Apple stock looks cheap ahead of results

By Poornima Gupta

SAN FRANCISCO (Reuters) - Apple Inc <AAPL.O> should deliver yet another bumper quarter, but some investors are holding out for a monstrous second half when the new iPhone hits and a new online content service takes wing.

Solid numbers from the company's quarterly report this week could snap the malaise that has hung over its once unstoppable shares, which have been in limbo since Chief Executive Steve Jobs took leave last January for unspecified medical reasons.

Apple's stock has found itself relatively immobile after quadrupling over the past two and a half years. The share price is up 11 percent on the year, but remain a far cry from brokerage price targets of $450 or more.

The stock rose 2 percent again on Friday in anticipation of stronger second-quarter revenue and profit with component shortages easing for the iPad and momentum accelerating in international markets.

"This stock is still very attractively priced, especially relative to the overall market," said Channing Smith, co-manager of the Capital Advisors Growth Fund, which owns Apple shares.

"About once a year, you get an opportunity when the stock is in a funk and some of the short-term concerns crop up... that's your window to step up," said Tony Ursillo, analyst with Loomis Sayles & Co, which owns Apple shares.

Apart from Jobs -- a survivor of a rare form of pancreatic cancer and the inspiration behind many of Apple's most iconic products -- Wall Street is worried about Google's <GOOG.O> rising prominence in high-end mobile and intensifying competition in digital content with Google and <AMZN.O>.

But the world's largest technology company by market value is expected to present a positive short-term picture when it reports Tuesday.

Solid sales of the aging iPhone in international markets and strong demand for new, thinner iPad 2s likely buoyed the second quarter, which also saw an easing in the supply crunch that previously held back sales of the tablet.

The two mobile products were instrumental in contributing to an expected 60 percent increase in Apple's revenue during the fiscal third quarter, according to analysts and investors.

Lower component costs -- owing to an easing of supply shortage of crucial components from Japan -- is another plus that could boost gross margins to as high as 41 percent.

"I am expecting a strong quarter," Ursillo said. "The concern on the street seems to be more about the outlook for the third quarter, ongoing supply constraints for the iPad and the timing of the iPhone introduction."


Wall Street expects that the outlook for the second half of the year will be enormous for Apple as it may include the launch of a new iPhone, its best-selling product, and one that accounts for about 40 percent of its revenue.

Apple is famously conservative with its forecasts, but investors will pick apart executives' comments to figure out how much the new iPhone will boost revenue.

The California company typically introduces a new iPhone during the summer, but it has yet to reveal any details on the next model. The new smartphone featuring a faster processor will begin shipping in September, sources have told Reuters.

Apple will also roll out its new cloud-based iCloud music storage service in the fall along with updates to its operating systems for mobile devices and computers.

"With our expectation for a big second-half new product ramp, combined with growing challenges at smartphone competitors and potential new carrier arrangements, we believe Apple has plenty of upside left in the stock price," said Ticonderoga Securities analyst Brian White.

Anticipation of a new iPhone may have caused some slowdown in sales during the June quarter, but analysts still expect shipments to be in the healthy 17 million range when the consumer electronics giant reports results on Tuesday.

Wall Street estimates that Apple sold about 8 million new iPads along with about 4 million Macintosh computers.

Apple rolled out its popular iPad 2 tablet in 36 countries in the last three months despite supply being backlogged. Wait times for the iPad ordered online have fallen to 3-5 days from two weeks in United States as Apple ramped up production to meet roaring global demand.

Apple is expected to report earnings of $5.83 a share on revenue of $24.9 billion, according to Thomson Reuters I/B/E/S. Apple has beaten Wall Street estimates for 13 straight quarters.

According to StarMine's SmartEstimate, which places more weight on recent forecasts by top-rated analysts, Apple should post EPS of $6.007 on revenue of $25.3 billion.

(Editing by Robert MacMillan)