Markets & Finance

Marcial: Apple Shines, No Matter Who's in Charge


Analysts say Apple's well-received rollout of new products and price cuts proves it can be innovative even with Steve Jobs on medical leave

Even though Steve Jobs took a medical leave in January, Apple Inc. (AAPL) remains as innovative and creative as it was in 1984 when Jobs unveiled the Macintosh to wide acclaim.

That creativity was reaffirmed on June 8 when the company held its Worldwide Developers Conference in San Francisco and unveiled new products and plans. The offerings appeared to meet with widespread approval from customers and shareholders alike—and Apple watchers showed little dismay that CEO Jobs didn't make an appearance.

Some analysts promptly raised their earnings estimates after Apple announced that it was cutting the price of its entry-level 8-gigabyte iPhone 3G to $99 from $199, and introduced a next-generation iPhone 3G S that's much faster and equipped with a compass and video camera. Apple also presented faster and lower-priced MacBook Pro laptops along with an updated Mac operating system called Snow Leopard.

Some investors took the new offerings as a signal that Apple without Jobs would continue to be a vibrant and imaginative company and should no longer be regarded as The Steve Jobs Show. It remains an enterprise, they say, with forceful products powered by its iPhone, iPod, and MacBook franchises.

Calming Investors

"Apple continues to meet or beat expectations with its innovative products," says Terry Morris, senior equity manager at National Penn Investors Trust, which has assets under management of $1 billion and owns Apple shares. And the stock, he adds, is still underpriced based on an estimated earnings growth rate of 18% to 20% over the next three to five years. More important, Apple "has momentum behind it, as people surely love to buy its products and its shares," he says.

Morris cautions, however, that after the stock's strong runup this year, from 78 a share on Jan. 20 to 141 on June 9, profit-taking could push it lower over the short term. But in 12 months Morris expects the stock to hit 162. It reached a heady 52-week high of 186.78 a year ago, on June 10, 2008.

Some Apple watchers view the developers conference as an attempt by Apple to focus more attention on its senior executives in the absence of Jobs, who has been on medical leave since January due to complications from pancreatic cancer. That has calmed investors, who had expected to see the CEO at the conference, notes Charlie Wolf, tech analyst at investment firm Needham. A longtime bull on the stock, who owns shares, he rates Apple a strong buy, with a 12-month target of 200 a share.

Wolf believes management is trying to demonstrate that Apple is no longer hugely dependent on Jobs' continued involvement and can display continued strength and much improved products even in the CEO's absence. The company has announced that Jobs would be returning to Apple by the end of June. But some still question whether that will happen because of his failure to attend the most recent Apple conference.

Most Analysts Are Bulls

What's increasingly becoming clear, Wolf says, is that Apple is "betting that its insurmountable lead in mobile software applications will eventually translate into a growing share in the smartphone market, if it is not already doing so," says Wolf.

How do analysts expect Apple's new products and price cuts will affect its profit outlook?

The combination of lower prices for the MacBook and performance enhancements could accelerate revenue growth and produce an upside to earnings estimates in the second and third quarters, figures analyst Kathryn Huberty of Morgan Stanley (MS). Hubert rates the stock overweight, with a 12-month price target of 180 a share. (Morgan Stanley does or seeks to do business with companies it covers).

She also expects increased demand for the lower-priced iPhone and the new iPhone 3G S will support her above-consensus estimates. Huberty expects Apple will earn $5.48 a share in fiscal 2009 (ending Sept. 30), $7.03 in fiscal 2010, and $8.83 in fiscal 2011. Apple earned $5.35 a share in fiscal 2008.

What will be debated is whether Jobs will, indeed, return to Apple by month's end. In spite of this unresolved question, Wall Street has stayed bullish on Apple, with 33 analysts recommending buying the stock and six rating it a hold, according to data from Bloomberg. Only two recommend selling it.

Did the Baton Pass Just Happen?

Some bulls already concede that Jobs won't come back. "Our biggest takeaway [from the conference] is the fact that the fairly major announcements were made by someone other than Steve Jobs," notes analyst Shaw Wu of securities firm Kaufman Bros., who rates the stock a buy. He assumes that the management transition is complete and that "there should be minimal concerns."

"We have the utmost respect for Steve Jobs and his contributions to Apple and position as one of the great thinkers and innovators of his time," says Wu. "We applaud him for being able to hand over the baton to the next generation of leaders at Apple." That, he says, signals that Apple has a "deep bench," and that the "unique culture that Steve Jobs created will continue to thrive and prosper."

But as of now, the big question is whether Jobs will return. The sooner that issue is resolved, the better for Apple and its stock. As it stands, a well-received public appearance by the man in the black turtleneck will give Apple bulls one more reason to smile.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


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