Lack of Sell-Side Capitulation May Create a Tradeable Rally in Apple (AAPL)

Apple (NASDAQ: AAPL) is down 3.4% in early trade and 27% from mid-2015, but this sell-off may be over as a barrage of positive sell-side reports shifts the focus from the near term fear of an iPhone trough to the greed of cashing in on expanding cash flow and low earnings multiples into the iPhone 7 product cycle. For the last two months, media pundits have been suggesting that with 50+ Buy ratings, investors should wait until the sell-side capitulates with ratings cuts. However, these cuts didn't materialize today and analysts are now looking ahead to 2017 multiples that incorporate the iPhone 7 cycle. With not one single downgrade after the disappointing report this suggests capitulation isn't likely to come.

Putting it simply, margins cushioned slowing unit growth and are now allowing analysts to look beyond 2016. The near term 2.1% yield with potential upside from accelerated buybacks and expanding multiples as the iPhone 7 product cycle approaches could mean the bottom is in and possibly that a tradeable rally is coming.

Consider these statements taken from earnings reports by some of the top analysts on the stock:

FBR analyst, Dan Ives sees margins supporting valuation until the iPhone 7 cycle: "iPhone revenue came in at $51.6 billion (up 1% year over year), above the Street’s estimate of $51.3 billion as the company experienced better-than-expected ASPs ($691 versus the Street's $680) and declining component costs helped lift margins during the quarter." and "Cook & Co. have a few tough quarters ahead until we get to the buildup around iPhone 7 later this year, which is what bulls (including ourselves) are focused on"

Credit Suisse analyst, Kulbinder Garcha, sees downside to $89 but upside to $140: "We believe we now have a handle on the degree of GM erosion over this subdued iPhone cycle. This, we believe, provides a baseline CY EPS estimate of $8.92, meaning incremental downside risk is capped at ~$89.".... "We continue to believe that Apple looks inexpensive on a P/E excash of 9x in the context of material capital return, sustainable revenues, and a powerful ecosystem. We apply a ~12x multiple and see upside to $140."

PiperJaffray analyst Gene Munster kept Apple as his top pick with a $172 price target: "Despite the negative macro commentary, we still believe that AAPL's multiple can expand over the next 6-9 months as investors realize that we have likely passed the low point in iPhone unit growth for the next two years.".... "we have seen average multiple expansion of ~30% MarchSeptember in anticipation of the last two full cycle launches (iPhone 5, iPhone 6). Additionally, the average multiple in September during those two full cycle launches was ~15x vs the current out year multiple of ~10x CY17E EPS".... "While we are adjusting our price target from $179 to $172 on lower EPS, AAPL remains our top pick for 2016."

Oppenheimer analyst, Andrew Uerkwitz was more subdued but still recommends the company: "Our AAPL thesis for 2016 is unchanged. For a volatile tech sector in 2016, we believe cash-rich, dividend-paying, and attractively valued stock such as AAPL offer one of the best defensive positions for investors."

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