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January 03, 2007

$102 Apple? So Says Goldman Sachs

posted by MR WAVETHEORY at 1/03/2007 02:34:00 AM
Goldman Sachs Group Inc. (NYSE GS) is putting a $102 target on Apple Computer, Inc. (Nasdaq AAPL).

Apple Computer (AAPL: Nasdaq)
By Goldman Sachs ($80.87, Dec. 28, 2006)

WHILE ALL OF THE POTENTIAL implications of Apple's options backdating cannot be neatly resolved with a single filing, Apple's long-awaited 10-K puts to rest the relatively minor financial impact of its backdating issues and provides further detail about the findings of the company's internal investigation, the most important of which is that current management was not involved.

This should allow the stock to be driven more by fundamentals in the near term where we see several positive catalysts which should take the stock higher, including likely product announcements at MacWorld on Jan. 9, December-quarter earnings upside to be announced on Jan. 18, and anticipation of additional product announcements including Apple's entry into the cellphone market.

During its independent internal investigation of over 42,000 stock options grants between 1996 and 2003, Apple found 6,428 grants that were backdated. While the number of backdated grants seems high, the financial impact is small, only $105 million pre-tax ($84 million after-tax) with the vast majority of that occurring before 2004.

Most importantly, Apple investigated two grants to Steve Jobs. The first grant showed no evidence of backdating. In the second case, which has attracted a great deal of media coverage, the options were backdated but without any evidence that Steve Jobs was involved in the backdating. The grants were approved by the board before the grant date but not finalized until after the recorded date of the grant.

Even from here, the Apple product story is kicking into high gear. The evidence is pointing to a MacWorld introduction and a calendar first-quarter release for the full-screen video iPod which, according to our checks, is noticeably more innovative than the current generation and should not be considered as a simple refresh.

Apple should formally launch its iTV digital hub at MacWorld which not only creates a new revenue stream for Apple and places the company in a lead horse position in this emerging market but should also increase sales of video iPods as the ability to watch movies and TV shows downloaded from iTunes on televisions as well as video iPods raises the incentive for consumers to purchase the new video iPod.

The Apple cellphone should be released to manufacturing in April 2007 for an on-schedule second-quarter launch and will almost certainly break new ground. Indeed, Apple is already in early discussion with multiple suppliers regarding next-generation models of cell phones with no decisions made yet as to which direction they're going in.

Reflecting strong demand and expected MacWorld announcements, we raised our already-above-the-Street fiscal 2007 estimates on Dec. 11. Our earnings-per-share estimate for fiscal 2007 is now $2.85 versus Street consensus of $2.76.

We could expect Apple to see at least a few pennies of upside versus the Street for the December quarter, with our forecast calling for 79 cents a share versus the Street's 78 cents driven by better margins and slight revenue upside (we're at $6.36 billion compared to Street consensus of $6.38 billion).

Across the Mac line, Apple seems to have had an exceptional Thanksgiving weekend. Fourth-quarter demand for MacBook and MacBook Pro [notebooks] are running better than Apple's already aggressive targets. We expect 1.1 million notebooks and 1.8 million total Macs in the December quarter.

Our retail checks point to strong Apple store results both on the Mac and the iPod side. Combined with a higher mix of Macs, higher retail sales should drive upside to our 28.6% gross margin forecast and Apple's 28.25% target. Based on strong demand, at least one key supplier is allocating even more capacity to Apple and taking it away from other areas.

Despite what has been described as a very "healthy" video iPod forecast entering fourth quarter, video iPod shipments seem very much on track, and should be up more than 40% sequentially. IPod shuffle demand looks strong.

With the bias to estimates still upward and Apple about to start a new product cycle, Apple shares could move strongly toward our $102 target price, based on target price-to-earning multiples, growth-adjusted earnings multiples, cash flow metrics, and discounted cash flow -- well before our 12-month timeframe.

-- David C. Bailey
-- Laura Conigliaro
-- Min Park

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