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The Bullish And Bearish Case For Apple


By Michelle Jones

Apple Inc. (NASDAQ:AAPL) usually draws out the bull in analysts, but one firm is predicting destruction for the company. In fact, the $60 per share price target set by the German investment bank is so low that some of you are probably wondering if that’s a typo. No, it isn’t.

Apple’s ultra-bear

Apple Insider‘s Neil Hughes reported on the research note from analyst Adnaan Ahmad of Berenberg Bank. His biggest problem regarding Apple is its reliance on iPhone sales—an issue that was raised by BGC analysts not too long ago, although even at that time, the firm’s price target for Apple was over $100 a share.

In all fairness, Apple does get 70% of its sales and 85% of its operating profits from the iPhone. Because of the company’s hefty size, the analyst thinks it will stumble as the law of large numbers catches up with it.

Any hope in Apple’s future products?

Ahmad believes the accelerated replacement cycle of the smartphone will slow down, resulting in negative growth for Apple’s iPhone volumes. He also thinks there’s a limit to just how much of the high end smartphone market Apple will ever be able to take and predicts that the company is going to have to slash its price premium gradually. He notes that Apple has already done this with the iPod, the iPad and the Mac.

Apple is preparing to launch the Apple Watch in a couple of months, but Ahmad doesn’t expect much from the smartwatch. However, he’s a big fan of the idea that Apple might build a car. He echoed the same worn-out suggestion we’ve heard so many times before: Apple should buy Tesla.

Again, a Tesla acquisition seems unlikely from any angle, as does the idea of an Apple car actually landing on the market one day.

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Adnaan Ahmad has a total average return of -1.3% and a 61.1% success rate. Ahmad has a -38.1% average return when recommending AAPL, and is ranked #2744 out of 3500 analysts.

 

Apple price target upped by Stifel

On the bullish side, Stifel analysts actually increased their bullish price target for Apple from $130 to $150 per share this week. They think investors will respond positively when management reveals their capital return plans going forward, which they are expected to do in April with the company’s next earnings report.

Stifel analyst Aaron Rakers and his team expect Apple to announced a capital return program of at least $150 billion, including a dividend that’s greater than 25%. They note that the company’s free cash flow has been over $40 billion for the last 13 quarters. Also Apple issued new debt recently, which could be used to fund share repurchases and dividends.

The Stifel team notes that Apple has returned 78% of its free cash flow since management began their capital return program in September 2012. The company has trimmed its share count by 11.4% since then and continued an annualized dividend payout of between $10 billion and $11 billion. Additionally, Apple upped its dividend per share payout 15% in 2013 and 8% in 2014. In their view, Apple can comfortably up its dividend to between $13.5 billion and $14 billion per annum, which would be between $2.30 and $2.40 per share or a 1.8% dividend yield.

Analyst Aaron Rakers has a total average return of 30.5% and a 77.1% success rate. Rakers has a 27.5% average return when recommending AAPL, and is ranked #93 out of 3500 analysts, according to TipRanks.com.

 

Apple may disappoint on capital return plans

Not everyone has such high hopes for Apple’s capital return plan, however, as Forbes contributor Chunk Jones thinks investors will be disappointed. He thinks Apple will up its dividend by 6% to 9%, and the reason he thinks it will be so low is because of the compounding impact of continually raising the dividend each year.

Jones has a -19.3% average return when recommending AAPL, and is ranked #3914 out of 4230 Bloggers, according to TipRanks.com.

Of course Apple is limited in terms of how much capital it can return because so much of its cash is overseas. Jones points to comments made by UBS AG analyst Steven Milunovich, who suggested that Apple might keep the amount of its share repurchase plan small with a shorter time frame than in past announcements. The reason for this is because lawmakers have been discussing tax cuts on profits made overseas.

As a result, it does seem likely that Wall Street will be disappointed because the amount of share buybacks Apple is planning might not be as high as investors would like.

As of this writing, shares of Apple were up by 1.26% to $130.41 per share, still hovering close to the recent record highs in the $130s.