By Katie Marsal

Published: 12:00 PM EST (09:00 AM PST)

Saying it's about time for a second-half rally, analysts for UBS Investment Research on Thursday raised their price target on shares of Apple Computer to $80 while maintaining a Buy rating on the stock.

iPods numbers a relief, Macs can grow

In an earnings follow-up note to clients, analyst Ben Reitzes said Apple's sale of 8.1 million iPods last quarter came as a "relief" and that he believes Mac momentum can continue to build in upcoming quarters.

"While concerns over iPod sales ran high going into the quarter, Apple sold approximately 8.1 million iPods in 3Q06 (compared to our lowered estimate of 7.8 million units) representing about 32 percent growth year-over-year and a sequential decline of only 5 percent," Reitzes wrote. "Apple also stated that it remains extremely excited about future iPods in the pipeline and our checks in the supply chain are pointing in that direction as well."

The analyst noted that solid Mac and iPod sales were offset somewhat by weaker than expected sales in the company's other categories, such as music, accessories and software. However, he believes investors "will be pleased" with these solid iPod and Mac sales because they tend to carry more "value" than the other categories.

Raising estimates

In order to reflect the improved product mix and higher margins announced by Apple on Wednesday, Reitzes raised his earnings-per-share (EPS) estimates through fiscal year 2007.

"We believe our revised estimates are more consistent with the [third quarter 2006] trends, which reflect solid growth and profitability," he said.

Apple's fourth fiscal quarter

For Apple's fourth fiscal quarter of the year (ending September), Reitzes maintained his revenue estimate of $4.63B based on 26 percent year-over-year revenue growth. However, he increased iPod revenues while lowering revenue expectations from the company's "other" categories.

The revised estimate factors in 34 percent iPod unit growth year-over-year to 8.6M units and Mac unit growth of 17 percent to 1.45M units. The analyst expects Apple to earn about 49 cents a share for the quarter with gross margins of 28.4 percent and operating margins of 11.6 percent.

Fiscal year 2007

Looking ahead to fiscal year 2007, Reitzes raised his yearly EPS estimates by 10 cents to $2.65 to reflect gross margins of 28.4 percent and operating margins of 12.9 percent. The estimates factor in sales of 52.9 million iPods and 6.7 million Macs.

"We believe that prospects for share gains with Macs are getting even stronger with a new operating system (OSX Leopard), a 3 month plus delay of Microsoft’s Vista and strong acceptance of new Intel Macs," Reiztes told clients.

New iPods and likely iPod phone

While the analyst believes Apple’s iPod and Mac product roadmap should help drive growth in the coming quarters, he continues to believe the company may choose to enter new consumer markets over the next twelve months, including the cell phone market.

"We still expect new video iPods to be released in time for the holidays with higher capacities and bigger screens," he said. "We expect new iPod nanos to be released by the end of the current quarter with larger capacity video iPods to be released in the December quarter."

Of all of Apple's new product opportunities, Reitzes is particularly excited about an Apple branded cell phone due to its potential to capitalize on the 800M+ unit per year global cell phone market. However, he warns that such a product may not materialize until the first half of 2007 at the earliest given some complex intellectual property issues in the mobile phone industry.

"Building on success with iTunes, we believe Apple could create a phone that allows for the easy loading of content (music, video, contacts, photos and more) by docking to a PC or Mac," the analyst told clients. "In addition, Apple could take advantage of its retail distribution to sell the product and create powerful revenue stream of post-sale accessories."