Showtime event 'just the start' of Apple CE push

In a series of recent research notes, a trio of analysts lead by David Bailey said they foresee additional upside opportunities on top of their already-above-consensus earnings estimates for the Cupertino, Calif.-based iPod maker.

Amongst Apple's three-pronged strategy — Mac, iPod, and new consumer electronics areas— Bailey said the Mac side is the most under-appreciated, as the company's aggressive pricing on Intel-based offerings would accelerate an upgrade cycle within its installed base and attract new users at a faster pace.

In the more immediate future, the analyst said Apple's upcoming "Showtime" event should recharge the iPod before the crucial holiday shopping season.

"After an 11-month hiatus when almost all of Apple's announcements centered around new Intel-based Macs, we expect Apple to begin to revamp its iPod line-up at its September 12 special event with new higher-capacity flash-based models (replacing the nano and shuffle) and potentially a refresh of the video iPod as well," he wrote.

"In light of potential shortages of Sony's PlayStation 3 and an unproven Zune music/video player from Microsoft, the new iPods should bring current owners back into the market and attract new customers, making iPod once again one of the top gifts this holiday season."

Bailey said Apple's expected iTunes movie service should create a new near-term driver for iPod demand but also raises longer-term possibilities of the company tying its offerings more tightly with home theaters. "The adoption of Apple's movie downloads in the living room is probably gated by the size of the downloads, particularly if Apple begins to offer movies with a higher resolution than what it offers with its TV show downloads today," he wrote.

Still, the analyst believes the most anticipated new product from Apple is a cell phone which he expects to be introduced in the June quarter of next year "although recent checks with the Asia supply chain suggest that Apple is trying to pull the launch into the first quarter."

"Carrying less buzz than iPhone but potentially adding another revenue stream to complement iPods and Macs is Apple's introduction of a digital hub," Bailey said. "The company has created a platform for a digital hub with its Front Row software but would need to add a device to connect iTunes to home theaters to further penetrate this segment."

Similar to Apple's June quarter, the analyst expects strong consumer and education notebook sales to drive above-market unit and revenue growth in the September quarter, at least offsetting any shortfall in iPods on the top line and driving gross margin above the company's 28.4 percent target. More importantly, he said, the company's new iMacs, which start at $999 compared to $1299 in the past, show early evidence that it is willing to price more aggressively to drive incremental share gains. "We think this not-yet-fully-appreciated story is still to come," he added.

Bailey, who recently placed Apple on Goldman's "Americas Conviction Buy List," rates shares of the company a "Buy" with a price target of $85.

"Our new earnings-per-share forecast of $2.26 and $2.78 for calendar 2006 and 2007, respectively (compared to $2.21 and $2.60 previously), higher expected growth, and the corresponding positive impact on cash flow yield underpin our $85 price target versus our prior price target of $77," he wrote.