Apple Inc. (NASDAQ:AAPL) is scheduled to release its next earnings report after closing bell tonight. One of the key metrics investors and analysts look at in each quarterly report is the company’s gross margins. UBS analysts have raised their price target based on their bullish view of Apple’s gross margins and also the results from their recent buyer survey.
Gross margin upside seen for Apple
In a report dated July 21, 2014, analysts Steven Milunovich and Peter Christiansen said the data points they looked at suggest there’s upside to Apple’s margins both now and in the medium term. They increased their estimates slightly and now are higher than consensus estimates for Apple. They believe iPhone and iPad product mix will support average selling prices and that shares could return to a market multiple like they did in 2012.
The analysts say their proprietary model suggests that Wall Street may be conservative in estimating Apple’s gross margins next year. As a result, they increased their 2015 fiscal year estimate 6% to $7.63 per share. Their new 2015 gross margin estimate is 38.1%, compared to their previous estimate of 36.6%.
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They see upside to Apple’s gross margin for four main reasons. First, they say the step-up in deferred revenue and also warranty expenses are declining. Second, they say Apple has “better fixed cost absorption” than the company had when it introduced the iPhone 5. Third, they say there appears to be a strong mix within the iPhone line, thus limiting deterioration of gross margins. And finally, they think the rumored iWatch will have a gross margin of at least 40% when it is released.
Apple sees positive product mix
The UBS team also said their survey suggests that Apple had a better mix of iPhones during the June quarter. They say it appears that the iPhone 5S contributed more than the iPhone 5 did a year ago. In addition, average storage on the iPhone rose during the June quarter, although it usually declines.
When it comes to the iPad, they say the mix shift has reversed from being skewed toward the iPad Mini and over to the iPad Air. They also note positive demand factors like that many more recent iPhone buyers seem to be waiting for the next iPhone this year compared to last year. Also they say more Android users are switching over to Apple products.
Apple price target raised to $115
The analysts have increased their price target for Apple from $100 to $115 per share based on their slightly higher estimates and also expansion in the company’s multiple. They think the current P/E discount of 13% to fall as the company’s earnings expand beyond the market rate.
They continue to rate Apple as a Buy.