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Hargreaves: Apple Guidance Isn't As Bad As It Looks

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Pacific Crest’s Andy Hargreaves believes Apple Inc. AAPL 6.23%'s FQ3 guidance “is not as bad as it first appears,” and that the iPhone would once again see unit growth in FY17, which in turn would drive profit growth.

Hargreaves maintained an Overweight rating on the company, while lowering the price target from $127 to $123.

FQ3 Guidance

“Weak FQ3 guidance reflects overexuberance from Apple early in the 6s cycle, but the impact from channel inventory reductions is not likely to last beyond FQ3,” the analyst mentioned.

Apple reported its FQ2 revenue and EPS below the consensus but in-line with the estimate, although the FQ3 revenue and gross margin guidance was below expectations.

“However, we believe the reduction of high-end iPhone channel inventory largely explains the gap in both metrics. We do not expect the inventory reduction to continue into the iPhone 7 cycle, which suggests gross margin can rebound,” Hargreaves pointed out.

The analyst also expects the iPhone 7 order volume to be smoother than that for the iPhone 6s, through its cycle. Therefore, the initial iPhone 7 Ramp indicates the potential for robust growth through its full cycle.

Estimates Revised

The EPS estimate for FY16 has been lowered from $8.73 to $8.44, to reflect lower channel inventory, while the FY17 EPS estimate has been lowered from $10.07 to $9.31 to reflect expectations of a longer replacement cycle.

Apr 2016Brean CapitalMaintainsBuy
Apr 2016BarclaysMaintainsOverweight
Apr 2016CitigroupMaintainsBuy

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