Why Carl Icahn Will Eventually Get What he Wants from Apple

It's another day, and another media frenzy surrounds Carl Icahn, chairman of Icahn Enterprises. This time, Icahn took to social media to declare that he had dropped his bid for Apple (NASDAQ: AAPL  ) to substantially increase its share buybacks. Icahn had long pushed for Apple to buy back as much as $50 billion of its own shares, putting to use some of the more than $150 billion in cash and investments Apple has on its books.

While Icahn backing off may seem like a victory for Apple, it doesn't seem likely that he would simply give up. After all, he's got a tremendous track record of latching onto companies and standing his ground until he gets what he wants.

In a sense, Icahn didn't really lose
The Wall Street Journal recently discovered that Apple had accelerated its buyback program after releasing its most recent quarterly results. Apple's report, which showed record quarterly sales numbers for iPhones and iPads, was poorly received by the market. Shares of Apple fell hard after the quarterly report was released, which prompted Apple management to repurchase $14 billion of its shares in the two weeks.

Apple's accelerated buyback means Icahn is already on the way to getting his wish. Plus, the prospect of new products from Apple this year means fresh revenue streams and an even greater opportunity for Apple to increase its buybacks later this year, if it chooses to do so.

The Apple of Icahn's eye
All along, Icahn's true motive was to produce a higher earnings multiple for Apple. For many investors like Icahn, share buybacks are the best way to accomplish that. By buying back its own shares and reducing the number of shares outstanding, Apple could produce earnings-per-share growth with its own cash. That would, hopefully, result in multiple expansion as well.

Icahn vented his frustration with Apple's low valuation, especially when compared to its peers. Icahn noted that fellow technology giant Google (NASDAQ: GOOGL  ) trades for 19 times its 2014 earnings estimate. If Apple were to enjoy a similar valuation, its shares would change hands for more than $1,200 per share.

Whether Apple deserves the same multiple as Google in light of their respective growth rates is another question. Google grew diluted earnings per share by 18% in 2013, compared to Apple's 10% earnings decline in fiscal 2013. Apple did return to earnings growth in its fiscal 2014 first quarter, which includes the holiday shopping season. Apple reported 5% earnings growth in its most recent quarter.

Apple is also notably cheap in comparison to the broader market. Apple trades at just 11 times its 2014 earnings estimate, while the S&P 500 Index trades at a forward multiple in the mid-teens. At least in Icahn's view, Apple is severely undervalued, and considering how much cash Apple generates and the strength of its balance sheet, it's hard to disagree.

The Foolish bottom line
While some may view Carl Icahn's decision to drop his bid for Apple to buy back more of its own shares as a failure, Icahn usually doesn't give up that easily. He has a long track record of staying the course with companies he feels are undervalued, and relenting only once he's gotten what he wants. That may be at play here, since Apple accelerated its buyback after releasing first-quarter results.

It may be that Icahn feels he'll eventually get what he wants out of Apple. In addition to Apple's buybacks, it's got a promising product pipeline that may bring the iWatch, a new iPhone, or an Apple television to market in 2014. Those would each conceivably bring in billions more into Apple's coffers, which would then allow for more of the share buybacks that Icahn craves.

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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 11, 2014, at 12:57 PM, melegross wrote:

    Icahn doesn't always win. A notable big loss was recently with Dell.

    And let's understand that Icahn wants Apple to buy back an additional $50+ billion shares over their current plans. His original plan was for at least a $150 billion buy back. What Apple has done shows no such thing.

    While Icahn does want Apple to buy back these shares now, rather than waiting for its plan to complete, and he says that the $14 billion buyback is moving in that direction, that's not really true. Icahn wants Apple to do this whatever the stock price would be, whereas Apple did this recent large purchase because of the large drop in the price of the stock.

    I have little doubt, after the $100 billion buy back and dividend plan is complete, that Apple will extend it further, making Ichan's demands seem to have been listened to. But that won't really be the case.

  • Report this Comment On February 11, 2014, at 7:46 PM, beetlebug62 wrote:

    Saying that Icahn will get what he wants eventually totally misses the point. Guys like Icahn want it NOW, not later. It was the same with Einhorn. Anyone with a little sense would know that Apple iterates on a long-term plan and that once it starts a cash return plan, it'll increase it annually until it reaches a cash-neutral policy. Guys like Einhorn and Icahn don't want to wait.

  • Report this Comment On February 12, 2014, at 12:27 PM, wsupper wrote:

    @melegross "A notable big loss was recently with Dell." Ichan didn't lose. He might not have won as much as he would have liked, but he still came out with roughly $70M in profit (WSJ). Dell still increased their purchase price higher, and paid out a special dividend.

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