UBS sees Macs helping Apple to another solid quarter

Apple Inc. continued to see solid demand for Macs last quarter with refreshes to both its MacBook lines leading the charge, according to Wall Street analysts at UBS.

In a note to clients Friday, Analyst Ben Reitzes and his associates said strong sales of the new notebook models should provide a slight boost to the Cupertino-based firm's fiscal third quarter earnings on July 25th, simultaneously offsetting some deceleration in iPod sales.

The analyst explained that iPod growth was more subdued during the quarter due to a combination of aging iPod product lines, some anticipation of the iPhone, and normal seasonality. He was, however, bullish on expectations for initial iPhone sales during the final two days of the quarter.

"We believe the June 29 launch of the iPhone was a big success and believe our estimate for 150,000 units sold in the first 2 days is very conservative," he wrote. "While we expect Apple to be conservative (as usual) in its outlook for [the fiscal fourth quarter], we believe the company’s new product momentum and upcoming product pipeline should support exceptional revenue momentum through fiscal 2009."

Based upon checks into Macs and his current views on component pricing, Reitzes said his estimates may prove to be too low. He's been modeling Apple to report per-share earnings of $0.71, reflecting yearly revenue growth of 19 percent to $5.21 billion, with gross margin of 32.1 percent and an operating margin of 15.1 percent.

"While less favourable in the June quarter vs. March — we believe component prices for NAND, panels, DRAM and drives still supported gross margin upside," the analyst told clients. "Our third quarter estimate factors in iPod unit growth of 19 percent year-over-year to 9.6 million which seems to lack any upside given the lack of new products combined with normal seasonality."

On the other hand, the analyst said his Mac growth estimates of 25 percent year-over-year to 1.66 million could prove conservative, especially given the new notebooks and strong demand witnessed across the Mac product line during the K-12 education buying season in June.

For all of fiscal 2007, Reitzes is modeling the Mac maker to earn $3.55 per share, based on projected revenue growth of 23 percent to $23.7 billion, gross margin of 32.2 percent, and an operating margin of 17.0 percent. The estimates factor in projected iPod unit growth of 34 percent to 52.7 million and projected Mac growth of 27 percent to 6.7 million units.

"We believe the iPhone, its associated marketing buzz and boost to retail traffic is in the process of creating another version of the 'multiplier effect' we introduced in early 2004, which was associated with iPods," the analyst wrote. "We believe the iPhone could have a similar effect, driving sales of accessories, bolstering retail traffic, and helping drive more sales of both iPods and Macs."