Merrill Lynch raises AAPL estimates

Analyst firm Merrill Lynch today raised its earnings estimates for Apple, following the record $1.1 billion quarter. Despite Apple's lower-than-expected Mac shipments, the company's Mac shipments were "healthy," growing more than three times the industry average, analyst Richard Farmer told clients. Farmer, like other analysts, is looking to the first native Intel release of Adobe Photoshop CS3 to help Mac shipments in the coming quarters and said that new Mac models could create an even greater upside to Merrill's estimates. The firm also agreed that continued strong shipments of iPods and better-than-expected operating margins of 42 percent also helped Apple achieve record revenues of more than $7 billion.

"Bears will attempt to make a case the halo effect is waning; we disagree," Farmer wrote. "Although we concede the Mac result was below our expectation, we still view 28 percent growth as very solid against a market growing 8 percent and we expect the pace to remain healthy as new Macs are introduced and as pent up demand in the creative professional segment is released this Spring with Adobe creative suite native on Intel/Mac."

Investors should look past Apple's traditionally conservative quarterly outlook, the analyst told its clients.

"We don't think investors should be spooked by the March Q outlook (below Street) given the track record of subsequent upside. Our slightly lower March estimates are within the typical excess of actual results over management guidance."

The firm raised its estimates from $23.4 billion in revenue and $2.76 EPS to $23.7 billion and $3.07 ESP for Apple's fiscal year 2007, saying the upcoming release of Mac OS X Leopard in the first half of 2007 and new Macs could be catalyst. Merrill also increased its fiscal year 2008 EPS estimates from $4.05 to $4.10, saying that the iPhone could be a "powerful drive of earnings." The firm maintains a "buy" rating on Apple stock with a price target of $113.

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