UBS Sees Lower 2Q Sales, new Macs On the Way

| Apple Stock Watch

UBS analysts are expecting that Apple will announce earnings that fall at or just below expectations at its second quarter financial report on April 19, but new Mac products will boost sales. Analyst Ben Reitzes sees weaker than expected iPod sales coming in at 9 million units or lower based on order cuts for component parts, along with mixed sales during the PowerPC to Intel chip transition for the Mac as causes for the lower earnings.

Despite the potential for a lower earnings report, UBS is still optimistic. Music sales have been adding to Appleis bottom line, and that trend is likely to continue. Mr. Reitzes expects Apple will ship new Intel-based iBook laptops and a larger MacBook Pro by June, which will help boost third quarter earnings.

He is also predicting that Apple will report 979,000 Macs sold for the quarter, which is down 8.5 percent compared to last year. The lower sales are attributed to the lack of availability of the MacBook Pro until late February. A pent up demand for Macs should translate into better sales later in the year. iPod sales are expected to be 9.6 million units, which is higher than other analysts are predicting.

Although iPod sales may be weaker than expected, Mr. Reitzes doesnit see a reduced consumer interest in the product. He blames retailer over-ordering, a change in video capable iPod suppliers, and seasonal weakness for the drop in sales.

Other music sales are expected to come in at US$36 million, up 9 percent from last year. The boost in sales is being attributed to iPod peripherals and accessories, and growth in the iTunes Music Store.

Moving forward, Mr. Reitzes expects Apple to issue conservative guidance for the third quarter in fiscal 2006. This is common practice for the company, and it often outperforms its guidance estimates.

UBS is lowering its estimated earnings per share for 2Q2006 from $2.14 to $2.10 based on revenue growth of 43 percent to $19.95 billion. Fiscal 2007 EPS estimates are being lowered from $2.75 to $2.70 based on 25 percent revenue growth to $24.96 billion.

UBS is also lowering its target price from $100 to $95, but maintains that Apple "is one of the best positioned stories in digital media."

Apple is currently trading at $61.79, down 0.95 (1.56%).

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