Stress Testing Apple's Bear Case

Apple Inc. AAPL is down more than 23 percent since hitting its 52-week high, with most of those declines coming in the past month.

Bank of America Merrill Lynch's Wamsi Mohan "stress tested" the firm's bear case scenario for iPhone growth, concluding that BofA Merrill's price objective of $130 and Neutral rating was appropriate.

Mohan notes that the firm assumed a bear case that just 200 million iPhones will be sold in FY 2016, a number that would lower earnings by $0.73 per share. Under that scenario, and assuming that Apple used a lower share price for buybacks, BofA Merrill said that the downside is limited to the low-$90s.

Analyst Wamsi Mohan said that the downside in Apple is largely related to how iPhones perform in the coming year. Mohan forecasted 223 million iPhones for FY 2016 in the likely scenario; however, this analysis focused on what might happen to the stock if iPhone sales come in 10 percent below that at 200 million. Mohan said that it would lower earnings by $0.73 per share.

However, the iPhone sales would not occur in a vacuum, Mohan said. Alongside lower sales, he would expect the company to accelerate its buybacks to $50 billion over the next four quarters, compared with a current forecast of $32 billion. That accelerated timeline would add $0.32 to EPS.

Related Link: Here's Why Apple Is A 'Uniquely Compelling Name To Buy'

If BofA applies Apple's historically low multiple (9x) to these stress tested EPS, it could imply a base at $84 for the stock. However, Mohan called that "an extreme case of applying a trough multiple to trough earnings." Therefore, he forecasted that the downside remains limited to the low-$90 range, which uses a 10x multiple.