updated 10:40 am EDT, Wed June 21, 2006
Macs may offset iPods
UBS analyst Ben Reitzes today predicted sequentially lower iPod sales for Apple in the third quarter of this year, but expects new iPods next quarter and noted that MacBook demand is solid. "To reflect checks that indicate more interest for new MacBooks and solid education buying, we are raising our 3Q06 estimate for Mac units to 1.32 million units (was 1.24 million) and our FY06 unit estimate to 5.1 million (was 5.0 million)," Reitzes wrote in a research note obtained by MacNN. "We now estimate iPod unit sales of 7.8 million for 3Q06 (was 8.4 million) reflecting year over year growth of 27 percent (-8 percent quarter over quarter) and FY06 unit sales of 39.8 million (was 40.9 million)." UBS is maintaining a "buy" rating for Apple shares with a price target of $90, hovering above its peers due to faster growth and higher margins.
The analyst maintained his estimates through fiscal year 2007 as higher Mac sales offset the company's lowered iPod estimates. UBS estimates third quarter earnings-per-share of $0.42 cents on revenue of $4.35 billion. The analyst estimates Fiscal year 2006 earnings-per-share of $2.03 on revenues of $19.3 billion, with fiscal year 2007 earnings per share of $2.60 on revenues of $24 billion.
"We believe acceptance of new products in terms of Macs and iPods is the key for Apple's shares this year."
Mac sales to quell iPod concerns?
UBS addressed the Apple story in the wake of recent volatility and share lows to take a closer look at catalysts moving forward for the company.
"We believe Apple's shares are at a critical point where investors must start to see Mac sales accelerate at a meaningful pace in order for shares to gather momentum in calendar 2H06," Reitzes wrote. "Also, we believe upside in Macs is necessary to alleviate concerns about the possibility of downward iPod revisions."
Worries over iPods seem to be the primary factor driving weakness in Apple's shares, according to UBS. While the firm highlighted the possibility of weaker iPod sales quarter over quarter, checks continue to show solid demand for MacBooks, which the company believes will lend support to Apple's fiscal third quarter estimates to offset iPod weaknesses.
"We continue to expect new iPods next quarter, which we believe should improve performance into year end," the analyst said. "In addition, we also expect new Intel-based Mac Pro's (formerly the Power Mac) to be announced by August in conjunction with a preview of the new OS X Leopard at Apple's Worldwide Developers Forum."
Mac outperformance may offset iPod revisions
For every 75,000 Macs sold, Apple earns $100 million in revenue (not including attach rates for software, service, and peripherals), while every 500,000 iPods equates to approximately $100 million in revenue, according to the firm.
"In short, if Apple falls short of street expectations for iPods by up to
500,000 units per quarter for the remainder of the year (our new model cuts iPods by about that amount for the June quarter), investors must see more than 75,000 in higher than expected Mac units per quarter for shares to gather momentum."
That scenario is quite possible, according to Reitzes, who has noticed a strong reception for the new MacBooks. The analyst believes Mac sales will build through calendar year 2007 in conjunction with other new products, as well as benefits from new software such as Mac OS X Leopard and Adobe's Creative Suite 3.
Macs hold earnings power
UBS has noted a shift in consumer interest toward Macs and away from iPod display counters at Apple retail locations. Mac displays appear "jammed" with customers, while iPod displays are less frequented than previous quarters, according to the company.
"While we believe increased focus on Macs should drive solid near term results, we also believe increased interest in Macs should lead to longer term PC market share gains, which we believe can provide significant top line benefits and earnings power," Reitzes added.