U.S. stocks finished the week flat as an escalation in the Ukrainian crisis appeared to weigh on investor sentiment; the benchmark S&P 500 was down just 0.1%. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) lost 0.3% and the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) fell 0.5%. High-profile technology names were among the biggest movers of the week, as quarterly earnings announcements lifted Apple (NASDAQ:AAPL) (+8.4%) and sank Amazon.com (NASDAQ:AMZN) (-6.5%). However, the best-performing stock in the Russell 1000 was drugmaker Allergan (UNKNOWN:AGN.DL) (+25.6%), as controversial hedge fund investor Bill Ackman added a new play to the activist investor's handbook.
Shares of Botox maker Allergan jumped 15.2% on Tuesday (they had already risen 6% on Monday) after the company received a $46 billion buyout offer from Valeant Pharmaceuticals. As Allergan's largest shareholder, Ackman's Pershing Square Capital Management has earned a nice a paper profit this week. Here's the wrinkle: Ackman teamed up with Valeant to put the offer together -- Valeant can thus already count of the support of an Allergan shareholder that represents nearly 10% of the shares outstanding. It's not uncommon for an activist investor to press a company to seek acquirers, but going out and "finding" the acquirer autonomously looks like a first.
My initial assessment was that the offer is generous and that shareholders ought to jump on it (at 31 times next twelve months' earnings-per-share estimate, the shares look fully valued, at first glance); however, I'm less certain today. As Dan Davidowitz, chief investment officer of Polen Capital Management, which owns 0.9% of Allergan shares told The Wall Street Journal: "We think we could get this type of price just from another couple of years of compound earnings growth. So I don't think this is that attractive of an offer." That seems quite plausible, and, as such, shareholders ought perhaps to hold out for a higher bid.
Even without a new product, Apple proved it still has the capacity to excite investors this week, as the company announced fiscal second quarter results that substantially exceeded Wall Street's expectations. Given the anchor that is the company's size and, consequently, slowing growth rates, there were concerns going into the announcement that Apple might even experience a revenue decline – the consensus estimate implied flat revenues with regard to the year ago period. That fear didn't materialize as revenues beat the consensus forecast by 4.6%, for a 4.7% year-on-year increase. Strong iPhone sales were the largest contributor to the surprise (not surprisingly, as the iPhone is Apple's largest product category); notably, the distribution agreement with China Mobile is now fulfilling its promise.
Investors also responded to a 15% increase in the dividend and an additional authorization to repurchase $30 billion worth of shares before the end of 2015. That's a good use of shareholder capital if, as CEO Tim Cook said, the shares are still undervalued. Now valued at less than 13 times the next 12 months' earnings-per-share estimate, I agree with him. Shareholders may be impatient for a new product, but, in the meantime, Apple continues to execute and is doing right by its shareholders.
While investors delighted in Apple's quarterly report, they panned that of another closely watched company, Amazon.com, even though the e-tailer displayed splendid growth: Revenues were up 23% year on year, while earnings per share grew 27%. I think the market may have been spooked by the company's outlook for the second quarter: Amazon expects an operating loss of between $55 million and $455 million.
However, investing in Amazon isn't a quarter-to-quarter affair -- the company is nowhere close to being a mature business as it continues to expand and experiment. Traditional valuation metrics are pretty useless for assessing the stock, too -- one really needs to dig deeply into the business to tease out an estimate of its fair value. I don't know whether Amazon represents a compelling value at its current price, but I think we may be surprised looking back at the company's evolution ten years from now -- this is an incredibly ambitious, well-run company.