Raymond James analysts Tavis C. McCourt and Daniel Toomey rate a Strong Buy for Apple Inc. (NASDAQ:AAPL), as the China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) deal becomes official. Below is Raymond’s report:


Analysts at Raymond are maintaining their Strong Buy rating on shares of Apple Inc. (NASDAQ:AAPL) and raising their price target to $700 from $650 following the announcement of an agreement with China Mobile to begin selling the iPhone on China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941)’s network on January 17. Given the lack of details on pricing, we are assuming, conservatively, 10 million additional iPhone sales in 2014 on China Mobile, or 8 million in fiscal 2014, which ends in September. They are therefore raising our EPS estimates for 2014 and 2015 to $43.69 and $48.06.

Apple-China Mobile deal confirmed

Apple Inc. (NASDAQ:AAPL) and China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) finally announced a long awaited multi-year agreement to offer the iPhone 5s and 5c on China Mobile’s network beginning January 17 with pre-registration beginning December 25. The iPhones will support China Mobile’s 4G/TD-LTE and 3G/TD-SCDMA networks. Details regarding pricing and promotions will be available at a later date.

Forecast for China Mobile

Just last week during the launch of its 4G TD-LTE network, China Mobile’s CEO Li Yue said he expects China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) to sell 220 million smartphones in 2014, up from 155 million in 2013, 100 million (~45%) of which are expected to be 4G TD-LTE handsets, such as the iPhone 5s and 5c. Analysts have assumed a 20 million run rate of incremental iPhone demand from China Mobile is achievable, but given the lack of details around pricing/promotion, analysts are currently forecasting 10 million incremental iPhones sold on China Mobile’s network in calendar 2014.

iPhone 6 next catalyst

A bigger screened iPhone 6 is likely the next meaningful new earnings catalyst for Apple Inc. (NASDAQ:AAPL). Media speculation abounds for a potential summer launch, but analysts are highly skeptical as earlier launches have been speculated on the last few years for the iPhone as well, but lining up numerous new components and a new OS release in less than 12 months is difficult to say the least. The bigger question financially will be what a bigger screen may mean for margins and upgrade sales, and whether Apple Inc. (NASDAQ:AAPL) will look to exact a premium for a bigger-screened version.

EPS estimates for Apple

We are raising our FY14 and FY15 EPS estimates from $41.77 and $45.95 to $43.69 and $48.06, respectively, as a result of the China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) agreement. Our iPhone shipment estimates for FY14 and FY15 are now 176 million and 190 million, up from 168 million and 180 million. Note we expect $49-51/share in FCF in the next two fiscal years.

Apple’s valuation

For the next two years, analysts believe Apple Inc. (NASDAQ:AAPL)’s current product portfolio should lead to single-digit revenue and ~10% EPS growth. They believe this warrants a roughly parity multiple with the S&P 500. Analysts are raising their price target to $700, which equates to 15.5x our 2014 calendar EPS estimate of $45.24, roughly in line with the S&P 500 (INDEXSP:.INX) 2014 P/E.

Apple Valuation