Is David Einhorn Right About Apple?

With Apple's (NASDAQ: AAPL  ) annual shareholder meeting coming up next week, investors are likely to focus primarily on Apple's cash problem. It's a good problem to have too much money, but in this case it's still a problem nonetheless.

Ahead of the meeting, Apple is wrangling with hedge fund investor David Einhorn, whose Greenlight Capital holds 1.3 million shares of the company. Einhorn boosted his fund's holdings in the Mac maker by 216,000 shares, or 20%, during the fourth quarter, and is now butting heads with management over the bundling of a proposal in Apple's proxy. Ultimately, Einhorn would like to see Apple issue high-yielding perpetual preferred shares as a clever way to give more back to shareholders.

Einhorn's on to something
For what it's worth, one analyst has Einhorn's back. Topeka Capital Markets analyst Brian White said today that Apple needs to "seize the opportunity" and return significantly more cash back to investors. White doesn't think that Einhorn is dead set on his preferred stock idea, but it's just one of several ways that Apple can reduce its cash balance for the benefit of shareholders.

Source: SEC filings. Calendar quarters shown.

White is also the Street analyst that seems intent to keep the highest price target on Apple at all times. He previously had a target of $1,111, but has now moved that figure down to $888 to accommodate for the recent weakness.

Too much, too fast
By White's estimates, Apple's cash balance could easily balloon to an even more absurd level of $241 billion by 2015 at the current rate unless the Mac maker changes its hoarding ways. To put that figure into context, that would be more than Microsoft's entire current market cap -- just sitting around as cash.

We already know that Apple's money mountain isn't earning a whole lot, in part because it's goal is capital preservation. It's also putting a drag on some of Apple's ratios regarding management effectiveness, such as return on equity and return on assets.

Bring the cash back home?
The bigger hurdle is that most of those dollars are stuck overseas due to hefty repatriation taxes. After the repatriation tax holiday in 2004 set a precedent, companies have continued to hold out in the hopes that another holiday would eventually see the light of day. Nearly a year ago, Apple said it was lobbying for another such holiday, but lawmakers don't seem interested.

Source: SEC filings. Calendar quarters shown.

As it stands, $94.2 billion (69% of total cash) is stuck overseas and cannot be returned to shareholders. This is one reason why Einhorn's idea is appealing: because Apple could fund it with domestic cash.

Another possibility that has been discussed before is the idea of raising debt to boost domestic cash specifically to pay dividends or repurchase shares. While this may seem counterintuitive at first, there is an implicit cost of equity that shareholders demand and if the cost of debt is lower than the cost of equity (quite possible given the current low interest rate environment), then the move would be beneficial in that it could reduce Apple's overall weighted average cost of capital, or WACC.

Apple can afford it
White thinks that Apple could easily afford to boost both its current dividend and buyback authorization. The analyst figures $5 per share quarterly is within reason, nearly twice the current quarterly payout of $2.65 per share. He also thinks that Apple could boost its share repurchase program to an incredible $100 billion over five years.

Either way, it's pretty clear that Apple has to do something about its cash, and when it does, that will probably bring in the value investors.

There's a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 21, 2013, at 6:44 PM, lojikfool wrote:

    Hi Evan, I wonder if Apple can buy back shares with overseas cash, maybe via a holding company or something, I live in Singapore and can buy Apple shares, so why can't they I wonder?

  • Report this Comment On February 22, 2013, at 12:53 AM, geoslv wrote:

    The point that gets to me is that preferred shares can be used to ward off takeover attempts. Apple wants to limit its ability to issue them out of the idealistic sentiment promoted by advocacy groups. I think those advocacy groups are fronts for the vultures that want to control everyone's businesses. Stop giving in to them.

    So Einhorn wants a separate vote on the preferred shares matter. I could support that. I don't know about his current perpetual share idea tho, that's a permanent commitment in what has been an uncertain business.

  • Report this Comment On February 23, 2013, at 1:38 PM, janequick wrote:

    How about Apple pay a fair share of taxes, rather than continuing the example of exploiting corporate loopholes. If a company benefits from overseas labor this is a good citizen to support the domestic economy.

  • Report this Comment On February 25, 2013, at 2:24 PM, The1MAGE wrote:

    janequick, why does everyone like to have people pay their "fair share"? What exactly is a fair share anyway? With some 40% of taxpayers not paying anything, are they paying their fair share?

    If this money is overseas, then it was made overseas sales, not here. And I assume tax was already paid where it was made, so does it make financial sense to pay tax again, especially a hefty one?

    This is about math, pure and simple. They have no reason to create a taxable event simply to make you happy.

    And if you truly want to support our economy, then you should support a reduced tax to get money into our country. There are trillions of dollars that are not being brought to this economy just to avoid the hefty tax involved.

  • Report this Comment On March 05, 2013, at 11:32 PM, RobertC314 wrote:

    "if the cost of debt is lower than the cost of equity (quite possible given the current low interest rate environment)"

    Sorry, because part of the purpose of this website is to increase financial literacy I could not let this go. For a given company, the cost of Debt is ALWAYS less than the cost of equity, regardless of the interest rate environment. The reason is simple: debt is more senior than equity, and thus bears lower risk and begets a lower return.

    Good article otherwise :)

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