Can Apple Hit $600? Carl Icahn Thinks So.

It wasn't long ago that you might have been wondering if Apple (NASDAQ: AAPL  ) would be able to hold the $400 per share level, having fallen all the way from above $700 per share last fall. With the stock finally trading above $500 again, you may have begun wondering if it can run all the way to $600. Here's a hint: activist investor Carl Icahn thinks it can -- and should.

Tuesday, Icahn tweeted that he had chatted with CEO Tim Cook, expressing his view that "a larger share buyback should be done now." The Wall Street Journal reported that Icahn's position is believed to be around $1.5 billion. In an interview, Icahn went further, saying: "Buy the company here and even without earnings growth, we think it ought to be worth $625." It is important to note that despite the size of the activist investor's position, it only represents a roughly 1% interest; the company is simply too big for Icahn to grab a controlling portion.

Buy, buy, buy
Central to Icahn's idea is the reality that Apple has the ability to accelerate its borrowing to finance the share buyback that he is advocating. If the company borrowed at a roughly 3% interest rate and bought back shares for approximately $525 per share, the transaction looks favorable because it should increase EPS by lowering the number of shares outstanding. The net effect would be positive for shareholders.

Noted Apple analyst Gene Munster of Piper Jaffray sees the advantage of Icahn's plan, but warns that it is not Apple's style:

[I]t would be accretive because of the lower share count. The math on this makes a ton of sense. The problem, Apple moves incredibly slow. I wouldn't think anything big is going to come out of this over the next few years.

Still, after David Einhorn brought a shareholders' suit against Apple earlier this year, the company accelerated the buyback program. What the company does next will be important to watch, but I agree with Munster in that whatever Apple does, it will be sure that it does not look like a reaction to Icahn.

Is $600 attainable?
Perhaps more important than any reaction from Cupertino to the disclosure from Icahn is the message that it sends to the investing world. Apple has been languishing in somewhat of a rut, trading essentially between $400 and $500 for some time. If Icahn's tweet acts as nothing more than as a catalyst to get people talking and thinking about the stock again in a positive light, $600 should be possible. Providing additional context is the fact that while Thursday's trading session saw the broader market slide significantly, Apple shares held, likely on continued enthusiasm over the Icahn news.

Of course, the reception that Apple's next round of products receives this fall will play an integral role in the stock's performance, but breaking free from the current range was needed. If the expected iPhone 5S and iPhone 5C are well received, the releases should provide additional catalysts to drive the stock even higher. How the stock behaves over the near term will give more color to Icahn's involvement, but Apple shares look as attractive as ever at current levels.

Looking beyond the financial engineering that may be afoot in Cupertino, Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


Read/Post Comments (7) | Recommend This Article (9)

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 August 16, 2013, at 9:54 PM, Henry3Dogg wrote:

    "...it only represents a roughly 1% interest; the company is simply too big for Icahn to grab a controlling portion."

    Come on. This is easy stuff but if you can't do it, then leave it out.

    You're out by a factor of 3x

    $1.5B = 0.33% of $450B

    If you can't do basic arithmetic, then why are you writing here?

  • Report this Comment On August 16, 2013, at 10:52 PM, MrSmith210 wrote:

    Seriously. $1.5b is roughly just barely 1% of its massive cash hoard. Not the company's entire freakin market cap. Icahn will be treated with respect, just as everyone is, but regardless.. Apple will do what apple does. And that is whatever THEY deem the right thing to do. The public may agree and sometimes disagree. Apple still prevails as its products are superior as they put the real time energy needed into their releases and dont release them until its perfected. And for the forseeable future, they will have appeal to the upper end and middle ground. You don't have to like it. But let's make money on it regardless. Not so damn emotional. Apple stock is cheap. And the company is a powerhouse and bellwether. It's ok to admit it even if you prefer your Samsung

  • Report this Comment On August 16, 2013, at 11:20 PM, XMFdsewrites wrote:

    Unfortunately, the "arithmetic" is a bit more complicated. If we followed that simple calculation, multiplying the $502 per share by the 980 million shares outstanding, you'd get a market cap of $491 billion. There are quite a few adjustments that must be figured into the calculation. The Icahn position is likely somewhat larger than $1.5 billion; the $60 billion in authorized share buybacks already underway need to be accounted for; and other factors impact the interest that can be controlled with Icahn's position. The point being made was that even with the most aggressive estimate, Icahn is still at less than 1%.

    But thanks for the comment.

  • Report this Comment On August 17, 2013, at 3:09 AM, skippywonder wrote:

    The only thing worse than the arithmetic is the pains you are going to make it sound like it wasn't a mistake.

    If you assumed the entire 60B buyback was completed tomorrow at $500 a share the share count would still be 860 million. At $500 a share is a market cap of 430 Billion.

    Then if you assume that the $1.5 billion position is actually twice that ($3 billion), you would still have an interest of less the .7%.

    This is nowhere near "roughly 1%" even doubling Icahn's stake and discounting the buyback immediately. It is clear this was just a back of the napkin error. Why not admit it and move on instead of trying to dance around the issue.

  • Report this Comment On August 17, 2013, at 4:27 PM, techanalyst1 wrote:

    Thanks to the big tweet, Apple now has to pay more per share for the $60 billion they were already buying back, hence there will be LESS shares bought back now.

    So if Tim Cook isn't thrilled to go along with Carl Icahn, can we blame him?

  • Report this Comment On August 17, 2013, at 4:48 PM, techanalyst1 wrote:

    Apple is currently more expensive than it was at the top and the growth is significantly less, so the only way it gets institutional buying to ramp it to $600 is if the company agrees to borrow this huge amount of money which they will be locked into paying interest on year in and year out in addition to the dividend.

    Could happen but I sure wouldn't count on it. Just because Carl Ichan is trying to bully Tim Cook into this plan, doesn't mean it even stands a chance.

  • Report this Comment On November 29, 2013, at 12:01 PM, Packard68 wrote:

    Being a very small investor does anyone think that apple stock is worth buying into and if so why and please elaborate.thanks for the forthcoming info.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2598407, ~/Articles/ArticleHandler.aspx, 10/21/2014 12:03:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement