With Upside Limited, KeyBanc Downgrades Apple

Apple Inc. AAPL's fiscal fiscal first quarter earnings report prompted at least one Wall Street analyst to move to the sidelines.

The Analyst

KeyBanc Capital Markets' Andy Hargreaves downgraded Apple's stock from Overweight to Sector Weight with no assigned price target (prior $192).

The Thesis

Apple's earnings contained several disappointing read-outs, including declining iPhone sell-through and a weak fiscal second quarter revenue guide, Hargreaves said in a note. As such, investors could reasonably conclude that the smartphone market is saturated with a limited inelastic base. The company's outlook reduces expectations for profit growth moving forward.

Apple's large cash position and strong cash flow over the years "comfortably" supports the case for a more than 200 percent increase in the annual dividend by 2020, the analyst said. This alone could boost Apple's stock over time even in a "stagnant earnings environment." But Apple' management may chose to take a "more modest approach" in its dividend policy so it doesn't subtly signal a lack of growth in its business.

Hargreaves acknowledged his hesitation in downgrading Apple's stock, but at the end of the day, the "secular pressures and soft profit outlook overwhelm the potential for cash return." The analyst's "fair value estimate" of Apple's stock is now $178 and is based on a 9 times EV/EBITDA multiple using a next 12-month EBITDA estimate of $78.7 billion.

Price Action

Shares of Apple were trading lower by 0.4 percent ahead of Friday's open.

Related Links:

Apple's Q1: Meager iPhone Growth Balanced By Strength In Services Segment, China, And Capital Return

Apple Falls On Lower Q2 Guidance, iPhone And iMac Sales Down