Apple: BMO Sees Risk of Subsidy Cut No. 1 Issue

BMO Capital’s Keith Bachman this morning reiterates an Outperform rating on shares of Apple (AAPL), and a $675 price tag, despite concluding this quarter and the September quarter may see the company’s sales of the iPhone be flat or down some, something that may make the stock “consolidate in the current June quarter.”

That’s code for something like “tread water,” I imagine. However, his larger point is one about carrier subsidies, which he comes to later in the report.

Bachman actually raised his estimate for iPhone sales for the March-ending fiscal Q2 to 31.5 million units from 30 million, but he sees only 27 million units in Q3 and 30 million in Q4.

And September might even be below June’s number depending on when Apple introduces the next model, an “iPhone 5″ in October, which is what he’s now guessing at.

Similar speculation was made about an October introduction by Piper Jaffray’s Gene Munster last week.

Bachman’s second, larger point, is that Apple dominates the “profit pool” for smarpthones, making 70% of the profit last year, and its stock has outperformed that of the phone companies selling the phones.

That, suggests Bachman, can’t last:

Apple�s relative stock price has materially outperformed the carriers over the past few years. Our conclusion is that Apple�s domination of the profit pool in high-end handsets, at the expense of other handset vendors and service providers, will not continue for perpetuity. Given the nature of consumer goods, we think this will change. Indeed, we can think of very few industries (only one � PCs), in which one or two companies dominated the profit pool for a sustained period.

He sees little examples here and there of push-backs on the iPhone’s subsidy requirement:

Recently, Telefonica and Vodafone in Spain have made comments about lowering subsidy levels in Spain, which is a cause for concern. Our take is that carriers would optimize economic outcomes by acting collectively in one geography, in pushing back the amount of iPhone subsidy levels, to mitigate the risks of a spike in churn. We don�t see risks to near-term changes in subsidy levels, but we do think: 1) this is the number one risk to the Apple story; and 2) it will change at some point in the future, for the reasons mentioned above. If Apple�s subsidy were reduced by $100/phone in FY2013, then we believe that Apple�s a) gross profit per iPhone would decline from about 50% to 40%, b) Apple�s consolidated gross margins would decline by approximately 500 bps, and c) consolidated EPS would decline by about $7.50 in FY2013.

Lastly, Bachman thinks it will be difficult for Apple stock to trade above a market multiple, “given Apple’s size (both market cap and revenue,” though he does not go into detail.

Apple stock this morning is off $2.93, or 0.5%, at $570.05.