Analyst: Apple’s Stock Is Undervalued

Verizon iPhoneConcerns for Apple’s (NASDAQ:AAPL) future have been woven into a well-worn and often-repeated narrative. Yet, among analysts assessing the company, there is one point in the story where opinions differ; some analysts see a different ending.

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While Oppenheimer lowered its price target for shares of Apple on Tuesday and Pacific Crest reiterated a Sector Perform rating on the company’s shares on Wednesday, analysts at FBN announced Thursday that the firm decided to retain an Outperform rating and $650 price target on the iPhone maker.

It cannot be denied that the road ahead will be difficult; Apple has been increasingly challenged by the rising competition from Samsung (SSNLF.PK) — which has proven to be better equipped to expand in the ever-growing emerging markets — and charges that without the guidance of Steve Jobs the company will have difficulties with innovation. Analysts are also concerned that Apple’s gross margins are headed lower over the long term.

However, according to ValueWalk, FBN sees Apple as prepared to address these concerns…

The research firm has postulated that the company will unveil new several new iPhone products — the iPhone 5S and its low-cost counterpart — in the latter half of this year, a move that will help Apple compete with Samsung in emerging markets. Because of this upcoming refresh in the product cycle, FBN has lowered its second quarter sales estimates from 37 million units to 35 million and its third quarter forecast from 43 million units to 30 million. But when the new iPhones are launched, FBN expects numbers to rebound, with iPhone sales increasing to 41 million units in the fourth quarter and 55 million in the first quarter…

In terms of iPad sales, the research firm believes that a new fifth generation tablet and an iPad Mini with Retina Display will be announced later this year, although the time frame is slightly unsure.

As many analysts have suggested — most notably Topeka Capital’s Brian White — Apple should consider increasing its dividend or buyback shares as such an effort will help the company’s stock recover. FBN believes that Apple will likely return capital to shareholders through higher dividend payments. In its opinion, the company will increase the dividend from $10.60 per year, with a 2.3 percent yield, to around $14 per year, with a 4 percent yield.

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While Apple’s gross margin is likely headed down to 33 percent, FBN still argued that the company’s stock is undervalued. Shares hit a 52-week low of $419 at the beginning of March, and while they have appreciated by about 10 percent since then, expectations for the stock are still down. In fact, the firm’s analysts believe the stock has been reduced to such a degree that an upside to the consensus is likely, especially as the current stock price embeds a 26 percent long-term gross margin. Increased competition from Samsung in the smartphone market — where the iPhone provides Apple with its highest gross margin — and the lower-cost iPhone are both factors will pull down the company’s gross margin from the 38.6 percent reported last quarter. However, if levels stay at 33 percent or higher, the stock is still undervalued.

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