Analyst at FBN today retained Outperform rating and $650 PT on Apple Inc. (NASDAQ:AAPL). Clearly, the Apple Inc. (NASDAQ:AAPL) story has become more challenged lately due to increased competition from Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) (which has more SKUs and more price points suitable for faster-growing emerging markets), concerns about innovation post-Steve Jobs, and concerns about whether the long-term GM is headed much lower.

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However, FBN see Apple Inc. (NASDAQ:AAPL) addressing the low-end iPhone concern in CH2 and the lack of a 5″ or higher iPhone concern in C2014. On the iPad front, research firm expect a new fifth generation iPad and and an iPad Mini with Retina Display this year, although the timing is more unclear. Meanwhile, FBN believes that the company will return capital to shareholders in the form of higher dividends (Analyst see dividends going from $10.60/yr. with a 2.3% dividend yield currently to ~$14/yr. with a 4.0% dividend yield). They may also share buybacks as the company executes on its program to return $45B in capital to shareholders over three years (note that $10B of this has already occurred).

Since hitting its 52-week low of $419 about three weeks ago in early March, shares of Apple Inc. (NASDAQ:AAPL) have appreciated by about 10% as analyst from FBN think that the growth fund-to-value fund transition is maturing and expectations for the stock have been reduced to the point that upside to consensus is more likely.

Analyst believe that much of the new iPhone products (iPhone 5S, low-end iPhone) will be shipping in CH2 2013, research firm is lowering their FQ2/Mar. quarter iPhone unit estimates from 37.0M units to 35.3M units and their FQ3/June quarter estimates from 43M units to 30M units. However, FBN see iPhone units rebounding to 41M units in FQ4/Sept. and to 55M units in FQ1/Dec. as the new products ship.

The research firm see Apple Inc. (NASDAQ:AAPL)’s GM headed toward 33% longer-term, but even so the stock is undervalued; current stock price embeds a 26% LT GM (too low). FBN see Apple Inc. (NASDAQ:AAPL)’s gross margin (38.6% last quarter) declining steadily over the next many years due to increased competition from Samsung (pressuring Apple Inc. (NASDAQ:AAPL)’s highest gross margin segment – the iPhone), the introduction of low-end iPhones, more form factors/SKUs (increasing costs), and the possible introduction of an iTV. Even so, as long as the GM does not decline below 33%, the stock is undervalued. According to FBN’s segmented GM model, a corporate GM of 33% translates into a 37% iPhone GM (vs. analyst estimate that the iPhone GM was 47% last quarter). FBN played with their DCF and conclude that the current stock price embeds a long-term GM of around 26% (which would imply an iPhone GM of roughly 25%), a level which they think is way too low.

Analyst see GM pressure starting to pick up in CH2 2013 due to an expected low-end iPhone introduction and see GM pressure increasing in FQ4 2014/Sept. when FBN expect the iPhone 6 (next major new iPhone SKU) to ramp.

Investors have many concerns on Apple Inc. (NASDAQ:AAPL); however, there are many counters to these concerns. For example, Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) are watching T-Mobile’s decision to end subsides and offer interest-free financing, but AT&T has said that such a move could make the iPhone less popular. EPS growth is expected to be small, but it could go higher if Apple Inc. (NASDAQ:AAPL) launches an iTV and ramps well with China Mobile Ltd. (ADR) (NYSE:CHL). Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) has strong momentum right now, but should Apple Inc. (NASDAQ:AAPL) launch low-priced iPhones then it could regain some lost market share to Samsung.