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By Jeremy Glaser | 07-19-2011 04:45 PM

Apple Shares Still Attractive After 'Monster' Quarter

Competitive threats and CEO succession questions shouldn't worry Apple investors, says Morningstar's Joe Beaulieu.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Apple had another outstanding quarter, and I am here today with senior analyst Joe Beaulieu to take a closer look at the numbers and see if the company will be able to sustain its momentum.

Joe, thanks for joining me today.

Joseph Beaulieu: Thanks for having me.

Glaser: So, how do you characterize this quarter?

Beaulieu: Monster.

Glaser: When you look at the individual businesses, what really stood out to you as doing particularly well in the fiscal third quarter?

Beaulieu: Everything did really well except for the iPod line, which is in decline given that pretty much everyone who has a iPhone doesn't need an iPod. iPhone sales were up 150% year-over-year, and iPad sales were up 180% year-over-year. So, obviously the iPad2 is really spurred growth of the tablet market and even without a new iPhone in the most recent quarter, they still grew tremendously.

Glaser: Now it looks like the iPhone 5 could come out sometime later this year, and rumor is that it could also be on the carriers that it's not on the United States yet, T-Mobile and Sprint. Do you think that will drive a lot of new business to Apple or is it really that everyone who has an iPhone right now has access to it, has already bought one?

Beaulieu: I think it will drive growth, as we saw with the Verizon iPhone. You did not have the huge blast that you had with AT&T. Essentially everybody who is desperate to have an iPhone had already jumped over to AT&T. So with Verizon, it's more of a matter of, your phone is up for renewal and you can have a new phone, and you're going to get an iPhone. And I would expect to see the same thing if the iPhone were extended to Sprint and T-Mobile.

Glaser: But it doesn't seem like that expanding competition from Android and potentially from Windows phone is really having an impact on the growth of the iPhone yet.

Beaulieu: Not really, no. Keep in mind that the iPhone is still a very high-end product. Android phones have a much larger span from low-end Huawei phones to high-end Motorola DROID phones. So Apple is still really where it's at in the very high-end of the market.

Glaser: Take a look at the PC business--I know, Apple is on the verge of launching a new operating system. Is that the sort of thing that could drive even more desktop and notebook purchases or is this business really just kind of on autopilot right now?

Beaulieu: I wouldn't say it's an autopilot, because it's still growing extremely well for such a mature line. They only have 7%-8% market share in the desktop and notebook market. So, there is plenty of room to grow there. I don't see the launch of Lion, which is supposed to launch this week, in itself to drive growth, but Apple tends to refresh its hardware lines when it comes out with a new OS. So, you might see a little bit of extra growth there in the current quarter.

Glaser: Now, one lingering concern that a lot of people have about Apple is with CEO succession. Who is going to take over after Steve Jobs leaves? He's currently on medical leave. There are reports that the board is now trying to consider more seriously who's going to replace him, and contracting with some executive recruiters to look at some replacements. What's your take on the succession there? Do you think that Apple can continue to thrive post-Steve Jobs?

Beaulieu: First of all, Steve Jobs responded to that story later today, and he called it hogwash. I saw his performance at the Worldwide Developer Conference; he still seems in good shape. He ... did a one-hour speech.

I think he'll be there for a while. Even if he were to leave campus and never come back again, I think they still have a two to three, maybe even four-year runway of products in the pipeline that could continue to drive growth even after he's no longer on the scene.

Glaser: So, the growth has been pretty spectacular over almost all of the last quarters in memory ... but what does that mean for valuation? Have the shares bid up to really take into account all this good information or is there still some value there?

Beaulieu: I still think there is some value. It's not as much of a screaming buy as it was, say, a month, a month and a half ago. We put it on our best ideas list, I believe on April 15, and since then it's running up about 14%-15%. I still think there is still some room to run, but it's no longer a 5-star stock.

Glaser: Joe, thanks for your take.

Beaulieu: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser.

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