Revisiting Icahn’s Apple Call After the Correction


Activist investor Carl Icahn has known to… ahem… talk his book. He’s been known to talk it quite loudly in fact. If “scream your book” was an expression, that would be an accurate description of what Carl Icahn does.

So, we should probably take Mr. Icahn’s public love affair with Apple (AAPL) with a large grain of salt. Apple stock is, after all, his largest non-controlled holding, representing more than 21% of his portfolio.

Apple stock is down nearly 20% from its 52-week high, and at one point during last week’s market pandemonium it was down over 30% from its 52-week high. So, with AAPL pretty roughed up in recent weeks and trading near $110 per share, I wanted to revisit some of the claims made by Carl Icahn back in May.

Icahn said that Apple is worth over $240 per share. But a lot has changed in the past four months. China’s market bubble turned into a major bust, and the U.S. market entered official correction territory. But if Icahn is accurate, then investors buying Apple stock today should be looking at returns of nearly 120% in short order.

In his letter to Apple CEO Tim Cook, Icahn wrote.

To arrive at the value of $240 per share, we forecast FY2016 EPS of $12.00 (excluding net interest income), apply a P/E multiple of 18x, and then add $24.44 of net cash per share. Considering our forecast for 30% EPS growth in FY 2017 and our belief Apple will soon enter two new markets (Television and the Automobile) with a combined addressable market size of $2.2 trillion, we think a multiple of 18x is a very conservative premium to that of the overall market.

Valuation is Absurdly Cheap

Let’s pick these numbers apart. Earnings forecasting site Estimize, which has an outstanding track record at forecasting company earnings, pegs AAPL’s 2016 earnings per share lower, at $9.54. So Icahn might be a little aggressive in his estimates. But still, even at the lower Estimize estimate, Apple stock trades for a very modest forward P/E of 11.5.

And we haven’t made any adjustments for the cash hoard. If you strip out the approximately $35 dollars per share in cash, you get a forward P/E of 7.9. To put that in perspective, the forward P/E on the S&P 500 is 17.5.

Now, I understand that Apple’s growth will probably slow down…a lot. With Chinese growth slowing and with no product coming down the pipeline to match the importance of the iPhone 6, growth might be very modest in the next few years ahead. But slow enough to justify AAPL trading at half the valuation of the S&P 500? Seriously, even boring, slow-growth utilities like Duke Energy (DUK) sport higher multiples. Duke sports a forward P/E of 13.9.

I think Icahn is far too optimistic about some of AAPL’s current projects. He sees an Apple paid TV service and car as being major moneymakers. Hey, maybe they will, maybe they won’t. We don’t have enough information to draw meaningful conclusions.

But it really doesn’t matter. If Apple never came out with another successful product, its current portfolio alone would make it attractive as a value stock. At these valuations, there isn’t exactly a lot of optimism built into the share price.

Cash Hoard Is Ridiculous

Back in July, I mentioned Apple as a stock with “too much” cash, and broke down the numbers. They’re worth repeating today.

If AAPL’s $203 billion in cash and marketable securities were a standalone company, they would be significantly bigger than Walt Disney (DIS) and Anheuser-Busch InBev (BUD) by market capitalization…and only about $40 billion short of Facebook (FB). Even allowing for punishing tax rates on Apple’s cash held offshore, Apple has enough cash in the bank to sustain its dividend at current levels for years … without earning a single dime in additional profit.

Yes, you read that right. Apple could simply break even for the next 10 years, not turning profit at all, and it would have enough cash to maintain its dividend. That’s not with zero profit growth. That’s with zero proft…period.

And the most amazing thing is that Apple’s cash hoard has continued to expand even while a disproportionate share of it gets dedicated to dividends and share repurchases.

Over the past year, Apple has raised its dividend by 11% and shrunk its shares outstanding by about 5%. And I expect plenty more to come.

Taking the Estimize consensus estimate for next year’s earnings and assigning a ridiculously conservative multiple of 15 gets you to $143 per share, or roughly 30% higher than today’s prices. So while Mr. Icahn might be a little on the aggressive side, I have to agree with him in principle. Apple one of the very best value plays available today.

Disclosures: Long AAPL

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. 

Photo credit: Insider Monkey

Why Carl Icahn is (Kinda) Right About Apple Stock

Carl Icahn is at it again.  After successfully lobbying (some might say “bullying”) Apple (AAPL) into aggressively repurchasing its undervalued stock, Carl Icahn penned another open letter to Apple CEO Tim Cook advocating more of the same, to “accelerate and increase the magnitude of share repurchase.”  By Icahn’s calculations, Apple is worth at least $203 per share, roughly double today’s price.

Icahn owns 53 million shares of Apple stock, making him one of Apple’s largest shareholders.  A cynic could say that Icahn is merely talking his book when he writes that “At today’s price, Apple is one of the best investments we have ever seen from a risk reward perspective, and the size of our position is a testament to this.”

While he might be guilty of speaking in hyperbole, I can’t say I completely disagree with him.  Apple may not be the growth dynamo it was under Steve Jobs, but it is a wildly profitable company trading at a stark discount to the broader market.  Apple stock trades for 16 times trailing earnings and 14 times expected 2015 earnings.  By Icahn’s estimates, Apple stock trades at just 8 times expected 2015 earnings after backing out the value of Apple’s massive cash pile.  Even if Icahn’s earnings estimates are a little aggressive, Apple would seem cheap in a world where the S&P 500 trades for almost 19 times trailing earnings and 15 times expected 2015 earnings.

As is usually the case, the devil is in the details.  Icahn’s estimate of $203 per share came from taking his estimate of 2015 earnings and multiplying it by a forward  P/E multiple of 19.  A forward P/E of 19 is a little on the aggressive side, though not necessarily crazy if you believe that Apple’s outsized returns on equity are sustainable.  In the post iPhone era, Apple’s ROE has consistently been above 20% and for most of that period has been above 30%.


I’m modestly confident in Icahn’s earnings estimates, at least for the next year.  Icahn sees revenues and EPS jumping  next year by 25% and 44%, respectively.  But looking further out, the picture gets a lot murkier.

Let’s dig a little deeper.   The iPhone is Apple’s most important product by a wide margin, accounting for 55% of net sales.  The iPhone 6 has thus far been a hit with consumers, and its larger screen should go a long way to stemming market-share losses to large-screen Android devices.  Icahn sees volume growth of 22% next year and 7% and 10%, respectively, in 2016 and 2017.  That might be doable.  But it depends on consumers continuing to aggressively upgrade their phones, as the high-end smartphone market in the developed world is already saturated.  Icahn is also assuming that Apple “experiences no pricing pressure.”  I’m not so sure that’s realistic given that Samsung is unlikely to sit idly while Apple steals market shares.

Icahn sees the IBM (IBM) partnership leading to 13% annual revenue growth in the iPad. Again, this might be possible.  But tablet sales industrywide have massively decelerated over the past year, and the larger-screen “phablet” iPhone is a direct competitor to the iPad.  Icahn’s estimates here seem a little aggressive but within the realm of possibility, I suppose.

I might be willing to give Icahn the benefit of the doubt on iPhone and iPad sales.  But some of his other projections are a bridge too far.   I have very little faith in the Apple Watch, for example, and I don’t see Icahn’s estimate of 72.5 million units in 2017 as being realistic.  To start, your potential market is limited to people who already own an iPhone.  Let’s say that Apple is able to sell something in the ballpark of 200 million iPhones per year over the next several years.  Is it realistic to assume that roughly one in three iPhone buyers will also buy an Apple Watch?  I’m thinking no.

But it’s his call on Apple Pay that strikes me as being ludicrous.  Icahn sees Apple pulling in a market share of 30% of all debit and credit card purchases by 2017.  Digital wallet adoption has been slow so far, and while that might change, it’s not going to happen on anything close to Icahn’s timeline.  I would be surprised to see Apple Pay accounting for 3% of all credit and debit card sales, let alone 30%.

Looking at back of the envelope estimates, one in four American adults currently owns an iPhone.  Let’s round up and say 30%. Icahn seems to think that all of them will be exclusively using their iPhones in lieu of traditional plastic by 2017.   That’s not realistic, to say the least.

Guess what?

I doesn’t matter.  Icahn’s estimates are likely pretty far off the mark, but I still agree with him completely that Apple is undervalued.  Apple should, at a minimum, trade at a modest premium to the S&P 500 rather than the discount we see today.  And starting at today’s prices, 20%-30% upside over the next year is possible if not likely.

And I would agree with Icahn completely that Apple stock represents one of the best risk/return tradeoffs I’ve ever seen.

Disclosures: Long AAPL in Dividend Growth Portfolio.


Sizemore Talks EBay, the Future of Mobile Payments, and More on CNBC

Watch Charles discuss EBay’s (Nasdaq:$EBAY) earnings, the future of mobile payments, and Apple’s (Nasdaq:$AAPL) transition to an income-focused value stock on CNBC’s Asia Squawk Box.

Can’t view the embedded media player? See Apple Looking a Lot Like Microsoft

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Microsoft, Apple and Big Tech for the Remainder of 2012

Last week, I suggested that Microsoft ($MSFT) would be the ultimate winner in the long war for dominance of the smartphone and tablet markets.

Though Apple ($AAPL) dominates today, it has no real defensible “moats” that would prevent an aggressive competitor from muscling in on its turf.  Consumers are notoriously fickle, and there is little to lock them into the Apple ecosystem.  You can access your key services—such as Facebook ($FB), Twitter, Skype and even Apple’s iTunes—from just about any device, after all.  And if Microsoft is able to leverage its dominance of the desktop market by familiarizing users with its Windows 8 operating system—which looks and feels more or less the same on desktops, tablets and smartphones—Microsoft may well dig the elusive moat that Apple has thus far been unable to dig.

Moreover, Apple’s “idea man,” the late Steve Jobs, is not something that can be replicated, and going forward Apple will find it increasingly harder to stay ahead of its competition.

As Apple discovered to its dismay during the PC era of the 1980s through the mid-2000s, computers are ultimately commodity products for which it is difficult to charge a premium (and yes, I lump smartphones, tablets and PCs together as “computers”).  The iPhone’s popularity has been bankrolled by generous subsidies by service providers like AT&T ($T), Verizon ($VZ) and Sprint ($S).  But as these carriers start to push back against subsidies, Apple will find it harder to maintain its margins without lowering its prices—something the company will be reluctant to do.  In a very short period of time, Apple may again see itself fall from the position of industry leader to that of a niche provider.

None of this suggests Apple’s imminent demise, of course.  As I wrote in the previous article, I’m talking about a long war of attrition that may take a few years to play out.

But none of this matters in the short term.  In the short term, I expect most Big Tech stocks to move together in a fairly tight correlation as investors reassess the economic picture.  For the remainder of 2012, I see investor risk appetites returning, and I see Apple and its competitors Microsoft and Google ($GOOG) leading a rally in technology shares.

I recommend investors pick up shares of the Technology Select SPDR ($XLK) and plan on holding for the remainder of 2012.

With the bad earnings releases of the third quarter mostly digested, I expect to see a broad-based market rally, and I expect more cyclical sectors such as technology to lead.

Disclosure: Charles Sizemore is long XLK through his Tactical ETF Model. This article first appeared on TraderPlanet.

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In a War of Attrition, Microsoft Will Beat Apple

Apple ($AAPL) is getting most of the attention this morning due to its earnings release late yesterday.  Two weeks ago, I asked “Is it time to dump Apple,” and I think the answer is increasingly “yes.”  Though the company remains wildly profitable, earnings missed estimates this quarter, and there is a sneaking realization that Apple’s competitors are catching up.

But today, it’s not Apple I want to talk about.  It’s Apple’s erstwhile PC rival Microsoft ($MSFT). 

Microsoft was the undisputed winner of the PC era, but the company hasn’t quite found its way in the era of Web 2.0 and social media.  The smartphone war is down to two main combatants in software—Apple and Google ($GOOG)—and two in hardware—Apple again and Samsung.  And despite coming out with a tablet years before anyone else, Microsoft has been left behind on this front as well.

Things are about to change.  With the long-awaited release of Windows 8, Microsoft is making a real push into the world of touchscreens and tablets.

Apple launched the first offensive in the smartphone and tablet wars, but in a long-term war of attrition it is doomed to lose for the same reasons that it lost the original PC war.  Apple has always maintained a closed ecosystem and insists on making its own hardware and software.  Steve Jobs’ pigheadedness is the reason why it was the Wintel platform and not the Mac that came to dominate the desktop and laptop markets.

It’s all happening again.  Apple again jumped out to a huge lead, but it will lose the war in the end.

And what about Google?  I like Google and I personally use an Android phone.  But I believe that in a long war it is Microsoft that will win.   I question whether Google really takes Android seriously.  It’s a free product that generates revenues only indirectly by encouraging mobile web browsing via Google’s search engine.  Meanwhile, Microsoft knows how to manage corporate clients, and corporate IT departments are comfortable with Microsoft products to a degree that they will never be with Google or Apple.

As a value investor, I often get into trades too early. Not matter how I might try to game myself to avoid this, it seems to be hardwired into my DNA as an investor.  So it’s entirely possible that I am early this time as well.

That’s ok.  If Microsoft takes longer than I expect to rise to the top, we still get to collect its 3.3% dividend and benefit from owning one of the cheapest major blue chip stocks in the world.

Microsoft is a buy.

This article first appeared on TraderPlanet.

Disclosures: Sizemore Capital is long MSFT.  Get Sizemore Insights delivered to your e-mail FREE.