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ITC's Prelim Ruling Favors Apple

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Apple Inc. (AAPL - Analyst Report) recently won a preliminary ruling from U.S. International Trade Commission (“ITC”) that temporarily cleared it of four patent infringement charges brought by Samsung Electronics related to certain wireless technology.

Although the current ruling will be reviewed by a six-member ITC panel, the full commission doesn't usually contradict with the judge's determinations. ITC is expected to issue the final verdict in January next year.

The preliminary judgment follows Apple’s recent high-profile win over Samsung. Last month, Apple won a key trial against Samsung at the U.S. District Court in San Jose, California. The nine-member jury ruled that the South Korean company had infringed upon six of Apple’s patents and also rejected all counter claims by Samsung. Moreover, Samsung was ordered to pay $1.05 billion to Apple.

We believe that the verdict has come at an opportune moment for Apple as it has just unveiled its iPhone 5. The latest ruling not only solidifies Apple’s stance in its design related patents against other smartphone makers, but will also serve as precedent in some other cases such as the upcoming ITC trial scheduled in October 2012.

The pending trial will address Apple’s patent infringement allegations against Samsung. Since ITC has the power of blocking import of products that infringe U.S. patents; we believe that an adverse ruling for Samsung may possibly result in ban on its products and will likely boost iPhone 5 sales going forward.

Moreover, Apple’s back-to-back design related wins may force other smartphone makers (HTC, Motorola) to alter their product designs in case they are found guilty of infringement. This advantage for Apple could act as a stumbling block for Samsung and curb the proliferation of Google Inc.’s Android operating systems in the near term.

Apple has been highly vocal about defending its intellectual property from misuse and violations. So far, these lawsuits have yielded mixed results for Apple. The present favorable ruling will definitely be a major morale booster for the company.

Apple remains the biggest growth story based on its product pipeline, popular apps, iCloud, the new iPhone 5, the new iPad, Apple TV and a loyal customer base.  With solid balance sheet and robust revenues, we expect Apple to outperform its peers in the long run.

However, the impending lawsuits and stiff competition from Samsung with its wide range of products in the smartphone and tablet markets will remain an overhang on the stock going forward.

We have a Neutral recommendation over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a ‘Hold’ rating in the near term.

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