Apple Inc. (AAPL) iPhone 6, iWatch, Bigger iPad Should Spark Growth

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Canaccord Genuity Inc, analysts T. Michael Walkley, Matthew D. Ramsay, and Siddharth Sinha reiterate their $600 price target and Buy rating.

Investment recommendation

Analysts’ holiday quarter surveys indicated very strong iPhone 5s sales with improved levels of supply for all color SKUs. Further, analysts believe the imminent TD-LTE iPhone launch with the world’s largest carrier, China Mobile Ltd. (NYSE:CHL) (HKG:0941), could bolster March quarter iPhone sales and offset some of the anticipated sharp decline in Western carrier iPhone sales post the holiday selling season.

Following the China Mobile Ltd. (NYSE:CHL) (HKG:0941) iPhone launch in January, analysts anticipate continued strong high-tier market share levels for Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) in C2014 with CES announcements from rivals lacking the innovation to alter current market trends. Further, despite concerns of slowing innovation and growth in the mid/high-tier smartphone markets globally, they believe larger screen models of Apple Inc. (NASDAQ:AAPL)’s flagship iPhone and iPad products, supplemented by the likely introduction of iWatch should allow Apple to return to Y/Y earnings growth in F2014/15. Analysts at the firm reiterate their BUY rating and $600 price target.

Investment highlights

Canaccord’s sales surveys indicated strong iPhone 5s and iPad Air sales through the December quarter holiday selling season. While we anticipate solid demand for iPhone 5s/5c products in China during the March quarter, the lack of clarity around the level of subsidy for iPhone devices at China Mobile Ltd. (NYSE:CHL) (HKG:0941) leads us to model sharply down Q/Q seasonal trends from 54.0M iPhone units during the December quarter to 42.1M units during March.

Apple sales growth

Analysts were disappointed with the lack of innovation from Android rivals at CES, and we believe a potential mid-year refresh for iPhone 6 and the upcoming larger-screen iPad position Apple Inc. (NASDAQ:AAPL) for solid Y/Y F2014/15 sales growth. Further, with many Western carriers introducing new data plans that include early smartphone upgrade options, they believe carriers are increasingly selecting smartphones that best maintain resale values following early trade-ins, and this should benefit iPhone sales.

After adjusting their iPhone quarterly estimates for a slightly earlier iPhone 6 product launch, analysts are raising their F2014 EPS estimate from $44.20 to $44.85 and their F2015 estimate from $50.02 to $50.24.

Valuation: Canaccord’s $600 price target is based on shares trading at roughly 12x their F2015 EPS estimate.

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