Credit Suisse Upgrades Apple (AAPL) to Outperform, Lifts Estimates and Price Target

(Updated - January 13, 2015 7:56 AM EST)

Credit Suisse upgraded Apple (NASDAQ: AAPL) from Neutral to Outperform Tuesday, while raising their price target to $130.00 (from $110.00).

Analyst Kulbinder Garcha raised EPS estimate by 18%/20% to $9.44/$10.06 given a solid and sustainable iPhone volume base, sizable increase in scope for cash return and EPS momentum. The firm now sees $10 EPS power in CY16, which drives earnings momentum and the upgrade to Outperform and upside to at least $130 per share.

The firm is raising their iPhone volumes again to 215 million units for both FY15 and FY16. They also said iPhone gross profit can grow by 42% or $18 billion over 2015. iPhone gross margin estimate move to 43.5% for FY15 and 42.6% for FY16. The firm notes two positive drivers for margins: 1) a material mix shift to 64GB devices, 2) iPhone 6 Plus could make up at least 21% of total unit mix FY15.

On cash returns, Garcha said excessive net cash levels suggests a new $200 billion cash return program is due. The analyst notes that since the program inception, Apple has regularly raised its cash distribution target, given strong free cash flow and excessive levels of cash. The company will arrive at the 3-year anniversary in April 2015 with $143 billion of net cash, or higher than when the program was initially implemented. "Given that FCF now stands at a substantial $50 billion per year, there is a scope to increase the cash return program to $200bn and extend it an additional 3 years," he said.

The firm sees three levers for additional upside: 1) with GM's at 40% at the corporate level, the firm said their projections could prove conservative. 2) they only assume 20 million Apple Watches at an ASP of $400 in CY2015, and GM of 50%, all of which can prove conservative. 3) they assume no significant impact from new products (large iPad, lower end iPhone, Apple TV long term) or the monitization of services, like Apple Pay, Beats, HealthKit and HomeKit.

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 $109.25 yesterday.

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