Firm sees good things for shares of Apple

Though Apple’s U.S. retail sales have been particularly weak over the last two months, and despite the current weak PC “demand environment,” Wit SoundView, an investment-banking firm, believes Apple is showing some signs of “solid execution” and looking good for the future.

“With several catalysts on the horizon and with the company in the middle of several new product cycles, we believe AAPL [Apple] shares have a solid chance of outperforming the S&P 500 over the summer months,” a Wit SoundView analysis said. “We reiterate our buy rating.”

Among the company’s signs that Apple is “executing well” are:

The company has entered a period of sustained profitability and improving fundamentals. “Apple passed its tough earnings period (the December quarter) and EPS should continue to improve over the next few quarters,” Wit SoundView said. They expect Apple to post revenue of US$1.5 billion and EPS [earnings per share] of $0.14 in the June quarter, up from revenue of $1.4 billion and EPS of $0.11 in the March quarter.

Apple is well positioned to grow its U.S. education share. The company’s education units were up 1 percent year-over-year in the March quarter in a poor PC demand environment. “With Windows XP (and Microsoft’s $500 million in marketing dollars) delayed until October 25 and with the new iBook, Apple is well positioned to drive education sales this school buying season.”

Mac OS X is doing well. “With OS X, we estimate that beyond-the-box (BTB) will represent about 18 percent of Apple’s sales in F01, up from 14 percent in F00,” Wit SoundView said. “OS X will likely also help attract new users.”

Channel inventories are lean. As of early May, channel inventories remain at target level of four weeks, the analysis said.

Apple’s two most recent product transitions, PowerBook and iBook, were successful. Both product categories are driving exceptional sales growth despite the poor PC demand environment, according to Wit SoundView.

Apple’s new retail initiative has strategic value. Retail stores should “considerably help” Apple reach out to new consumers, a key component of the company’s strategy, according to the analysis. “Because of the stores’ presence in high foot-traffic areas, the efforts to reach women and the value of in-store demonstration of Apple’s products, we estimate that 50% of Apple’s retail sales will be from consumers who did not otherwise anticipate buying a Mac,” said Wit SoundView.

The company also added that “catalysts” are on the horizon. Wit SoundView thinks that the US consumer demand for personal computers has stabilized for the last 2.5 months and a “snap back” in consumer demand could be a boon for Apple. The company also lists the possibility of a flat panel iMac introduction as boosting “tired” sales of the consumer desktop.

Apple also faces “moderate exposure” to weakness in Europe and Japan. Wit SoundView estimates that Europe and Japan will represent about 19 percent and 13 percent of sales in the June quarter, respectively. (In the March quarter, Europe and Japan represented 25 percent and 15 percent, respectively.)

“Apple is in the middle of several new product cycles, which could help drive the stock,” Wit SoundView said. “Over the last five years, Apple’s stock has handily outperformed the S&P 500 six, nine and 12 months after each major professional product launch.”

Their analysis pointed out that over the last four years, Apple’s stock has also outperformed the S&P 500 by an average of over 31 percent in July and August. Wit SoundView attributed much of the out performance to investors’ anticipation for the back-to-school buying season, which starts in July and ends in September.