Citigroup bullish on Apple: still time to buy

In a research note, analysts Richard Gardner and Yeechang Lee said they continue to view Apple shares as a compelling Buy, even on this morning's strength.

Shares of Apple are up over 11 percent today following the company's third quarter earnings report, in which it posted a net quarterly profit of $472 million. The company also said that Mac sales rose 12 percent to 1.33 million units.

"We believe that Apple is well positioned to gain at least one point of global consumer PC share annually thanks to superior ease of use, superior reliability and virus resistance, superior product design and, last but not least, the ability to run Windows on Intel- based Macs," Gardner told clients.

And despite a down quarter for iPods, the analyst said he sees plenty of space in the global market for Apple to build its install base of the players.

"We believe the global available market for portable digital music players is approximately three times the size of Apple’s current installed base of 45-50M units, suggesting potential for several more years of solid growth," Gardner wrote. "We also believe that investors underestimate Apple’s ability to bring innovation capable of driving regular upgrades to iPod (much as investors have underestimated the upgrade cycle for mobile phones in recent years).

Gardner is also one of several analyst who doubt Mircrosoft's rumored digital media player strategy will have a noticeable impact on Apple's iPod business, telling clients it's unlikely that Microsoft could produce a device with a user experience that rivals the iPod.

Additionally, he said, various other iPod competitors are relying on Windows Media Player 11 in order to deliver significant improvements to their players, which won't be available until Microsoft Vista ships sometime in 2007.

Over the next year, Gardner expects Apple to enter several new product and service categories, including portable media players, on-line movie downloads and 3G mobile phones that sport integrated music and photo capabilities.

"We do not believe that these new products are currently reflected in our estimates or consensus," he wrote. "We also expect a steady stream of compelling enhancements and/or price cuts to existing products in coming months beginning at the company’s Worldwide Software Developers’ Conference on August 7."

In revising estimates for Apple's current (fourth) fiscal quarter, the analyst reduced his revenue estimate from $5.1B to $4.6B to reflect a reduction in assumed iPod shipments from 10.5M to 9.0M. "This change reflects our view that the redesigned iPod nano may not ship until mid-September," he said. For the same reasons, he also reduced his earnings-per-share (EPS) estimate from 59 cents to 54 cents.

Gardner also tweaked his 2007 and 2008 fiscal year models. In 2007, he expects Apple to generate revenue of $22.2B and EPS of $2.77 on sales of 49.5M iPods and 5.75M Macs. The following year, he sees the company generating $24.4B and EPS of $3.16 on sales of 57.5M iPods and 6.5M Macs.

Citigroup maintains a Buy rating on Apple shares with a price target of $80.