Why You Should Buy Apple Ahead of Earnings

NEW YORK ( TheStreet) -- Apple ( AAPL) is set to report fourth-quarter earnings, and given the hype and hoopla surrounding the iPhone 5s/5c and what's in store with next week's iPad event, it's going to be a doozy of a report. One analyst is making a very bold call, saying shares should be bought ahead of the print.

Morgan Stanley analyst Katy Huberty, who rates shares "overweight" with a $540 price target, notes that "Apple is becoming a clean story again with upside to our estimates, signs of meaningful innovation in iOS 7 and 5s, strong positioning for the next computing cycle (IoT), and rebuilding of the management bench all signs of a positive trajectory in FY14," she wrote in her report. "We are buyers into a strong Sep Q print."

Huberty expects exceptionally strong numbers for the September quarter, due in large part to the popularity of the iPhone 5s. She expects 34.5 million iPhones to be sold in the quarter, but adds that this number could have reached 37 million, if not for supply constraints. That would allow Apple to earn $8 a share, generating gross margins of 37% and $37 billion in revenue.

Meanwhile, Wall Street analysts surveyed by Thomson Reuters expect the Cupertino, Calif.-based firm to earn $7.88 a share on $36.76 billion in revenue. When Apple announced it had sold over 9 million iPhones in the opening weekend of availablity, it raised guidance. "Apple expects total company revenue for the fourth fiscal quarter to be near the high end of the previously provided range of $34 billion to $37 billion, and expects gross margin to be near the high end of the previously provided range of 36% to 37%," the company said in an SEC filing.

As for the all-important holiday season, Huberty expects a monster number, particularly iPhone sales. She predicts that 55 million iPhones will be sold in the December quarter, above Wall Street's projection of 53 million. Last holiday quarter, Apple sold 47.8 million iPhones, so if the 55 million number is hit or exceeded, that would mean 15% year-over-year growth.

The mix of iPhone 5s and iPhone 5c sales is the most important variable in the quarter, Huberty noted. She is assuming that the iPhone 5s, which has exceptionally strong margins, will account for 45% of all shipments, though she notes, "demand has been stronger than expected." For every 5% increase in 5s mix, Huberty notes it would add "$5 of ASP, 10bps of GM, and $0.16 of EPS."

For the quarter, she's expecting earnings of $14.30 a share on $55.6 billion in revenue, with gross margins coming in at 38.7%. Analysts surveyed by Thomson Reuters are looking for earnings of $13.80 a share on $55.4 billion in revenue.

Outside of the earnings number catalysts, Huberty is exceptionally bullish on Apple over the next few months. The upcoming iPad refresh, which is slated to happen on Oct. 22, "would give the product line a much needed boost after shipments fell Y/Y for the first time ever in the Jun Q," she wrote. Cheaper iPhones, such as the 5c, or a discount to the iPhones, would help earnings. It's important to note that while Apple doesn't discount its new products, some retailers, including Wal-Mart, Best Buy, and Target have been discounting the 5c.

Outside of hardware, Huberty notes that the new fingerprint sensor, TouchID, could herald new services to make the iOS ecosystem "even stickier and differentiated." The same could apply to iCloud Keychain and iBeacon, something akin to GPS for indoor locations. Apple acquired WiFi Slam, an indoor-GPS company , earlier this year for a reported $20 million.

One more thing Huberty is bullish on: that little thing called the iWatch.

-- Written by Chris Ciaccia in New York

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