updated 06:30 pm EST, Fri March 9, 2007
WR Hambrecht covers Apple
Research firm WR Hambrecht has officially initiated coverage on Apple Inc., and has issued a "buy" rating with a $110 price target on shares of the Cupertino-based company. "Apple has a very impressive desktop and notebook offering that continues to grow faster than the industry and command higher average selling prices, an iPod franchise that dominates the category and represented almost half of the total company revenue in the strongest quarter in its history (December 2006), a new operating system due out shortly that is expected to help facilitate operating both Mac OS X and Windows operating system through virtualization software, an upcoming iPhone offering in the approximately one billion unit total cellphone market and numerous other products and initiatives in place and ongoing."
The firm speculates that Apple will continue its successful metamorphosis into a full-blown consumer electronics "powerhouse" that successfully combines hardware and media offerings.
The research company points to Apple's iPhone, Apple TV, and new Mac OS X 10.5 Leopard operating system alongside updated and/or additional versions of the iPhone by 2008. Further positives listed for Apple include an upcoming solid-state drive ultra-thin subnotebook and an update to its iPod lines in the back half of 2007 or in 2008.
"Although nothing specific has been announced, we expect to continue to see hardware and offerings that address the growing digital home (could gaming be next?) into 2008 from the company as well."
Apple's Mac line continues to shine since its migration to Intel processors, causing Mac notebook sales to surge 65 percent year-over-year during its last fourth calendar quarter.
"Apple continues to grow its Mac franchise above industry growth rates, coupled with above average selling prices, and gained market share in the notebook segment last year (a gain of 2 percent in the U.S. according to IDC). The Leopard operating system is expected in March/April 2007 and we believe it will contribute to additional software sales as previous versions have, and help drive continued Mac growth above industry rates in part due to the expected virtualization feature that will allow Mac OS X and [Microsoft] Windows operating system to run simultaneously (and switch back-and-forth without rebooting)."
Adding to the positive side of Apple's story is its iPods, which continue to dominate and grow in the market. 2006 proved a record year for iPods with 46.4 million units sold worldwide. NPD Tech World reports that Apple held a 72 percent market share for MP3 players in December and has an 85 percent market share for online music sales, indicating that iPod hardware and the iTunes store remain the dominant choices in the market for customers.
"Our checks show strong calendar first-quarter performance of the iPod Shuffle in the seasonally weak quarter as well," the firm wrote. "Retail distribution strategy is paying off. Apple sold more than $1.1 billion through its retail distribution network in the calendar fourth quarter. The profit margins are impressive, and the Apple stores are an important component of the Apple story in our opinion."
WR Hambrecht believes that Apple's stock valuation is reasonable given growth rates, despite currently trading at 24 times the firm's calendar 2007 earnings-per-share estimate of $3.67 -- 23.2 times its calendar 2007 estimate excluding interest income and options expense plus $13.40 in net cash -- representing a PEG (price-to-earnings ration divided by the expected annual earnings growth) of roughly 0.7 times for calendar year 2007.
"We are establishing a price target of $110 which is 30 times (Apple's forward estimated organic earnings growth rate) our calendar 2007 EPS estimate -- excluding interest income and options expense, plus approximately $13.50 in cash."