Why Apple Gets a Sell Rating

The iPhone is immensely popular and regarded as superior in terms of multimedia applications (i.e., as an entertainment device). Consumer reviews, however, favor the Blackberry when it comes to call clarity, email functionality, and camera quality. Tightfisted R&D expenditures may explain why.

Valuation & Recommendation

Shares are up 15% year to date and valued at 24 times trailing earnings. Chief competitor in the personal computing space Microsoft(MSFT), rated sell, trades at 17 times.

Mobile communications device comparable Research In Motion also trades at 17 times. Microsoft has its share of P&L and earnings quality concerns and has also resorted to cost containment measures to stabilize expense levels. Apple's recent results have not included restructuring or impairment charges. Research In Motion missed estimates in its latest quarter and also has various operational challenges. Earnings management, however, has not been as flagrant as Apple.

Market appraisals for both Microsoft and Research In Motion already discount some of the abovementioned irregularities. Apple may look cheap if recent results are taken at face value. Valuation looks far less attractive without benefit from questionable P&L quality. We reiterate a sell rating and $228 price objective on Apple (target multiple goes to 19 times revised 2010 EPS estimate from 25 times).

--- Written by Chris Bulkey in Narberth, PA

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