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NEW YORK (MarketWatch) — As investors steady themselves for the release of Apple’s latest generation iPhone this September, analysts from Morgan Stanley say there is no need to fret about this product cycle.
Shares of Apple AAPL, +1.33% were up 0.7% to $99.82 Tuesday morning, a 52-week high and just shy of their Sept. 19 split-adjusted record high close of $100.30. The stock has risen 24% year-to-date compared with a 6.7% gain in the S&P 500.
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Worries about competition and emerging markets aside, analysts say Apple should be better positioned this iPhone 6 product cycle, partially due to improved margins and the belief that its highly-anticipated iWatch is underappreciated.
Here’s 7 other reasons why:
Lower institutional ownership
The top 100 institutional owners of Apple shares hold a 2.3% stake on average in their portfolios. That is down from a peak of 4.5% in 2012 and compares to Apple’s S&P 500 weighting average of 3.4%. While high institutional ownership has its perks, large holdings from mutual funds and hedge funds can also lead to short-term swings that can hurt retail investors.
Positive estimates
Earnings estimate revisions for Apple have recently turned positive, and Morgan Stanley says that is likely to continue even after the launch of the hotly-anticipated iWatch. For the quarter ending in September, analysts in a FactSet poll are currently calling for sales of $39.6 billion, which would mark an increase from $37.4 billion a year ago. Earnings per share are projected to come in around $1.29 a share for the fourth quarter, up from $1.18 a year ago.
Increased cash return
The Cupertino-based tech giant recently boosted its cash return for a total yield, including both dividends and buybacks, of 8.5% this fiscal year. In April, the iPhone maker said it expected to utilize more than $130 billion of cash under an expanded buyback program by the end of calendar year 2015. That included raising its existing share buyback program to $90 billion from $60 billion previously and lifting its quarterly dividend by 8% to $3.29.
Stronger management team
Apple has scored a number of c-suite level talent since its last product cycle. In October, it tapped Burberry CEO Angela Ahrendts to serve as head of retail and online stores. It has also added more than a dozen leaders in key areas such as fashion, digital content, wearables and marketing. Morgan Stanley said it believes Apple CEO Tim Cook now has “the bench in place” to execute on new product categories.
More M&A and R&D
Apple continues to enhance research and development spending, while acquiring companies that will serve to expand its existing technologies. According to Morgan Stanley, Apple’s M&A spend so far this fiscal year is up seven-times that of 2013, while R&D is on track to accelerate a whopping 60% year-over-year in the fourth quarter.
Morgan Stanley analyst Katy Huberty says these are both signs Apple is working to extend iOS beyond the iPhone and iPad. The brokerage also believes the iWatch and bigger-screen iPhone represent an “underappreciated market opportunity.” The iWatch has the potential for up to 60 million shipments the first year.
Stabilizing margins
Apple released the iPhone 5 in Sept. 2012 under compressed margins. Two years later, its margins have stabilized, and Morgan Stanley says it has reason to believe this trend will continue as Apple pulls more money from services, such as its App Store and iTunes. At the same time, warranty expenses as a percentage of revenue have started to decline year-over-year. Morgan Stanley believes Apple will continue to grow revenue and EPS at a single-digit pace over the long term.
More money from services
If Apple’s $3 billion purchase of Beats Music this year was any indication, the company continues to position itself as a seller of third-party products and services. Sales from iTunes, the App Store and other online services are making up a larger share of gross revenue. Morgan Stanley says they are now accretive to corporate average margins and total company growth.
While Apple faces intense competition in emerging markets, particularly from Google GOOG, +0.81% , it has recently expanded points-of-sale in emerging markets such as China, Brazil and India.
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