Reset estimates leave Apple room to surprise - analyst

"One of our key concerns on Apple in 2006 was that we believed published consensus estimates were too aggressive (particularly revenue) and no where near Apple's guidance, but more importantly, didn't make any logical (financial or business) sense," analyst Shaw Wu wrote in a note to clients Wednesday morning. "Fortunately for longs, most investors agreed with this assessment and discounted the nonsense and gave Apple a 'freepass.'"

Looking ahead to the next 6-12 months, Wu said consensus estimates appear more reasonable, and will likely prove conservative. "We believe estimates have finally been reset, leaving Apple room to surprise on the upside," he wrote.

In addition, the analyst is expecting strong product momentum in 2007 to be driven by the release of Mac OS X Leopard with tighter Windows integration that will help accelerate Mac sales, iTV ushering a new product category, new movie content partners, new iPod features including widescreens and Bluetooth, and cell phones.

As a result, Wu said he is introducing estimates for Apple's 2008 fiscal year of $3.50 earnings per share on $28.1 billion in revenue, compared to consensus estimates of $3.28 and $27.8 billion.

"We are assuming Mac growth of 23 percent to 8.8 million units, iPod growth of 9 percent to 47.3 million units, and cell phone contribution of $326 million, up from $100 million in [fiscal 2007]," he wrote.

In his note to clients, the analyst also said he remains comfortable with his estimates for Apple's recently concluded fiscal first quarter of 2007. He's modeling for earnings of $0.79 per share on revenues of $6.4 billion, which includes sales of 15.5 million iPods.

"We have noticed that consensus at $6.38 billion and $0.78 has moved closer to our forecast over the past few weeks," he added.

Wu maintained his Buy rating and $99 price target on shares of Apple.