Apple becoming a bigger cash flow machine

***AppleInsider*** · 06-08-2007, 11:49 AM

Citing their belief that Apple's iPhone and free cash flow potential is even greater than investors realize, analysts from UBS Investment Research joined those over at PiperJaffray this week in raising their firm's price target on shares of the electronics maker to $160.

"We believe that free cash flow and deferred revenue will become more important metrics in driving Apple’s shares through fiscal 2008, perhaps eventually trumping the current quarterly frenzies over iPod and Mac unit sales," Ben Reitzes and his team of analyst told clients in a research note on Thursday.

The analysts say the company's focus on free cash flow growth should expand its price-to-earnings (PE) ratio, similar to events that played out at rival Dell when the PC maker's PE expanded from about 18x to about 30x at its peak in late 2003.

"This year, a free cash flow rebound has contributed to a 29 percent surge for shares of storage leader EMC as well," Reitzes wrote. "In Apple’s case, a free cash flow expansion could have similar results in our view."

Given that more than 80 percent of revenues from Apple's new Apple TV and iPhone products will show up as deferred revenue under Apple's new accounting principles, the analyst said free cash flow could evolve into a better indicator of the company's true "cash profit" once the iPhone translates to material value in the first fiscal quarter of next year.

On the other hand, the analyst said Apple TV may take another year or so to take hold given his view that iTunes will need to offer more films and even pay-per-view services in order for the solution to be attractive enough to compete more effectively with cable boxes and DVD players.

While Reitzes has not yet made material adjustments to his revenue or per-share estimates, he did raise iPhone unit estimates given indications that the product should be extremely well received in the U.S. and his view that build plans out of the supply chain look very compelling vs. unit estimates for sell-through in the second half of the year.

"We are establishing free cash flow estimates of $4.90 per share ($4.37 billion) for fiscal 2007 and $6.50 per share ($5.97 billion) for fiscal 2008," the analyst wrote in his note to clients. "These estimates factor in projected unit sales of 950,000 iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008."

Given those estimates, Reitzes said Apple is undervalued on a free cash flow yield basis versus other growth stocks. He raised his price target on shares of the Cupertino-based company to $160 from $133.

"Our new price target is based on our view that within a year Apple should achieve a 4.5 percent free cash flow yield," the analyst wrote.

[ View this article at AppleInsider.com ]

anantksundaram · 06-08-2007, 03:38 PM

Ben Rietzes says: "We believe that free cash flow .... will become more important .... in driving Apple’s shares..."

An analyst finally discovers "free cash flows" (FCF)?

Sheesh. When are these guys going to figure out that EPS*(P/E) is just a back-of-the-envelope simplification of FCF discounted at the appropriate discount rate? (In other words, any detailed valuation of Apple should always have been based on its free cash flows, and therefore, it is not something that became suddenly important or trendy!).

Aaaaaaargh....... sometimes, I really worry about these guys.

plus · 06-08-2007, 03:56 PM

Quote:

Originally Posted by AppleInsider

"We are establishing free cash flow estimates of ...." the analyst wrote in his note to clients. "These estimates factor in projected unit sales of 950,000 million iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008."

WOW!!! 950,000 million iPhones in fiscal 2007!! That's got to be the most optimistic projection anyone has published yet - more than 100 iPhones for each and every person on the planet ... and then some! Just THINK what this is going to do to the stock price when the word gets around!!!

Bageljoey · 06-08-2007, 04:13 PM

Quote:

Originally Posted by plus

WOW!!! 950,000 million iPhones in fiscal 2007!! That's got to be the most optimistic projection anyone has published yet - more than 100 iPhones for each and every person on the planet ... and then some! Just THINK what this is going to do to the stock price when the word gets around!!!

I'm selling my house to buy Appl!

mgkwho · 06-08-2007, 04:32 PM

Quote:

These estimates factor in projected unit sales of 950,000 million iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008."

Quote:

Originally Posted by plus

WOW!!! 950,000 million iPhones in fiscal 2007!! That's got to be the most optimistic projection anyone has published yet - more than 100 iPhones for each and every person on the planet ... and then some! Just THINK what this is going to do to the stock price when the word gets around!!!

Quote:

Originally Posted by Bageljoey

I'm selling my house to buy Appl!

That's what I wanted to say when the servers were down!

AI, c'mon, how many times do we have to correct your articles?

-=|Mgkwho

britwithgoodteeth · 06-08-2007, 04:39 PM

Quote:

Originally Posted by mgkwho

That's what I wanted to say when the servers were down!
-=|Mgkwho

You must have been heartbroken!

***Kasper*** · 06-08-2007, 04:53 PM

Quote:

Originally Posted by mgkwho

That's what I wanted to say when the servers were down!

AI, c'mon, how many times do we have to correct your articles?

-=|Mgkwho

Guys, it was a simple copy and paste of a quote. That's the way the analyst wrote it in the note to investors. I'm sorry we didn't catch it earlier. However, I appreciate you pointing it out.

Best,

K

minderbinder · 06-08-2007, 05:04 PM

Target of 160? Wow.

I guess I'm not feeling so bad about buying at 80.

Ireland · 06-08-2007, 08:26 PM

Just as well I bought mine when they were worth sweet f-all.

bwik · 06-10-2007, 02:16 PM

Where were they in 2005 with this $160 forecast? Answer: Their 2005 forecast was dead wrong. Their 2006 forecast ($90?) was very probably also wrong. They are concerned that, again, they will be wrong. So they upped the forecast.

Their track record has been consistently wrong through history, particularly in regard to AAPL. They have been too pessimistic. Instead, they should apologize for being such incompetent analysts. What basis to they have to make projections? This "target" is nothing more than conventional wisdom. Of course people expect AAPL to rise -- that's why it is where it is. Believe it or not, it could hit $300 within a couple years.

Analysts' job should be to tell us the future. It is not good enough to tell us about the present -- we already know that. Instead, run the numbers on some various scenarios of market domination of cellphones circa 2009. What will AAPL be then? We all know free cash is slated to rise. It's baked into today's price. What we don't know is future strategic endeavors and pricing powers.

06-08-2007, 11:49 AM	#1
*AppleInsider* Kasper's Automated Slave Join Date: Nov 1997 Posts: 6,159	Apple becoming a bigger cash flow machine Citing their belief that Apple's iPhone and free cash flow potential is even greater than investors realize, analysts from UBS Investment Research joined those over at PiperJaffray this week in raising their firm's price target on shares of the electronics maker to $160. "We believe that free cash flow and deferred revenue will become more important metrics in driving Apple’s shares through fiscal 2008, perhaps eventually trumping the current quarterly frenzies over iPod and Mac unit sales," Ben Reitzes and his team of analyst told clients in a research note on Thursday. The analysts say the company's focus on free cash flow growth should expand its price-to-earnings (PE) ratio, similar to events that played out at rival Dell when the PC maker's PE expanded from about 18x to about 30x at its peak in late 2003. "This year, a free cash flow rebound has contributed to a 29 percent surge for shares of storage leader EMC as well," Reitzes wrote. "In Apple’s case, a free cash flow expansion could have similar results in our view." Given that more than 80 percent of revenues from Apple's new Apple TV and iPhone products will show up as deferred revenue under Apple's new accounting principles, the analyst said free cash flow could evolve into a better indicator of the company's true "cash profit" once the iPhone translates to material value in the first fiscal quarter of next year. On the other hand, the analyst said Apple TV may take another year or so to take hold given his view that iTunes will need to offer more films and even pay-per-view services in order for the solution to be attractive enough to compete more effectively with cable boxes and DVD players. While Reitzes has not yet made material adjustments to his revenue or per-share estimates, he did raise iPhone unit estimates given indications that the product should be extremely well received in the U.S. and his view that build plans out of the supply chain look very compelling vs. unit estimates for sell-through in the second half of the year. "We are establishing free cash flow estimates of $4.90 per share ($4.37 billion) for fiscal 2007 and $6.50 per share ($5.97 billion) for fiscal 2008," the analyst wrote in his note to clients. "These estimates factor in projected unit sales of 950,000 iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008." Given those estimates, Reitzes said Apple is undervalued on a free cash flow yield basis versus other growth stocks. He raised his price target on shares of the Cupertino-based company to $160 from $133. "Our new price target is based on our view that within a year Apple should achieve a 4.5 percent free cash flow yield," the analyst wrote. [ View this article at AppleInsider.com ]

06-08-2007, 08:26 PM	#9
Ireland Registered User Join Date: Feb 2006 Location: Ireland Posts: 8,561	Just as well I bought mine when they were worth sweet f-all. Collecting my SSD iMac Fry-die. :D

06-10-2007, 02:16 PM	#10
bwik Registered User Join Date: Feb 2007 Posts: 186	Where were they in 2005 with this $160 forecast? Answer: Their 2005 forecast was dead wrong. Their 2006 forecast ($90?) was very probably also wrong. They are concerned that, again, they will be wrong. So they upped the forecast. Their track record has been consistently wrong through history, particularly in regard to AAPL. They have been too pessimistic. Instead, they should apologize for being such incompetent analysts. What basis to they have to make projections? This "target" is nothing more than conventional wisdom. Of course people expect AAPL to rise -- that's why it is where it is. Believe it or not, it could hit $300 within a couple years. Analysts' job should be to tell us the future. It is not good enough to tell us about the present -- we already know that. Instead, run the numbers on some various scenarios of market domination of cellphones circa 2009. What will AAPL be then? We all know free cash is slated to rise. It's baked into today's price. What we don't know is future strategic endeavors and pricing powers. Last edited by bwik; 06-10-2007 at 02:23 PM..

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06-08-2007, 03:38 PM	#2
anantksundaram Registered User Join Date: Sep 2006 Posts: 3,233	Ben Rietzes says: "We believe that free cash flow .... will become more important .... in driving Apple’s shares..." An analyst finally discovers "free cash flows" (FCF)? Sheesh. When are these guys going to figure out that EPS(P/E) is just a back-of-the-envelope simplification of FCF discounted at the appropriate discount rate? (In other words, any detailed valuation of Apple should always* have been based on its free cash flows, and therefore, it is not something that became suddenly important or trendy!). Aaaaaaargh....... sometimes, I really worry about these guys.

06-08-2007, 05:04 PM	#8
minderbinder Registered User Join Date: Jan 2006 Posts: 1,395	Target of 160? Wow. I guess I'm not feeling so bad about buying at 80.

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