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Apple's Margin Massage

How will iMac and iPod price cuts hit the bottom line?

Apple (AAPL) - Get Apple Inc. (AAPL) Report has had a great run since an unexpectedly strong third quarter rekindled investor enthusiasm.

The stock has soared by nearly 40% in about three months, while the

Nasdaq

has appreciated by

just

13%.

So with the computer maker poised to report fiscal fourth-quarter earnings after Wednesday's closing bell, investors are wondering if another strong quarter can elevate a stock that's within 20% of its all-time high.

The answer: yes, though immediate gains may not be great, and Apple's share price can be rather volatile around earnings time.

Standard & Poor's analyst Richard Stice, for example, downgraded the stock last month. But Stice is hardly an Apple bear. He cut his outlook to buy from strong buy, but he still sees decent appreciation in the coming period.

The back-to-school buying rush likely bolstered the fourth quarter --- Stice says he'd like to see double-digit gains in Mac sales -- while the holiday shopping season will carry the first quarter.

Moreover, Apple will probably gain from a new version of its operating system expected early next year and will be helped by its refreshed iPod line.

Analysts polled by Thomson First Call are expecting a fourth-quarter profit of 51 cents a share on revenue of $4.66 billion. In the year-ago period, the company earned 38 cents on $3.68 billion in revenue.

Like many analysts who cover the company, Prudential analyst Jesse Tortora is expecting some upside in the September quarter, but he describes himself as cautious regarding December's outlook. Indeed, his target price is just $74, or 29 cents lower than Tuesday's closing quote.

One reason for his guarded outlook is concern over margins. Apple recently cut prices on both its iMac and iPod lines, and faces rising component costs.

Apple's third-quarter results were driven by the resurgence in sales of its Macintosh computers. Those sales jumped 19% year-over-year in the quarter to $1.87 billion, resulting in the strongest revenue growth for the company's computer business in the last three quarters. Apple ended that quarter with a backlog of orders for its new Macbook consumer notebook.

The company believes that many of its professional customers were holding off buying a new system until Apple completed the update of its professional desktops with

TheStreet Recommends

Intel

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chips.

Apple announced early in September that it was

replacing the Core Duo chips within its iMac line of consumer desktops with Intel's latest processors, the Core 2 Duo line.

Additionally in September, the company introduced new top-end and low-end iMac models and hewed prices on the two previous versions of the all-in-one computer.

As for the iPod, the informal sell-side consensus for iPod sales is about 8.6 million units. However, that level confirms a slowing in the growth of the most-popular digital music player, which has now shipped at a similar level for three straight quarters. In last year's third quarter, the company shipped about 6.5 million of the devices.

Tortora says the iPod standard price cut was the first since the hit music player debuted in 2002 and may well have been a pre-emptive move against

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

, which will launch its

Zune music player later in the year.

"We think the combination of these factors adds risk to Apple's December quarter, falling short of investor expectations," he wrote in a note to clients published this week. Prudential does not have an investment banking relationship with Apple.

Over the last two years, Apple shares have typically swung about 7% or 8% either way in the aftermath of earnings announcements. Given the current level of volatility and pricing of options, the soon-to-be-reported quarter isn't likely to be an exception, says Stacey Briere Gilbert, chief options strategist at Susquehanna Financial Group.

Apple's Options

The biggest recent blip in the Cupertino, Calif.-based company's share run-up was caused by concerns that CEO Steve Jobs could be forced to resign because of his role in the company's possibly flawed procedures for awarding stock options.

But most analysts see that as a low-probability event, despite recent CEO departures at technology companies including

McAfee

(MFE)

and

CNet Networks

(CNET) - Get ChinaNet Online Holdings, Inc. Report

.

Jobs said earlier this month that although he was

aware of favorable grants, he didn't benefit personally from them and "was unaware of the accounting implications."

"We continue to believe Apple's internal investigation was sufficient and Steve Jobs, while aware of options backdating, was not aware of the accounting impact," says Piper Jaffray analyst Gene Munster, whose company does not have an investment banking relationship with Apple.