Apple's shares have troughed, Citi says

US broker Citigroup has initiated coverage on consumer electronics kingpin Apple (NASDAQ:AAPL) with a 'buy' recommendation.

Citi has set a price target of US$675, suggesting an expected improvement of around 20% over the next year for a stock which, despite a recent rally, has declined 19% since September 21.

"Our analysis shows that Apple shares have corrected consistent with the average correction in its own history, with companies that have achieved 4% of the [market weighting in the] S&P500, and with companies that have shown similar deceleration," said Citi.

"Historically, such corrections are followed by 20%-50% appreciation in the following 12 months,” the broker reckons.

Using the market consensus earnings forecast for fiscal 2013, the stock is trading on a forward earnings multiple of 11.3, whereas the S&P 500 index is on a price/earnings ratio of 13.6, suggesting to Citi that Apple's shares "have troughed".

"To be sure, sell-offs in past have been of a higher magnitude, but Apple’s low valuation provides support, achieving trough multiples with a smaller sell-off. To be fair, should Apple shares track to the worst case pullback, significant downside exists. We note, however, that these typically include periods of significant macro combustion, and while this is not out of the question in the current environment, we argue adverse macro outcomes are required to drive the shares below the recent lows. We err on the side of optimism,” Citi admits.

In any case, Citi’s US$675 price target is 11% below market consensus, partly because Apple’s competitors are getting their act together. “Google/Samsung, Amazon, and Microsoft headline these new competitors and bring with them new and different business models. Now armed with increasingly competitive hardware, these new competitors raise the risk of share loss, possibly tempering earnings growth,” Citi asserts.

On top of that, the smartphone market is showing signs of maturation, with penetration already past 25% of the handset market and set to top 50% in 2013. History indicates this will drive average selling prices lower.

Citi thinks the growth in the smartphones market will stem mainly from the low-end, where Apple traditionally does not like to compete. “Deceleration for iPhone sales is a virtual certainty in the next 6-18 months,” Citi predicts, though, on the bright side the US broker thinks the market has been conservative in its predictions of take-up of computer tablets, where Apple is utterly dominant.