Noted activist investor Carl Icahn, Chairman of Icahn Enterprises LP stated on Wednesday, January 22 that he had again increased his stake in technology behemoth Apple (NASDAQ:AAPL). This time, Icahn said he's purchased another $500 million of Apple shares, bringing his firm's total investment to more than $3 billion. That represents nearly 1% of the company.
With that much invested in Apple, Icahn obviously has a lot to lose. Not surprisingly, he's got a lot to say about Apple's board of directors, its massive cash hoard, and what steps should be taken to further enhance shareholder value. Icahn has been extremely bullish on Apple for some time, and yet, the market doesn't seem entirely convinced. Could Apple really be as good an investment as Icahn believes?
Is Apple really a no-brainer?
That's how Carl Icahn described his investment in Apple, for a number of reasons. First and foremost is the massive amount of cash Apple holds. That's why he's been so critical of Apple's board. Apple has famously sat on its cash pile, which currently stands at $150 billion including cash, equivalents, and short and long-term marketable securities.
Last year, Icahn pushed Apple to buy back as much as $150 billion of its own stock, although he's quieted somewhat on that front recently. In any event, he's got a point. It's becoming clear that Apple has more than enough cash to provide itself a margin of safety, as well as reward loyal shareholders. Buying back more stock, increasing its dividend, or pursuing wise strategic acquisitions should be on the table as ways to unlock shareholder value.
Apple is already committed to returning as much as $100 billion to investors over the next two years. Of that amount, $60 billion will be in the form of share buybacks, with the remainder coming from the company's dividend payments. While those are truly staggering numbers themselves, Apple could actually easily afford much more.
Apple's profits dipped in 2013 from higher costs, but the company is getting no credit for what it still does best: producing gobs of cash. Apple grew its operating cash flow by 6% last year. The company generated $45 billion in free cash flow last year. And yet, it pays just a 2% dividend yield.
Apple could easily borrow at extremely low rates, since interest rates are still low and considering its pristine business model. It could use those proceeds to buy back huge amounts of stock or reinvest in the most promising growth initiatives.
Other tech giants get much more credit
Apple is clearly being punished for its lack of profit growth last year. It's obvious the market is deeply concerned about Apple's margins going forward. But it needs to be stated that last year was one in which Apple had no new iPhone releases (its most important product) to benefit from, and the company still threw off loads of cash.
Consider that other technology giants like Google (NASDAQ:GOOGL) get a lot more credit from the investing community. Google is undoubtedly a hugely successful company, and it's producing strong profit growth. Earnings per share rose 19% through the first nine months of 2013.
At the same time, Google is much more aggressively valued than Apple. Google trades for more than 30 times trailing earnings, which is quite a pronounced premium over Apple's valuation.
"You don't have to be a genius to see Apple's value"
Those words are Carl Icahn's, which he stated on CNBC. Once again, he's right on the money. Apple has all the makings of a clear value opportunity. The stock trades for just 13 times its 2013 earnings per share. By contrast, the S&P 500 trades for 17 times earnings.
Icahn has a pretty strong track record of stock-picking, and considering his arguments, it's hard to bet against him. He believes Apple is needlessly sitting on a mountain of cash, and that unlocking some of that cash would not only increase value in itself, but may also produce a higher valuation multiple. Apple's massive cash hoard, its ability to generate huge amounts of cash flow, and its cheap valuation make it extremely difficult to disagree with Icahn.