design brewing in its labs. "Slightly farther in the future, we expect Apple to introduce a phone with integrated mp3, photo and video capability at Macworld San Francisco in January 2007," he wrote.

According to the analyst, this presumed product pipeline would suggest that most of the risk associated with the Intel transition and iPod transitions will be behind Apple in time for the back-to-school selling season. However, Gardner notes that product transition woes during the March quarter could prevent the company from delivering meaningful upside to consensus revenue and earnings-per-share (EPS) estimates for the first time in several years.

"While Apple introduced Intel-based versions of the iMac, MacBook Pro and Mac Mini in early January and late February, recent channel checks with Apple stores suggest that the most profitable of these products — the MacBook Pro — remains in short supply," the analyst wrote. "Almost none of the U.S. Apple stores that we called last week had the MacBook Pro in stock and most still have waiting lists of between 5-50 people for the 1.83GHz version of the product." As a result, he believes Apple may not receive much retail-based revenue from the professional notebook line until next quarter.

He notes that Apple's decision to introduce the MacBook Pro with a base price of $1,999 has created a very large, but temporary, gap in its notebook product line. "The gap between the high-end iBook at $1,299 and the low-end MacBook Pro at $1,999 leaves Apple without an appealing price point in the important $1,499-1,799 range," Gardner wrote. He cautions that Apple's aggressive marketing of the performance improvement yielded by the transition may prompt consumers to defer the iBook purchases during the current quarter, pending an introduction of Intel-based models next quarter.

"Finally, we believe Apple is in the process of reducing iPod Video channel inventories in anticipation of a product refresh during [the second calendar quarter]" the analyst wrote. "While we do not know the exact nature of the new product, we believe it may have a larger screen and/or more storage capacity. Since Apple recognizes revenue on sales into third party retail, this inventory reduction could negatively affect iPod Video revenue during [the first calendar quarter]."

For the aforementioned reasons, Gardner reduced his March quarter revenue and EPS estimates from $4.8B and $0.48 to $4.5B and $0.45. However, Citigroup believes the recent decline in the Apple shares from $85 to $63 has left them priced fairly in regards to near-term risk or lack of positives from recent product transitions.

Citigroup analyst Richard Gardner was one of only very few analysts to accurately predict an Intel-based PowerBook at this year's Macworld expo.