Trip Chowdhry: China GDP Will Contract, But Buy Apple

Trip Chowdhry of Global Equities Research commented in an e-mail to clients on Monday that even if China's GDP contracts by a "grossly pessimistic" two percent, Apple Inc. AAPL's stock is still attractive. Chowdhry argued in his e-mail that recent weakness in Apple's stock still represents a buying opportunity despite headline China fears. The analyst argued that even in his worst case China contraction scenario, Apple's China revenue (27 percent of total revenue) would only fall by eight percent; resulting in a total revenue reduction of just two to three percent – which is "still very good" and supports a $155 valuation. To further support his position, the analyst took a historical look at the 2008-2009 Global Recession as a proxy for projecting a decline in China's GDP and the resulting impact on Apple's business. Specifically, Nordstrom, Inc. JWN and Tiffany & Co. TIF's revenue declined by three percent over 2008 while Starbucks Corporation SBUX's revenue fell six percent. Meanwhile, Apple's business increased by 32 percent over the same time period. Chowdhry continued that the three companies all sell discretionary items, similar to Apple while also claiming a similar client base as an iPhone buyer and these companies are appropriate proxies for Apple's business. Based on a historical model, Chowdhry is making the following assumptions for Apple's revenue:

• Fourth quarter 2015 revenue will total $48.9 billion.
• Full year fiscal 2015 revenue will total $231 billion.
• Full year fiscal 2015 earnings per share will total $9.06.
• Full year fiscal 2016 revenue will total $239.5 billion.
• Full year fiscal 2016 earnings per share will total $9.58.

Chowdhry concluded by stating that his $155 price target is based on an EV/operating income multiple of 10.7x fiscal 2015 operating income estimate of $69.9 billion; and EV/operating income multiple of 10.3x fiscal 2016 operating income estimate of $72.2 billion.