I was sent the research report put out today by Morgan Stanley on Apple, Inc. AAPL. I find this very interesting to read, and see that although Morgan is Very Bullish on the shares of Apple going forward, the report states exactly:
December 13, 2010
Still Our Top Pick But
Removing from Best Ideas
List After Outperformance
Investment conclusion: Apple is being removed from
Morgan Stanleyâ€™s best ideas list in light of the fact that
the stock outperformed over the past six months (up
28% vs. S&P +14%) and the gap between our estimates
and consensus has narrowed.
Now, upon further reading the report says, after the above update:
We continue to see four
key long-term growth drivers including: 1) Smartphone
market growth and expanded iPhone distribution, 2) the
tablet market opportunity, 3) rising enterprise adoption,
and 4) the Chinese consumer. At 16x our CY11 base
case EPS estimate (13x ex cash) and a 7% FCF yield,
we believe that Apple shares are attractively valued in
light of our strong double-digit earnings growth outlook.
Increasing confidence in our bull case of $25+ EPS
in CY11: The combination of new distribution (Verizon
iPhone, Apple stores in China), new products (lower
priced iPad in April 2011), and higher product gross
margins as iPad/iPhone manufacturing yields improve
are key catalysts for upward earnings revisions over the
next six months.
The consensus CY11 gross margin forecast of flat
Y/Y is too conservative, in our view: Despite investor
concerns that margins may have peaked, we believe
Apple will limit major iterations to its product line in CY11
in order to flow component cost and manufacturing
yield/volume benefits through to the bottom line. As a
result, we see upside to both C4Q10 and CY2011 gross
Apple product pipeline remains robust: We expect:
1) iPhone on Verizon in early 2011, 2) new, lower priced
iPad in April 2011, 3) iPhone 5 in June 2011, 4) Smart
TV, redesigned iPad, LTE iPhone in 2012.
The target price they have on AAPL for 2011 has a base price range of $375.00 per share to $500.00 per share for the bullish case. SO WHY ON EARTH WOULD THEY REMOVE THE STOCK FROM THEIR LIST??
My guess, and my gut feeling, is that like other analysts, this one at Morgan is paid his yearly bonus on how well his recommendations perform for the year. Today he says sell Apple, locks in his performance bonus on AAPL for 2010, and in January after the holiday season sales he reitinstates his BUY on the shares and does well for himself too for 2011.
That’s the game people. That’s usually how it works.
My recommendation is to BUY APPLE on this and any other weakness. Its the best company in the world.