Analyst Examines Stock Option Investigation Fallout

Merrill Lynch analyst Richard Farmer on Wednesday issued a research report in which he offered an overview of the potential fallout from the investigation into the backdating of Appleis stock options, concluding: "Potential restatements are not likely to be large vs. earnings and market cap. Delisting risk contains to be contained."

However, he offered a murkier look at the potential impact on Appleis executives, stating: "We believe there are not yet enough facts to form a conclusion on whether key executives might have been involved in creating options irregularities at Apple or Pixar, and our default assumption is that Jobs is not likely to have been involved; however, our review of Pixar disclosures does not allow us to rule out the possibility, given Jobs was a member of the board that made options decisions, and our analysis suggests these may contain irregularities."

Looking at a worst-case scenario in which Apple CEO Steve Jobs leaves the company, Mr. Farmer concluded: "Our positive view of Appleis fundamentals does not depend on any single executive. We think Appleis brand, technology, and network effects are largely independent of management and consumers will buy Macs and iPods regardless of who is CEO."

The analyst added: "That said, we acknowledge the stock would likely gap down, at least temporarily, if a key executive such as Jobs were to leave. For instance, when Mark Hurd left NCR in early 2005 the stock dropped 20% (justifiably in that case, in our view) though it eventually traded above and below that departure- related range. All else equal in our fundamental view, we would consider Apple executive related stock weakness to be a continued buying opportunity."

Mr. Farmer retained his "Buy" rating on Appleis stock, with a US$72 price target. At 3:06 PM EST on Wednesday, the companyis shares were selling for $67.70, up 1.88% for the day. The stock has been on an upward trend this week, buoyed by analyst reports similar to Mr. Farmeris assessment.

Thanks to MacNN for the heads-up.