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Recent Apple (AAPL) Supply Chain Cuts Could Actually be a Positive - Analyst

December 19, 2012 10:47 AM EST Send to a Friend
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JPMorgan reiterated its Buy-rating on Apple (NASDAQ: AAPL) Wednesday, and, counter to the recent trend of price target cuts, maintained its $770/share target. The firm said their is now reason to fade Apple as supply chain adjustments actually point to better yields, gross margins.

On the recent supply chain adjustments, which has pressured shares, JPMorgan's Mark Moskowitz notes: "Our research indicates that the order cuts could impact the Mar-Q, but build plans are ever-changing. Either way, we think the order adjustments are explainable but not alarming. We also think that the supply chain adjustments could imply that manufacturing yields on iPhone 5 have improved, which means Apple's gross margin profile could rebound to 40%, which would be a positive."

Moskowitz explains that given the fast-and-furious global rollout of the iPhone 5, Apple pushed its suppliers with "white hot" build/order activity. "Currently, there are indications the supply chain has seen 20% order cuts related to iPhone 5, but we are not alarmed," the analyst said. "We estimate that the revised quarterly build capacity for iPhone 5 is 38M units, which is well above our sell-in estimate of 25M for Dec-Q and Mar-Q. Our total Dec-Q and Mar-Q iPhone (4/4S/5) unit estimates are 48M and 45M."

The analyst notes that the order cuts cuts impact the March quarter, so there is time for the build activity to be reset higher or lower.

While the firm does not have confirmation of what the driving forces behind the order cuts is, they think the bigger message of the order cuts could be that iPhone 5 manufacturing yields and thereby gross margin are on the rebound. "We had written previously that Apple had to absorb cost overage (due to poor yields) in the building of iPhone 5 and iPad mini. In our view, recent order cuts could suggest that the manufacturing yields are improving on the iPhone 5, and as a result, this could be another reason that Apple pulled back on excess orders of certain components."

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 $533.90 yesterday.




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