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China Mobile Deal Strengthens Case for Undervalued Apple

World News Daniel Sparks 2013-12-18 21:39:08 

If The Wall Street Journal is correct, China Mobile (NYSE: CHL  ) could officially announce its deal with Apple (NASDAQ: AAPL  ) tomorrow. At this point, the announcement is basically inevitable; a page on China Mobile's website taking reservations with a picture of Apple's new iPhone 5s basically gives it away. What kind of impact could the deal have on Apple? One analyst believes it could mean 12 million incremental iPhone sales in 2014.

12 million iPhones
The estimate comes from Morgan Stanley's Katy Huberty. Fortune's Philip Elmer-DeWitt says the estimate is one of "the two most persuasive estimates I've seen." The other estimate Elmer-DeWitt is referring to comes from Bernstein's Toni Sacconaghi, who estimated incremental sales of 15 million in 2014. But Huberty's estimate is particularly intriguing because she draws up three scenarios: a bull, middle, and bear case. The 12 million number comes from the middle figure.

In each case, she adjusts the total addressable market gained from the China Mobile deal -- each based on different assumptions of who may follow through with an iPhone purchase. To arrive at her varying addressable markets, she's drawing from China Mobile's subscribers. The world's largest carrier boasts 759 million total wireless subscribes and 176 million 3G subscribers. For each estimated market she projects the total number of incremental iPhone sales based on answers to an AlphaWise survey of China Mobile customers in both large and medium-sized cities.

The bull case suggests Apple could sell 23 million iPhones based on an addressable market of 279 million. The bear case projects 5 million iPhones sold on an addressable market of 121 million. Finally, the middle case suggests 12 million iPhones sold on an addressable market of 195 million.

The benefit of her approach is that it highlights the massive range of possibilities. China Mobile is a wild card in 2014; iPhone sales from the carrier could disappoint, but there could be plenty of upside surprise, too.

Impact on earnings per share
According to Huberty, 12 million incremental iPhones could add approximately $2.40 to Apple's EPS. That would boost trailing-12-month EPS by about 6%. The bullish scenario would provide approximately a massive 12.5% boost to EPS, she says.

Even the middle case would be a significant boost for Apple. Already, the company has a massive share repurchase program working in its favor to help with year-over-year EPS comparisons. And with the stock priced at just 14 times earnings, investors don't expect much as far as bottom-line growth.

Best of all, these estimates only project the impact on Apple during the first year. But since the total subscriber base at China Mobile is so large, the country's fast-growing upper-middle class will probably enlarge Apple's addressable market over time. It's reasonable, therefore, to expect some meaningful incremental demand from the deal for the next several years.

If Huberty's middle-case assumptions turn out to be somewhat accurate, the case for an undervalued Apple looks even stronger.

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