"The surging sales of the iPhone were not a surprise considering the robust growth in new subscriber additions that have been announced by AT&T, Apple's exclusive U.S. wireless carrier.

"Apple helped to stoke sales by cutting the price of the original iPhone while also introducing a popular new 3G version in June.

"The big jump in Mac sales shows the product remains popular with students as back-to-school promotions helped drive sales. The strong sales of the Mac also suggest that consumer spending for computers may be emerging from their recessionary trough.

Apple's profit for its fiscal fourth quarter ended September 26th totaled $1.67 billion, or $1.82 per share, compared to a year-ago profit of $1.14 billion, or $1.26 per share. Sales jumped 25% to $9.87 billion, with 54% of total revenues coming from the U.S.

"The results easily topped the already bullish expectations of analysts. The consensus estimate was for EPS of $1.42 on $9.2 billion in sales, but the results were also likely ahead of the so-called 'whisper number' that represents the even loftier, unspoken expectations of bulls.

"Profit margins also improved as the company also introduced the latest version of its operating system for the Mac, known as Snow Leopard, during the quarter.

"With upgrades selling for $29, the high-margin product helped to boost the company's gross margin by nearly 2 full percentage points better than last year; it came in at 36.6%, up from 34.7% last year.

"The strong revenue and gross margins resulted in Apple positing its best-ever operating margin of $2.19 billion, or more than 22% of revenue and better than the company's guidance heading into the quarter.

"Looking ahead, Apple guided for fiscal first-quarter revenue in the range of $11.3 billion to $11.6 billion and EPS of $1.70 to $1.78. The company earned $1.78 in the year-ago period and booked sales of $11.45 billion.

"Needless to say, most analysts are brushing off management's forecast; prior to its release, Wall Street was already expecting $1.91 in the current fiscal year.

"A conservative forecast from other management teams would normally send many investors to the exits, but Apple is notorious for low-balling its guidance and then beating it soundly.

"The iPhone, of course, remains one of the big drivers of Apple's success. Apple is set to begin selling the product in China later this month, which is a huge potential new market for the company.

"It is also expanding its carrier relationships in the U.K. and Canada. If Apple is at all concerned about the new Android-based phone being promoted by Verizon, it isn't showing it.

"Wrapping up, Apple's balance sheet remains incredibly strong. The company ended the year with $25.6 billion in cash and short-term investments, up from $22.1 billion at the end of the 2008 fiscal year. The company has zero debt.

"The bottom line is that Apple has a strong product line-up in phones, computers, and entertainment devices. The phone market can be fickle, with customers flocking to the latest cool gadget, so Apple can't rest on its laurels, but it does have a strong start in an expanding marketplace.

"In computers, the Mac remains a niche product compared to PCs running on Windows. However, as a niche product, the Mac lineup has plenty of room to grow.

"Lastly, the iPod's success shows just how difficult it is for competitors to knock a strong product off the top rung of the ladder. Yes, it's a maturing market, but the iPod remains the top performer.

"The question is can Apple top this performance and where does the stock go from here? The stock has more than doubled in the past year and it was up strongly on the earnings report, pushing the P/E -- excluding the pile of cash Apple is sitting on -- to around 24x the current 2010 consensus estimate of $7.08.

"However, assume the accounting change to let Apple recognize iPhone sales immediately (instead of over the life of the contract) boosts EPS estimates by 40% and the company exceeds estimates by 10%, then the stock is really looking at 2010 EPS of close to $11.00.

"Even assuming some estimates have been adjusted to reflect the accounting change, we think Apple can still likely earn $11.00 in EPS. Add back the cash, place a 22x multiple on it (given its close to 20% expected 5-year growth rate), and you have a $270 stock, which will be our new target. Our 'Buy' Rating remains unchanged."

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