Apple stock should shine again

By Michael V. Copeland, senior writer

(Fortune) -- As reliable as a holiday fruitcake that shows up season after season, Apple's stock could once be counted on to ride a year-end price bump. The swirl of anticipation for the shiny new gadgets CEO Steve Jobs would reveal at January's annual Macworld product-fest usually gave it a lift. But not this year.

Rather than rising in this brutal fourth quarter Apple (AAPL, Fortune 500) has fallen 36% in the past three months, outrunning the 31% decline of the Nasdaq and the 29% drop of the S&P 500 in the same period.

This is clearly not a normal year for anything, and Apple's share price collapse, down 55% since the beginning of the year - coupled with the recent revelation that Jobs will not present at Macworld ever again - has caused some stalwart Apple supporters to lose faith.

But should you? That depends in part on whether you bought Apple at around $200 last year this time, or are contemplating it now at around $85.

Analysts from Goldman Sachs, Oppenheimer, Morgan Stanley among others have downgraded the stock recently. In the face of uncertain consumer demand for iPods, iPhones and most importantly Macintosh computers heading into 2009, even the most bullish Apple analysts have lowered revenue estimates for the coming year.

Following the news that Jobs was pulling out of Macworld, Oppenheimer analyst Yair Reiner, downgraded the stock to "perform" and refused to give a price target. Like others, Yair speculated on what the announcement implies about Jobs' health (Jobs has been battling cancer).

"We don't know why Steve Jobs has pulled out of his annual address at Macworld," Yair wrote in a note. "Maybe he's not feeling well, or maybe he just has nothing new to say. Whatever the reason, the unexpected announcement has underscored the greatest risk to Apple's long-term success--its dependence on Jobs' health and its apparent lack of succession plan...It's past time for Apple to either disclose the state of his health or elaborate a viable plan for eventually transferring power."

Goldman Sachs analyst David Bailey, pulled Apple from the bank's "buy" list citing lower-than-expected shipments of Apple gear in the most recent quarter and a "nearer-term outlook that is less positive." Bailey also cut his 12-month price target from $125 to $115 a share.

"It now looks unlikely that Apple will launch a new product category at Macworld in early January, taking away a potential catalyst for the shares and causing Apple to try and generate demand in a tough environment without the benefit of a new offering." The stock was downgraded from a "buy" to "neutral."

But if you didn't buy Apple back in May, at around $180 a share, when the Cupertino-based, Calif.-based company was added by Bailey to the Goldman Sachs "Conviction Buy" list (not much conviction there apparently), is it a value at less than half that price?

Leaving aside the question of Jobs' health and his possible successor, which is a big uncertainty, the underlying fundamentals of Apple are solid. Consider the $24.5 billion in cash Apple is sitting on, with no debt. That's north of $27 a share in net cash per share alone (at $95 a share). Apple's balance sheet is a monumental advantage over competitors like Dell (DELL, Fortune 500) and HP (HPQ, Fortune 500), which gives Apple both solidity and the flexibility to move quickly if necessary in this economy.

And while slightly below most estimates in the teeth of the global recession, sales of the new line of MacBook notebook computers, higher priced iPods and the 3G iPhone are still relatively strong, especially compared to other PC and smartphone vendors.

Needham analyst Charlie Wolf shrugs off the Jobs' Macworld exit. "Apple wants to get away from the tyranny of Macworld where it is forced to introduce new products on IDG's (the show's producer) schedule than its own," Wolf says, adding that his sources indicate, "Jobs is cancer free."

Much of the weakness Apple may see in iPod and Mac sales next year should be offset by iPhone revenue, Wolf predicts. Wolf has a "strong buy" rating on Apple with a lofty 12-month target price of $240, assuming 2009 revenue of $36.6 billion and a forward P/E of around 18.

That is about as a high a price target as you can find among analysts - most are clustered in the $115 to $125 range. Barclays Capital, which also has a buy rating on the stock, has a 12-month price target of $113 based on a 20X multiple of EPS in fiscal 2010 of $5.70.

"We continue to believe that Apple deserves a much higher multiple relative to both the group and the market; given it is one of the best long-term growth stories in the space," wrote Barclay's analyst Ben Reitzes in a note following the Macworld announcement.

Reitzes too, loves Apple's cash position, estimating $10 per share in free-cash-flow in fiscal 2010. "While we see a few tough quarters (ahead), the company's business model should still allow it to garner above average returns over the long-term."

Long-term seems to be the key with Apple. Does long-term mean a future at Apple without Steve Jobs? At some point yes, but does that mean Apple will stop offering the superior user experience upon which it has built its reputation and market? Not likely.

You can beat yourself up over share price moves between now and midyear, when most folks expect new products to once again come out of the Apple factory. But if you hold on long term Apple ought to bring some rewards, especially if you are getting in now.

source : http://money.cnn.com/2008/12/24/news/companies/apple.fortune/index.htm?postversion=2008122410