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Canaccord Genuity on Apple, Home Depot, and Microsoft

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Apple is in a slump while Home Depot beat expectations with its earnings. Plus, Steven Sinofsky leaves Microsoft.

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The following are excerpts from Canaccord Genuity's Morning Coffee, a compendium of news on market-moving equities.

Apple (NASDAQ:AAPL): Taking a bite.

Apple, once a market darling, has slumped in recent trading as it combats slowing top-line growth rates and contracting gross margins as competitors fight for market share in categories Apple invented. This has contributed to the (so far) rapid 25% decline in share price from its peak at $705 in late September. Also contributing to the downward momentum is the notion that AAPL's "innovation momentum" is in secular decline because, after all, how many new product categories can AAPL create and dominate?

Mostly though, AAPL is a "fiscal cliff" stock. Billions in pregnant capital gains in this name will be crystallized before calendar year end because cap gain rates in the US are going up next year no matter what happens with the fiscal cliff negotiations. So we will pay less tax today rather than more tomorrow. OK, the short-term drivers in this downtrend are currently prevailing, but with a 12x trailing P/E, high top-line and EPS growth rates, a 2% yield, and 20+% of the current $515 billion market cap covered with cash, we think that value buyers are taking notice and will soon start re-owning this name.

Home Depot (NYSE:HD): Nailed it.

Home Depot reported Q3 earnings and revenue that beat expectations, which was helped by recent improvements in the US housing market. Earnings came in at $0.74 per share, topping the consensus estimate of $0.04. Revenue increased 4.6% from the prior year to $18.1 billion, beating the Street estimates by $150 million. Same store sales improved by 4.2% overall and by 4.3% in the US, helped by the housing recovery. Credit Suisse notes that dynamic continues to point to even stronger future results as a housing recovery picks up steam.

Looking ahead, management increased its full-year guidance, expecting adjusted EPS to increase by 23% to $3.03 versus the consensus estimate of $2.97. The company forecasts revenue to rise by 5.2% to $74.1 billion, while analysts were expecting $73.8 billion. Credit Suisse continues to believe that management is a difference maker for HD, with Chairman & CEO Frank Blake and CFO Carol Tome laying a foundation for steady operating performance. They note that a combination of smart strategic decisions -- such as distribution changes, enhanced customer service and solid tactical execution -- have helped HD achieve consistently strong results. On the back of a solid Q3, the brokerage reiterated its bullish rating while increasing its full-year earnings estimates and target price for the stock.

Microsoft (NASDAQ:MSFT): Change near the top.

Microsoft announced that Windows and Windows Live chief Steven Sinofsky is leaving the company to pursue other opportunities. Julie Larson-Green will be promoted to lead all Windows software and hardware engineering. Many had thought that Sinofsky would be next in line for the CEO role once Steven Ballmer retires, particularly if Windows 8 is a success.

While no specific reason for his departure was given, tech sites are buzzing with several different theories. One said that Sinofsky left due to his "abrasive" personality and habit of "putting up roadblocks for products" that are perceived as a threat to his power. Another said that Sinofsky threatened to quit if not given the proverbial tap on the shoulder to become CEO and Ballmer called his bluff. On top of this, sales of the recently launched Surface tablet are reported to be tepid, and may only reach 60% of the company's forecasts by the end of the year.

Editor's note: For more information on Canaccord Genuity, click here.
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No positions in stocks mentioned.
Canaccord Financial and its affiliated companies may have a Corporate Finance or other relationship with the companies mentioned and may trade in any of the Designated  Investments mentioned herein either for their own account or the accounts of their customers, in good faith and in the normal course of market making. The authors have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Corporate Finance activities, or to coverage herein.
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