Jeremy Glaser: Apple gets aggressive on pricing; we're still optimistic about Nike; and housing demand looks strong. This time on the Morningstar Weekly Wrap.
Apple announced a new iPad this week, and analyst Brian Colello thinks the low price is a good move to keep users in the iOS ecosystem.
Brian Colello: On Tuesday Apple issued several press releases announcing new products. The most important of which is a $329 10-inch iPad. It's a far lower price than the $499 introductory price that Apple used to issue for iPad Air, and all of the prior versions. We really think Apple is trying to jump-start the iPad with this lower price model. There's a lot of low end competition, particularly coming in from Amazon. We think it's important for Apple to be more price-competitive on the iPad.
It's not a very high gross margin product anyway. The iPhone is much higher gross margin than the iPad, but pricing at that lower price should keep people within the iOS ecosystem, and that's the most important thing. As customers buy the iPad they're more likely to continue to buy iPhones particularly at premium prices, and as we think about an iPhone 8 coming out with some innovated new features--there's a lot of buzz about this new device coming out in September--keeping customers tied to that ecosystem is extremely important.
If you think about the other side, if people start using Android-based tablets they care maybe less about interoperability, and then Apple might not be able to keep that premium pricing on the iPhone. I think the $329 iPad is really interesting.
Glaser: The market was disappointed by Nike's outlook when it reported earnings this week, but analyst R.J. Hottovy is optimistic about the firm's prospects for two reasons. First is the continued growth outside of the U.S., and second is how the company continues to innovate in personalization and technology. Still Hottovy recommends investors wait for a wider margin of safety before buying shares.
Homebuilder Lennar had a good first quarter, but Morningstar's Brian Bernard thinks that shares are fully valued.
Brian Bernard: Lennar, one of the nations largest homebuilders, reported strong first-quarter results this week, and we expect much of the homebuilding sector to follow suit this quarter. We thought that the management team had a noticeably more bullish tone this quarter. They know that the sales pace is accelerating, and that better pricing power should follow. Forward-looking indicators such as, backlog value and community count, both improved year over year and point toward another strong year of growth for Lennar.
During the quarter Lennar completed its acquisition of fellow Florida homebuilder WCI Communities. We like that deal a lot, and we think that it should augment Lennar's growth and profitability this year and beyond.
We did raise the fair value estimate $2 from $47 per share, to $49 per share, but that was just because we think that their longer term tax rate will be more in line with what they're reporting, around 34%. It is about fairly valued, but we think that if the stock does pull back it would be interesting. We do think that Lennar has one of the stronger management teams in the industry, and they're multifamily segment also adds some diversification which a lot of the other homebuilders do not have.
Glaser: In case you missed it on Morningstar.com this week, Dan Rohr took a deep dive into the demographic headwinds China will face in the years to come.