Cash Deployment, Cheap iPhones and Expanded Services are 3 Keys for Apple (AAPL) - Morgan Stanley

February 22, 2013 10:09 AM EST Send to a Friend
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On Thursday, activist investor David Einhorn hosted a 1-hour conference call discussing his 'iPrefs' ideas as the best way for Apple (Nasdaq: AAPL) to unlock shareholder value. Meanwhile, analysts at Morgan Stanley went straight to one of the primary decision makers - CFO Peter Oppenheimer.

Following a meeting with Mr. Oppenheimer, analyst Katy L. Huberty is convinced that Apple will: (1) increase cash return to shareholders, (2) expand carriers, distribution,
and possibly price points to drive iPhone growth, and (3) improve and expand its services offerings.

"Our analysis suggests Apple can match the S&P IT sector's average FCF payout of 68% if it returns $28B in FY13, implying a 6% total yield," Huberty said on shareholder returns. The company can address the high mix of international cash by raising low-interest debt instead of repatriating the cash, she said.

Huberty said there are several signs that a lower priced iPhone makes sense: 1) iPad Mini is expanding Apple’s customer base with 50% of purchases in China/Brazil representing new customers to the ecosystem. 2) Chinese consumers show a desire to purchase the latest version of iPhone (instead of discounted older generations). 3) iPhone 4 demand surprised to the upside in the December quarter. "Even at a low 40% gross margin and 1/3 cannibalization rate, we see an "iPhone Mini" as incremental to revenue and gross profit dollars," the analyst comments.

In addition to the debate about capital action, the analyst said expanded services is a key to unlocking value. "With a 500M installed base of iTunes/App Store accounts, Apple has the opportunity to introduce new services that drive increased device sales, customer stickiness, and/or new revenue streams," the analyst said. "At an enterprise value per
account of just $570 today (less than half of June '11 levels), these services can unlock significant value."

Despite worries, the firm also said Apple's innovation pipeline is "robust." "The company’s approach to product decisions and innovation has not changed in the past several years despite the CEO transition," the analyst comments. "Making great products remains Apple’s core strategy and the company is as confident as ever about the future pipeline of new products and services."

Morgan Stanley reiterated an Overweight rating and price target of $630 on Apple. Their bull case is $980 and the bear case is $400.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $446.06 yesterday.


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