In a research note to investors this morning, Credit Suisse analyst Seth Sigman downgraded big box electronic retailer Best Buy (BBY) to Neutral on concerns over about its revenue in the second half of the year. Sigman sees the mobile category failing to deliver the improvement needed to reach quarter comparable sales growth expectations if Apple's (AAPL) iPhone 7 proves to be only a "modest upgrade," as expected by his colleague Kulbinder Garcha.
MOBILE MAY NOT DELIVER: Credit Suisse's Sigman downgraded Best Buy to Neutral from Outperform citing concerns over expectations for Best Buy's second half of 2016 top line results. Sigman believes the mobile category may not deliver the improvement needed to hit fourth quarter comparable sales estimates, citing a colleague's report on Apple being seen making only a "modest upgrade" in its upcoming iPhone 7, with more significant innovation pushed out to the iPhone 8. Additionally, the analyst said Best Buy is lapping market share benefits from Sears (SHLD) , Radio Shack (RSHCQ) , and hhgregg (HGG) , among others, that may become "less incremental" through this year and next. The underlying concern is that while expectations assume a fourth quarter improvement, visibility is lacking, Sigman told investors. He lowered his price target on Best Buy's shares to $31 from $36.50.
IPHONE 7 MUTED CYCLE IMPACT: As details emerge, Credit Suisse analyst Kulbinder Garcha concluded that Apple's iPhone 7 will prove to be a "modest" upgrade, with significant innovations pushed out to the iPhone 8, which is expected to adopt this designation instead of 7s. While the analyst noted that this does not change his view of the long-term earnings per share power of Apple's business, he cut his 2016 earnings per share estimates by less than 1% and his 2017 estimates by 5%. Given the company's high retention rates, a superior ecosystem, a multi-product compute advantage and a growing services business, Garcha believes free cash flow of about $67B should be sustainable long-term. He reiterated an Outperform rating and $150 price target on Apple's shares.
PRICE ACTION: In morning trading, Best Buy advanced fractionally to $29.28 per share.
Reporting by Jessica de Sa-Mota.
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