Citigroup Ups Apple to Buy

Apple(AAPL Quote) is being hamstrung by product transitions, but should start beating earnings estimates again later this year, Citigroup said in upgrading the stock to buy from hold Monday.

The brokerage maintained its 12-month price target of $82. Apple closed Friday at $63.19, down 12% since the start of the year. The current price is 29.5 times the Thomson First Call earnings estimate of $2.14 a share for the 12 months ending this September.

Citi expects Apple to complete its transition to Intel(INTC Quote)-based microprocessors in August with the introduction of a new, dual-core PowerMac, with Intel-based iBooks coming as early as April. The brokerage also expects Apple to release a new video iPod in April.

"We believe the medium- to long-term story remains intact," Citigroup wrote. "In short, Apple remains one of the best ways to play the digitization of music, photos and video. While [Microsoft's(MSFT Quote)] Vista may close the gap at the operating system level, Apple will maintain a lead with media management apps and on-line downloads."

At the moment, Citi said, Apple is being hurt by product transitions.

"While Apple introduced Intel-based versions of the iMac, MacBook Pro and Mac Mini in early January and late February, recent channel checks with Apple stores suggest that the most profitable of these products -- the MacBook Pro -- remains in short supply," the analysts wrote. "Almost none of the U.S. Apple stores that we called last week had the MacBook Pro in stock and most still have waiting lists of between five and 50 people for the 1.83-gigahertz version of the product. This suggests that Apple will probably not receive much revenue related to the stocking of retail shelves with this product until the second calendar quarter."

Once the issues are resolved, however, the outlook is bright.

"Apple is not likely to post large upside to consensus revenue or EPS during the March or June quarters due to the product transitions discussed above. However, our modeling suggests that the company will begin to generate significant upside again beginning in the September quarter, once the product transitions are behind the company (assuming the current consensus estimates do not trend higher between now and then). "

In early trading, Apple shares rose $1.86, or 2.9%, to $65.05.