Apple Inc. (AAPL) is set to release its earnings on Oct. 19. We expect the company to report strong results for the fourth quarter of fiscal 2009, and therefore raise our price target to $200.

Apple has undergone a total turnaround. The first nine months of 2009 is evidence of this trend, as both revenue and earnings exhibited growth, beating the Zacks Consensus Estimate and the company’s own guidance.

For the fourth quarter of 2009, Apple expects revenue in the range of $8.7 – $8.9 billion. Earnings are expected to be in the range of $1.18 – $1.23 per share. This compares to earnings of $1.26 per share on sales of $7.9 billion during the fourth quarter of 2008.

Although the company provided a cautious guidance, we expect it to post upbeat results. The Zacks Consensus Estimate EPS of $1.42 on revenue of $9.2 billion for the fourth quarter is higher than the company’s guidance. We remain particularly optimistic on Apple’s higher iPhone sales and increased Mac shipments for the holiday season.

Apple reported that it has sold 1 million units of the new iPhone 3G S in just 3 days after its June 19th launch, making it the most successful model launched to date. Thus the fourth quarter will be the first full quarter since the iPhone launch. Apple has recently lowered the price of the iPhone 3G to $99.

Apple sold 5.2 million iPhones in the June quarter, representing a 626.0% unit growth over the year-ago quarter. In the current quarter the company released Snow Leopard, the latest upgrade to Apple’s OS X operating system. In addition, Apple announced new upgrades to its iPod digital media players. We continue to believe that Apple will outperform its peers given its strong iPhone sales and new product launches.

The company is currently benefiting from a positive mix shift to the higher-margin iPhones and iPod business from its traditional MP3 players, as a result of which management posted non-GAAP gross margin of 41.3% in the last quarter. We expect the company to post higher margins as a result of higher sales and the continued mix shift in the next several quarters.

However, Apple faces significant competition in all areas of its business from Microsoft (MSFT), Hewlett-Packard (HPQ), Research In Motion (RIMM), Palm (PALM) and Nokia (NOK).

Year to date, Apple’s share price have more than doubled, far outperforming the peer group as well as the S&P 500. Apple’s valuation premium is justified, given the company’s various positive attributes and leaves room for further upside from the current levels.

Zacks Investment Research
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