Apple (AAPL -0.50%) shares could hit $1,250 in three years if Apple follows hedge fund investor Carl Icahn's advice, Icahn explained in an open letter to Apple that he made public this morning. Apple shares closed yesterday at $524.96. All it would take is an immediate $150 billion buyback, Icahn says in the letter, continuing to push a buyback he has previously suggested to Apple.
As we proposed at our dinner [at the end of September], if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion. Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT.
Apple would have no problem affording this unprecedented buyback, Icahn explains.
While the board's actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast).
Icahn says he has no problem with the existing management team, its culture, or "the spirit of innovative spirit it engenders." His only problem is with "this size and timeframe of Apple's buyback program."
Icahn also revealed he has increased his stake in Apple by about 20% from 3.9 million shares at the end of September to 4.7 million shares. At Apple's current stock price, that's worth about $2.5 billion and amounts to less than a 1% stake in the company. Icahn says "we currently intend to buy more." Furthermore, he promises to withhold his shares from the $150 billion buyback if Apple chooses to follow through with it.
He has published his letter to Apple CEO Tim Cook on a new website, making it accessible to anyone after registering for free. Called Shareholders' Square Table, the new website's mission statement states that it is "a platform from which we can unite and fight for our rights as shareholders and steer toward the goal of real corporate democracy." The site opens with three posts. The lead story is his letter to Cook. Also featured are items titled "The Golden Parachute: An outrageous, board-approved, pay- for-failure package" and "Poison Pills Erode Investor Rights and Hurt the Economy," both written by Icahn.
-- Material from The Associated Press was used in this report.
