David Sterman

That notion is widely known among Wall Street analysts. They realize it's a lot safer to keep your earnings and target prices in line with the hoard of other analysts. If you do go out on a limb with bold predictions right before quarterly results are announced, then you'd best be right.

So when Citigroup's Richard Gardner boosted his target price on Apple (Nasdaq: AAPL) from $480 to $500 on Monday, Oct. 20, just a day ahead of the company's earnings release, you would have expected such a late-breaking call to be quite accurate. "Our checks suggest strong performance in iPhone, Mac and iPad this quarter," he wrote on Monday in a note to clients. And he boosted his fiscal 2011 EPS (earnings per share) forecast from $8.14 to $8.54, well ahead of the $7.29 consensus.

Well, Apple not only missed his profit forecast, but the much lower consensus forecast as well, earning just $7.05 a share in the quarter ended September. Gardner is not one to eat crow. Instead, he's sticking to his guns -- and that $500 price target. His big mistake as he sees it: failing to realize that many consumers would hold off buying new phones in September ahead of the much-anticipated launch of the iPhone 4(S) in early October. Rather than look behind, he notes that the new phone is off to a stunning launch. "In just the first two weeks out of a 14 week quarter, Apple has sold more than 1/3 as many iPhones as it sold during the entire previous quarter."

In effect, Gardner is arguing that investors were mistakenly selling shares on Wednesday (the stock sank by $20). With shares back to the $400 mark, he now suggests "the opportunity is even more compelling." Why now? Because the holiday season is approaching and he expects Apple to post blowout results in the current quarter. To his credit, this is a company that usually delivers upside, not downside -- the actual EPS results were at least 19% ahead of forecasts in the previous three quarters.

And how does he arrive at his $500 target price? By applying a multiple of 11 to his fiscal (September) 2012 EPS forecast of $36 and then adding in Apple's $85 in cash per share. But this is where Gardner is once again sticking his neck out. He thinks Apple will earn far more in the next new few years than consensus forecasts currently anticipate. For example, in fiscal 2012, his $36 EPS forecast is above the peer group's $33 forecast. He expects Apple to earn roughly $40 a share in fiscal 2013, while his peers are at $38. And he expects EPS to hit $42 by 2014.


David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com
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