Is Apple a Buy on Icahn's Plan?

Carl Icahn likes Apple a lot. Should the company listen to his suggestions for its future?

Jan 29, 2014 at 11:30AM

Apple (NASDAQ:AAPL) is still a relatively undervalued company, and big name investors like Carl Icahn are still singing the company's praises. The company is expected to see solid earnings growth over the holiday quarter and its deal with megacarrier China Mobile should drive upside in the first quarter of 2014.

Icahn, Apple's fanboy, is pounding the table and urging the company to ramp up its share repurchase plan and drive value for shareholders. And as a testament to his claim, Carl Icahn ramped up his stake in Apple by $600 million and now owns roughly $3.6 billion in Apple stock. 

Significantly cheaper than the overall market
Icahn's proposal to the Apple board is predicated on the company's cheap valuation relative to the S&P 500. The S&P 500 is trading at a multiple of roughly 19 times earnings, whereas Apple is trading at almost 14 times earnings. If Apple trades at the market multiple the value of the company would be north of $750, which represents significant upside from current levels. 

To narrow this valuation disconnect, the activist shareholder wants the iPhone maker to ramp up its share repurchase program to $50 billion in fiscal 2014. It's worth noting that Apple has roughly $37 billion worth of share repurchases left to execute until fiscal 2015, but Icahn wants another $50 billion on top of the existing program. 

There's a lot of truth to that claim of undervaluation, because Apple's CEO, Tim Cook, has stated in a number of occasions that Apple remains undervalued. If that is the case, the company can generate significant amounts of value for long-term shareholders by buying back its own stock at a cheap level and reducing its share count.

Icahn stated that the management is doing a great job, but its Board of Directors is doing "a great disservice to shareholders."  Apple's board should be more opportunistic in buying Apple stock at cheap valuations. Apple does have enough liquidity resources to go about running its business and pursuing other strategic M&A opportunities as well. The company has roughly $130 billion in net cash, and this overcapitalization is not generating any value for stockholders.

Ample liquidity and robust outlook
In spite of operating in an extremely competitive landscape, Apple has been doing very well due to its rapid pace of innovation. Apple recently signed up a number of big carriers including NTT Docomo in Japan, China Mobile and Russia's second biggest mobile phone operator, Megafon.

Under the just-concluded deal with Megafon, Apple signed a three-year deal to supply various models of iPhones. Apple had only 9% of the mobile units sold in Russia in 2013, according to Euroset, so unit sales should be growing in the Russian market. Apple's deal in Japan should also be very profitable for the company. The company has the highest segment operating margins from its Japanese operations, which amounted to more than 50% operating margins in fiscal 2013. 

The company's outlook remains very robust, with Apple expected to generate a ton of cash and have consensus earnings of close to $40 billion in the current fiscal year. Such excess liquidity in the company's balance sheet warrants the company to issue debt in the current low interest rate environment and take opportunistic advantage of the company's cheap valuation in the stock market. 

Icahn stated that his company upped its stake in Apple by buying $1 billion worth of Apple stock in the last two weeks, bringing his Apple stake to approximately $3.6 billion. Given Apple's tremendous borrowing ability, Apple should repurchase $50 billion worth of stock in fiscal 2014 by issuing additional debt.

Consumer loyalty
Apple has a been a leader in innovative consumer electronics products and managed to amass very high customer loyalty. This loyalty represents one of the company's greatest assets.

The company's brand value and global reach will ensure that future Apple products are well received not only in the U.S. but across the globe. The market for smartphones and tablets is expected to grow significantly in the next few years, and Apple along with Google (NASDAQ:GOOGL) are well positioned to capitalize on this growth.

Samsung has made itself very dominant using Google's Andriod OS, but its focus has been mostly on the mid and low tiers of the consumer funnel. Apple's pricing and products are mostly directed toward higher end consumers. Its massive customer base of more than 575 million enables the company to charge much higher prices for its products relative to its competition. This allows it to maintain very strong gross margins to the tune of roughly 37%.

As consumers ramp up their software and service demands on Apple's App store and iTunes, customer loyalty will only increase and drive more value for Apple's earnings. 

Going forward
Apple has built up a massive ecosystem of software, hardware and services that gives the company a massive edge in launching newer products. Its huge customer base represents a major asset for the company. New product options including newer categories like TVs, wearable devices, and a payments platform are all realistic product lines for the company in the near future.

Because it features so much upside in its core business and a reasonably cheap stock, Apple should consider Carl Icahn's proposal. If the company's shares surge above $600, the value of the share repurchases will fall dramatically. As a result, the company should be more opportunistic in capitalizing on its undervalued stock now.

This company has a better runway for growth than Apple
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information