We are often asked two related questions: First, how should an investor time the iPhone cycle? And second, when will the price of Apple shares discount the iPhone 8 cycle, which is expected to drive a significant number of user upgrades? We’ve found that the stock price shows a positive correlation to expectations—which is unsurprising and confirms our view that investing is an expectations-based endeavor. Rarely has the stock outperformed without revenue and earnings per share beating estimates. So, “all” that investors have to do is correctly predict Apple’s next 12-month results relative to expectations—a tall order indeed.
Our estimate of 8% iPhone unit growth for fiscal 2017 is close to the consensus, and that’s one reason we don’t expect a dramatic near-term move in the share price. But our forecast for a 16% unit increase in fiscal 2018 is above consensus. Given a 12-month product release lead—or possibly more, as in the iPhone 6 cycle—the stock could begin to discount the coming iPhone 8 cycle early in calendar 2017.
Our price target stands at $127, or 14 times our fiscal-2017 estimated EPS. We expect that Apple’s 30% discount to the market should narrow closer to its five-year average of 20% as investors perceive life beyond fiscal 2018. The current price, which we think indicates a conservative outlook, appears to reflect gradual erosions in the installed base and the number people willing to spend with Apple.
AT&T T-NYSE
Buy Price $27.91 on Oct. 11
by Deutsche Bank
Coming away from recent investor meetings that we hosted, we are bullish on the telco giant’s competitive/strategic positioning versus peers, given its leading scale and more efficient cost structure across distribution platforms. While these advantages enable substantial free-cash-flow generation today, the meetings focused forward on, among other things, synergies with subsidiary DirecTV, the direct satellite broadcaster, and reinvestment opportunities such as DTV Now and the company’s two recently (2015) acquired Mexican mobile-phone companies.
DTV Now is AT&T’s foray into over-the-top, or OTT, content: video, audio, and other content made available over the Internet without the scheduling or distribution control of the user’s carrier. Set to launch this quarter, DTV Now will seek to target the estimated 20 million “cord never” and “cord cutter” homes in the U.S. AT&T expects that it will negotiate aggressive pricing with lower margins on content that it will then deliver, as ordered, over the Internet.
That said, we are trimming our near-term estimates by two cents and five cents, to $2.85 and $3.02 in 2016 and 2017, respectively, to account for some of this reinvestment. However, we view the recent pullback as an attractive buying opportunity, and we reiterate our Buy rating and price target of $45.
Netflix NFLX-Nasdaq
Buy Price $100.59 on Oct. 11
by MKM Partners
The Internet-based television network is scheduled to report third-quarter earnings on Oct. 17. We expect a strong quarter for revenue growth as price increases drive average revenue per user, or ARPU, acceleration, and a sloppy quarter for net paid subscribers as a result of churn-induced attrition. While second-half subscriber trends are still volatile, we think they will be reported within the consensus range. Also, our recent survey suggests that churn is about in line with current consensus and not competition-driven.…
We think the EPS power story is very much on track. Applying recent disclosures, we estimate that revenues including those from the U.S. and the DVD business will provide $5.80 per share of positive contribution this year, up 35% from $4.30 in 2015. Also, business from the company’s “new regions” global expansion appear to be entering a steep ramp-up in profit contribution in the third to fourth year after launch. Over 60% of the company’s footprint is less than three years into streaming-service availability. While the second-half net subscriber outlook is still murky, we believe that in four years the stock can be two to three times its current price, based on our view of $11 per share of EPS in 2021.
Therefore, we would add to positions, as we believe underlying fundamentals remain intact. We reiterate our Buy rating and $130 price target.
Illumina ILMN-Nasdaq
Underweight Price $184.85 on Oct. 10
by Morgan Stanley
In a third-quarter preannouncement, the company, which makes systems and supplies for genetic-sequencing laboratories, highlighted another 20% instrument revenue decline, and consumables growth deceleration is a risk. Fourth-quarter guidance implies a growth rate of less than 5%, its slowest since 2012. Our price target remains at $115.
While instrument revenues get the headlines, there is more to the challenges the company faces. The instrument revenue line, down 26% in the third quarter and more than 20% this year to date, is unquestionably the key culprit behind the downtrend in 2016 guidance from the initial 15% to what now is closer to 8%. Instrument revenue will eventually stabilize, unmasking growth elsewhere in the business. We now model a recovery from 8% growth in 2016 (down from our prior 11%) to 11% in 2017 (down from 13%) on that lower base.
The more concerning observation from the third-quarter preannouncement was that fourth-quarter sales would be flat to up slightly, which implies 3% to 4% year-over-year growth and that the business excluding sequencing instruments will decelerate materially. It is not clear at this point what the driver of that slowdown is, but sequencing consumables…and services are possibilities.
Our base-case target price, calculated on 25 times calendar-2020 estimates, is $115.
Alcoa AA-NYSE
Buy Price $27.91 on Oct. 11
by Deutsche Bank
The lightweight-metals miner and processor, and producer of stock metals and engineered products, operates in five business segments: alumina (mining and processing), primary metals, global rolled products, engineered products, and transport and construction.
Alcoa reported adjusted diluted EPS of 32 cents, below our estimate of 33 cents and the consensus of 35 cents.…Headline profit of $166 million (33 cents per share) was impacted by restructuring charges ($18 million or 4 cents per share), tax items ($33 million or 8 cents per share), and special items ($51 million or 12 cents per share) related to asset sales and separation costs.
The company’s Nov. 1 split into two companies remains on schedule, with one company being a traditional aluminum smelter and manufacturer, and the other focused on engineered parts for vehicles and aircraft. The split means there will be another $250 million of nonessential asset-sale proceeds now expected in fourth-quarter 2016.
We are lowering our price target to $33 per share on the company’s guidance, but we reiterate our Buy rating.
Lazard LAZ-NYSE
Buy Price $34.46 on Oct. 12
by Sandler O’Neill
We are reducing our third-quarter 2016 EPS estimate from 79 cents to 77 cents, in line with the consensus. Our estimate primarily reflects reduced financial-advisory revenue expectations, as the number of transactions closed in the third quarter was lower than we had hoped. We continue to expect that restructuring revenues will be volatile from quarter to quarter, and to see a sequential decline in the wake of an extremely strong second-quarter 2016.
On the brighter side, we expect a combination of market appreciation (especially in emerging-market equities) and net inflows to drive up third-quarter 2016 Equity Office Properties assets under management just over 4% sequentially, to $200 billion. We are also reducing our fourth-quarter 2016 and 2017 EPS estimates from $1.13 and $3.55 to $1.10 and $3.45, respectively. The number of visible transaction announcements during third-quarter 2016 (we count 48) was lower than we had hoped for. While announcements could certainly accelerate into year end, the current pace leaves our revenue pipeline estimate trending down approximately 10% Y/Y, which primarily accounts for our 2017 EPS estimate reduction.
Our 12-month price target on the shares stands at $46.
Lindsay LNN-NYSE
Neutral Price $69.30 on Oct. 12
by Boenning & Scattergood
The company operates in two segments—irrigation and infrastructure. Sales in the irrigation unit were up double digits despite continued industry pressures. Sales rose 3% in the quarter (versus our model at –10%), with the U.S. up 5% and international up 1%. Management said that the revenue gains were driven by higher volumes, with pricing essentially flat on a Y/Y basis. Despite the top-line strength, the irrigation operating margin was 8.9%, 230 basis points (2.3 percentage points) below our estimate of 12.2%. On an Ebit contribution basis, irrigation was actually a shortfall relative to our model, with segment Ebit at $8.9 million versus our model at $10.6 million. Still, the top-line performance was impressive.
Infrastructure sales rose 23% in the fourth quarter (versus our estimate of a 20% drop). The result is remarkably strong, given a tough year-over-year comp. On the third-quarter conference call, answering a question on whether a big project should be expected near term, management said there was “no significant project in the backlog by any means.” The top-line strength drove significant margin beat, as well: Segment Ebit margin was 28.2%, the highest since first-quarter 2007. Of note, infrastructure Ebit ($9.3 million) actually exceeded that of irrigation ($8.9 million) despite bringing in just a third of the revenue—a rarity for Lindsay and a vivid demonstration of infrastructure’s role in the beat.
We maintain our Neutral rating but don’t offer a target price.
[Source:-Barrons]
