UBS Weighs In On Apple And GE

By Yoni Kalin

UBS analysts provide updates on tech giant Apple Inc. AAPL and multinational conglomerate General Electric Company GE as they discuss weak hardware upgrades in anticipation of the iPhone 5se and share takeaways from an executive meeting about GE Healthcare's business growth.

Apple Inc.

UBS analyst Steve Milunovich reiterated a Buy rating on Apple with a price target of $120. He believes that Apple's new iPhone 5se, set to be announced on March 21st, could help the company be more "proactive," despite F16 proving to be disappointing as iPhone upgrades fell short of earlier expectations. Milunovich believes the iPhone 5se, priced at $450, could increase upgrades among 40% of users who still own the iPhone 5. Further, he estimates that the new iPhone model can add 12 million incremental units this year, or about $0.25 per share, conservatively.

Milunovich's original forecast that 70% of the installed base would upgrade to the iPhone 6 by the end of F16 was "optimistic." Upgrades were slower as the base of used phones is not known by investors, but the users are likely to upgrade more gradually, and upgrade cycles in developed countries are lengthening based on remarks from large mobile providers AT&T and Verizon.

The current iPhone user base is split among four iPhone sizes, 40% of whom still use the iPhone 5 hardware. About 20% of users prefer a smaller phone and according to Milunovich, emerging market customers are price sensitive but want reasonably up-to-date technology. He thinks the 5se can meet these needs with iPhone 6 level technology at a 5s $450 price point. Milunovich concludes that Apple should become more active in the used phone market by refurbishing phones as "market maturity requires more aggressive upgrade incentives."

According to TipRanks, which measures analysts' and bloggers' success rate based on how their calls perform, analyst Steve Milunovich has a yearly average return of 0% and a 39% success rate. Milunovich is ranked #2185 out of 3795 analysts.

General Electric Company

Shannon O'Callaghan of UBS reiterated a Buy rating on General Electric, with a price target of $32 after meeting with GE executives who discussed plans to drive higher margins and growth at healthcare.

O'Callaghan writes that GE and its healthcare business are now more focused on product and service costs, taking managing, messaging, measuring, and compensating into account. GE Healthcare is targeting 18% operating margins in 2018, up from 16.3% margins in 2015. Key drivers of lowering product cost, according to O'Callaghan, include design productivity (engineers focused on material cost reduction, new product launches at higher margins), low-cost procurement, manufacturing (targeting an increase in factories from 5 to 60), and dual-source supply from 28% to 50%.

Within the healthcare business, Life Sciences and Ultrasound are GE's growth drivers. Life Sciences grosses $4 billion in revenue (20% margins, $1B in FCF). The business began with GE's acquisition of Amersham and is now positioned to outgrow the 10-15% CAGT in biopharmaceuticals from 2015-2025. Ultrasound has grown sales at a 10% CAGR from 2010-2015 and improved margins by 700 bps in a market that experienced 10% price erosion. GE plans to expand Ultrasound's success model of new products to the rest of GE Healthcare.

O'Callaghan concludes that from 2010-2015, GE Healthcare's revenue and margins have been near flat. Looking forward, three things can potentially improve the trajectory; 1) "Greater focus on cost under new Healthcare management; 2) Signs of life in the US after ACA uncertainty and bottoming China tenders with 2016E flat to slightly up -4.5% in 2015; and 3) new management brought in this week to turn around GE's $2B Healthcare IT business."

According to TipRanks, analyst Shannon O'Callaghan has a yearly average return of 16.3% and an 80% success rate. O'Callaghan is ranked #63 out of 3795 analysts.