Analysts at UBS Investment Research increased their price target and earnings per share (EPS) estimates for Apple Inc. (NASDAQ:AAPL) based on their expectations that the upcoming mid-range iPhone 5C will increase the company’s gross margin. In addition, the analysts also expect the potential deal with China Mobile Ltd. (NYSE:CHL) (HKG:0941) would provide significant earnings for the iPhone maker.
iPhone 5C will increase the gross margin of Apple
UBS Investment Research analysts Steven Milunuvich and Peter Christiansen believe that the iPhone 5C will increase the gross margin of Apple Inc. (NASDAQ:AAPL) by 32% to 38% on lower bill of materials. They assume that price of the device will be around $399. Previously, the analysts’ price assumption for the iPhone 5C was $379.
Milunuvich and Christiansen also estimated that the potential agreement with China Mobile Ltd. (NYSE:CHL) (HKG:0941) would contribute $3.23 to the earnings of the iPhone maker. According to them, Apple Inc. (NASDAQ:AAPL)’s would be able to capture more than 100 million consumers or one third of the total 3G subscribers in China. The analysts projected that the two companies would be able to reach an iPhone agreement by the end of the year.
Apple would be able to sell 17 million iPhones through China Mobile
The analysts estimated that Apple Inc. (NASDAQ:AAPL) would be able to sell 17 million iPhones through China Mobile Ltd. (NYSE:CHL) (HKG:0941) next year. Out of the 17 million projected iPhone sales in the country, 70% would be iPhone 5C and 30% iPhone 5/5S. According to them, each incremental one million units would add approximately $0.20 per share to their EPS estimate for Apple.
Milunuvich and Christiansen’s current EPS estimate for Apple Inc. (NASDAQ:AAPL) are $44.65 for fiscal 2014 and $48.45 for fiscal 2015. Their previous estimates were $42.29 FY14 and $45.80 FY15.
In addition, the analysts explained that their model changes include a slight increase in share count to reflect the higher price and increased iPad mini contribution to the iPad shipments and margins, which is earnings neutral. According to Milunuvich and Christiansen, they projected that the iPad mini gross margin would increase near-term and over the long-term its gross margin will remain at around 23% to 26%.
Furthermore, Milunuvich and Christiansen are uncertain that activist investor Carl Icahn would be able to convince Apple Inc. (NASDAQ:AAPL) to raise its shares buy back in the near term. However, they believe that the tech giant could easily fund 50% or increase its three year plan by $30 billion, which could add around $2.00 per year to its earnings.
The analysts raised their price target for the shares of Apple Inc. (NASDAQ:AAPL) to $560. According to them, “We value Apple on an increased EV/FCF multiple of 6.5x (from 6x) our C14 FCF estimate of $50 billion. On a P/E, our target would be 12x our C2014 EPS estimate of $47.18.”