This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Apple: JPMorgan Sees Gross Margin Upside

NEW YORK ( TheStreet) -- JPMorgan analysts, who on Thursday reiterated their "overweight" rating on Apple (AAPL - Get Report) with a price target of $725, expressed optimism about upside potential to the tech giant's gross margin in the March quarter ahead of its earnings announcement next Tuesday.

Mark Moskowitz and Mike Kim also wrote in their report that Apple could be on the brink of driving a major leveraging up for a bigger stock buyback and dividend program that could build a "New Apple" focused on profitable innovations and greater shareholder returns.

"We continue to think that Apple is still trading like a value stock despite its above peer growth potential," they noted.

In its first-quarter earnings report, Apple had forecast gross margins of 37.5% to 38.5% for the fiscal second quarter vs. the peak 47.4% in the same quarter a year ago, prompting investors, particularly growth-based investors, to reduce their exposure to the stock in recent months for fear the company's consolidated gross margin could collapse to the 30% to 35% threshold.

But Moskowitz and Kim wrote a Thursday client note saying these fears are overdone. The supply chain inefficiencies that led to a hit in gross margins have mostly been resolved, they wrote, increasing the potential for higher gross margins in the March quarter and beyond. In their view, Apple returning to 40% or better gross margin could revive interest from growth-based investors who are averse to owning any stocks having downside risk to gross margin.

They further noted that Apple's foray into the midrange segment with a lower-priced iPhone does not mean the company's gross margin profile will collapse. A lower-priced iPhone, which would likely sell for about $350 without an annual service contract, could contain lower quality display and casing components to construct a bill-of-materials close to $175, they estimated. They also said that Apple could reduce costs by using its own applications processor and targeting savings in NAND flash and DRAM memory.

Adding in royalties, freight and logistics costs, and the total cost of sale could equal about $200, implying a 43% gross margin, Moskowitz and Kim calculated. That's lighter than the 45% to 55% profile for the iPhone 4 and iPhone 5, but exceeds Apple's consolidated gross margin figure.

The analysts predict Apple could perform better than investors expect for the fiscal second quarter as iPhone sales reach within earshot of JPMorgan's forecast for 40 million units, "signaling the product has not lost its way." They expect that Apple's June quarter outlook may be conservative ahead of potential iPhone and iPad updates, but that this could be overlooked by investors if the March quarter results were better than expected.

-- Written by Andrea Tse in New York

>To contact the writer of this article, click here: Andrea Tse.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $110.38 0.00%
FB $92.07 0.00%
GOOG $626.91 0.00%
TSLA $247.57 0.00%
YHOO $30.71 0.00%


Chart of I:DJI
DOW 16,472.37 +200.36 1.23%
S&P 500 1,951.36 +27.54 1.43%
NASDAQ 4,707.7750 +80.6910 1.74%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs