Prudential: "Encouraging" iPod, iTunes Sales Positive Signs for Apple

Strong demand for the iPod shuffle and sales from the iTunes Music Store (iTMS) are "encouraging" signs Apple Computer (AAPL) is tracking above expectations for the remainder of 2005, Prudential Equity Group analyst Steven M. Fortuna commented to clients Friday. As a result, Prudential raised raised its revenue forecast for the second quarter to US$3.16 billion from $3 billion and its earnings per share estimates to 25 cents a share from 23 cents a share.

"We continue to believe that the music story not only has legs but is capable of materially moving the revenue and earnings needles," Mr. Fortuna wrote in his report, obtained by The Mac Observer. "Growth in the music business, the retail franchise, international markets, and core CPUs could drive very strong earnings per share and share performance over the next 12 months."

Prudential has set an iOverweighti rating on the stock, meaning it expects the stockis total return will exceed the average total return of all of the stocks covered by Mr. Fortuna. Prudential is targeting a price of $55 per share on Apple.

Mr. Fortuna also raised his fiscal 2005 forecast to $13.5 billion from $12.9 billion, and raised his earnings per share estimate to $1.17 from $1.08. The current street consensus is $1.04.

Mr. Fortuna has raised his 2005 and 2006 fiscal year estimates for iTMS sales to $480 million from $410 million and $820 million from $740 million, respectively.

"The music story not only has legs but is capable of materially moving the revenue and earnings needles," he wrote.

Prudential raised its iPod unit sales projections significantly for both the March quarter, full year 2005 and full year 2006. The brokerage firm believes Apple will sell 5.2 million iPods in the current quarter, up from 3.9 million, and 21.9 million for the full year, up from 16.9 million. Mr. Fortuna believes Apple has built in comfortable profit margins into its iPod product line so its can lower prices if needed to stave off competition.

As for Macintosh sales, Mr. Fortuna said demand remains "seasonally solid" and "continued strong growth in both music sales and iPod hardware should positively impact CPU attach over time."

"We are currently modeled at 970,000 units for the March quarter," he wrote. "For the full year 2005, we have modeled (Macintosh unit sales) of 4.35 million, or 32% annual growth, including roughly 600,000 (sold) units of (the) Mac Mini."

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