iPhone Upgrade Program Seen as Tailwind for Apple (AAPL) and Citizens Financial (CFG)

Not much has been made of it on Wall Street, but Citizens Financial Group (NYSE: CFG) stands to benefit from Apple's (NASDAQ: AAPL) recently launched iPhone Upgrade Program. In the fall, Citizens announced it was picked by Apple to provide financing to customers who want to use the program to get the latest iPhone model faster.

Recent channel checks and a consumer survey from Piper Jaffray suggests the program has been well received with participation rates in the 30%-50% range. This compares to the firm's initial estimates of just 15%.

In a joint research report today, Piper Jaffray analysts Kevin Barker and Gene Munster also highlighted that Apple is making a concerted marketing effort through e-mail advertising and a focused sales effort within Apple Store. "These recently-launched initiatives could drive participation rates even higher," they said.

The upgrade program is sees as a potential tailwind to both Apple and Citizens Financial.

Barker said based on recent conversations with the investment community, they believe the market has not fully grasped the potential accretion Citizens Financial could realize from the iPhone Upgrade program. "We believe the upgrade program could be a ~$3.4B incremental tailwind to loan growth in FY16, indicating our total loan growth estimates could reach ~$9.2B from our current estimate of ~$5.8B. Furthermore, we highlight that in a base case scenario, CFG would potentially see a $0.17 benefit in FY16 and $0.28 in FY17E, respectively. Notably, our bear case would represent $0.07/$0.10 benefit to EPS and our bull case would represent $0.48/$0.73 benefit to EPS in FY16/FY17, respectively." Importantly, these estimates are not in the firm's model.

For Apple, the move across carriers for annual upgrades in addition to the iPhone Upgrade Program is likely to have two impacts, Gene Munster highlighted. "First, we expect the upgrade cycle in the US to shorten from around 22 to 15 months based on our assumption that 75% of US iPhone consumers become annual upgraders by the end of 2018. We note that about 18.5% of iPhone 6S owners in November expect to upgrade annually vs about 10% prior to the program launch. We expect such a high percentage of annual upgraders because the majority of carrier programs today build in an annual upgrade option that makes sense for the majority of consumers to utilize. While some may believe the 75% is conservative given the vast majority of US consumers will be on annual upgrade type plans, we feel it is the most likely outcome. Second, we believe the impact of the narrowing upgrade window could provide an average annual tailwind of 10% to US iPhone units over the next 3 years through CY18, or about 3% to total units."

The firm has an Overweight rating on both stock.

For an analyst ratings summary and ratings history on Citizens Financial Group click here. For more ratings news on Citizens Financial Group click here.

Shares of Citizens Financial Group closed at $25.72 yesterday.

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