July 7, 2009: Morning Call

July 7, 2009: Morning Call

Fair Value: SP500 – 895.02; NDX: 1440.22; DOW: 8271.58

Technical Levels:

SPX: 765, 788, 832, 875-880 support/ 935-943 resistance

Events:

13:00: Treasury auctions 35 billion in 3-year notes
16:30: API Crude Oil and Gasoline Inventories
17:00: ABC Consumer Confidence (July 5): -50


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 2 points above fair value and the NASDAQ futures are trading 4 points above fair value at 7:45am ET. Asian markets closed mixed (Japan down 0.34%, Hong Kong down 0.65%, Shanghai down 1.1%, Taiwan up 0.98%, South Korea up 0.27%, India up 0.90%). Construction stocks rose in Taiwan after Ting Shin International Group bought a 20% stake in Taipei 101 from China Development (2883.TT), which jumped 6%. Tech stocks in South Korea continued to be supported by Samsung Electronics (005930.KS)’s guidance yesterday. Samsung itself benefited from a broker upgrade and added another 3%. LG Electronics (066570.KS) jumped 5% after announcing it would reorganize its manufacturing plants and expand its investments in Mexico. Japan extended its losing streak on persistent concerns over the likely strength of any economic recovery, while exporters were dragged lower by worries over a strengthening yen. European markets have reversed modest losses on the open and are currently trading up 0.50% to 1.0%. British industrial production and manufacturing production numbers came in weaker than expected while German factory orders came in better than consensus. Basic material, financial, and industrial sectors are outperforming while the health care and telecom sectors are lagging.

Research Calls/Market Moving News:

AAPL (138.61): Piper Jaffray’s Gene Munster reiterates a buy rating and 180 price target and is “increasingly confident in June Mac and iPhone estimates.” “We are increasingly confident in our 2.2m Mac and 5m iPhone unit estimates for the June quarter given the following data points: • New lower-priced 13" MacBook Pros have a 7-10 day lead-time at Apple's online store (we have not seen similar delays on 13" models in over 2 years at 5-7 days). • 7 of 10 Apple retail stores we called are in short supply of 13" MacBook Pros. • NPD (April & May) tracking down 3%, vs. our model of down 10% for the June quarter. We expect NPD for the June quarter to be tracking up 1% once the month of June data is factored in. • Media sources are reporting that AT&T had its best retail sales day ever at the launch of the iPhone 3GS (i.e. an improvement from the iPhone 3G). Shortages Indicate Strong Mac Sales In June Quarter. Apple's online store is currently showing a 7-10 day delay in shipments of some models of the 13" MacBook Pro. Recall that Apple re-branded the popular 13" aluminum MacBook as the MacBook Pro and lowered the price on 6/8. We track product lead-times and our records show that Apple has never had a 7-10 day delay on its most popular 13" model, with the most recent significant delay being 5-7 days over 2 years ago in 9/08. We see this as a sign that demand is outpacing the company's build expectations, and it may take several weeks to reach a supply demand equilibrium. delays at its online store, Apple retail stores are experiencing shortages in some 13" MacBook Pro models. Of the 10 Apple stores we contacted, 7 are short of at least one 13" MacBook Pro model. Again, we see this as a sign of strong demand for Apple's most popular computer, which gives us increasing confidence in our 2.2m Mac unit estimate for the June quarter. AT&T Indicates Recent iPhone 3GS Launch Better Than Previous Launches. Several media sources are reporting that AT&T had its best retail sales day ever at the launch of the iPhone 3GS. While Apple has indicated the 3GS launch was as good as the 3G launch a year earlier (both reached 1m units), AT&T has indicated that the Jun-09 launch was its best-ever retail sales day and the largest order day in att.com history and (i.e. an improvement from the iPhone 3G). We are modeling for 5m iPhones in the Jun-09 quarter, a reduction from the 6.9m units the company sold in the launch quarter of the iPhone 3G. However, these datapoints suggest domestic sales of the new 3GS are tracking ahead of Apple's internal expectations. That said, the 3GS was launched in just 8 countries this year (vs. the 3G in 21 countries last year), so the international units will likely be weaker. The Bottom Line On Our iPhone Estimates. While we could be raising our June quarter unit numbers from 5m, we are maintaining estimates given a successful 3GS launch was built into our numbers and we remain significantly above the Street for June quarter iPhone unit estimates."

AAPL (138.61): BMO Capital reiterates their overweight rating and raises the price target to 152 from 150. “In this note, we take a look at Apple’s guidance for the September quarter, focusing on the introduction of the new iPhone and MacBook models with lower price points, and the impact to Apple’s gross margin. At the product level, we believe gross margins for both iPhones and MacBooks in the September quarter will decline owing to higher cost of goods sold (COGS) and lower pricing. However, factoring in mix, we believe overall gross margins should remain at healthy levels of 34%-35%, owing largely to increasing iPhone contribution. Further, we believe that Apple has been aggressive about reducing supply costs, to help offset the cost of
richer configurations and lower consumer ASPs. We offer a few main points:
1. iPhone impact, like for like. Given the $100 price cut and higher COGS, we believe gross margins for the new 16GB iPhone 3G S is currently around 53% versus 63% for the
previous 16GB 3G during the March quarter, or approximately a 940 bp decline.
2. iPhone, net of mix. We estimate total iPhone gross margins decline to 52% in the
September quarter from 59% in March, or approximately a 690 bp decline. We believe that mix within the iPhone family will help offset the like-for-like pricing pressure. Moreover, we note that profit margins on the 32GB iPhone are greater than the 16GB iPhone, given that the increase in price is greater than the increased cost of flash.
3. MacBook impact. For MacBooks, we assume a $50 price cut in ASPs lowers gross
margins to 25% in the September quarter from 30% in March, or approximately a 510 bp
decline.
4. Despite the price cuts, we believe Apple’s overall gross margins in the September quarter should be in the 34%-35% range, helped by higher mix of iPhones. Given Apple’s conservative guidance posturing, we would not be surprised if Apple provided gross margin guidance in the 32% range.
5. Estimate changes – higher. We are modestly raising our CPU and iPhone unit estimates as well as raising our gross margin assumption. We are raising our June CPU forecast to 2.4 million units from 2.2 million, and raising our iPhone forecast to 4.5 million units from 4.2 million. Net, we are raising our EPS estimate to $1.17 from $1.04, which compares with the Street $1.15. For FY2010, we are raising our GAAP EPS estimate to $6.10 from $6.00, and our non-GAAP EPS estimate to $7.00 from $6.75.
6. Raising target. Given our estimate changes, we are raising our target price to $152 from $150, based on 20x-22x our GAAP EPS plus cash, or 20x-22x our non-GAAP estimate. We note that June quarter results will be impacted by the release of iPhone OS 3.0, in which Apple did not recognize new iPhone sales until June 17, or only two weeks of revenue recognition. We believe the iPhone accounting treatment will impact June quarter revenues by approximately $200 million and EPS by $0.05. Still, we believe Apple will be able to at least meet Street estimates of $1.15. If Apple were to report June quarter EPS of $1.20-$1.30, we believe Apple will guide September quarter EPS in the range of $1.05- $1.15, or a 10%-15% q/q decline."

Information Technology Spending to Drop 6 Percent, Gartner says- Bloomberg: “Spending on information technology will drop 6 percent to $3.15 trillion this year, more than previously forecast, as the economic crisis forces companies and consumers to cut back, researcher Gartner Inc. said. “While the global economic downturn shows signs of easing, this year IT budgets are still being cut and consumers will need a lot more persuading before they can feel confident enough to loosen their purse strings,” Gartner said in an e-mailed statement. In March, the Stamford, Connecticut-based researcher had predicted a 3.8 percent decline for 2009. The drop is worse than the slowdown after the Internet bubble burst in 2001, when technology spending fell 2.1 percent. The “full impact of the global recession on the IT services and telecommunications sectors is still emerging, and forecast growth in these areas has been further reduced significantly,” Gartner said today. The researcher also changed its forecast because the U.S. dollar rose against most currencies in recent months. Computer-hardware sales will fall the most, with spending on equipment declining 16 percent, Gartner said. That compares with a 2.5 percent gain in 2008. Spending on services, software and telecommunications gear will also drop. For 2010, Gartner predicts spending on information technology products and services will increase by 2.3 percent."

INTC (16.54): Bank of America Merrill Lynch upgrades INTC and other semiconductor stocks: Intel (INTC) upgraded to buy from neutral; target is $19. LSI Corp (LSI) upgraded to buy from underperform; target is $7. Marvell (MRVL) upgraded to buy from neutral; target is $17. Maxim Integrated (MXIM) upgraded to neutral from underperform; target is $15. National Semiconductor (NSM) upgraded to neutral from underperform; target is $13.

Goldman Sachs upgrades DKS, JNY, KSS; downgrades BJ: Dick's Sporting Goods (DKS) upgraded to buy from neutral, tp $20. Jones Apparel (JNY) upgraded to buy from neutral, $12. Kohl's (KSS) upgraded to buy from neutral, tp $50. Downgrade: BJ's Wholesale (BJ) downgraded to sell from neutral.

APC (41.79): Anadarko Petroleum upgraded to buy from neutral at Bank of America Merrill Lynch

HES (48.62): Hess Corporation upgraded to overweight from equal-weight at Barclays Capital: Valuation cited. Target is $75.