Yesterday, Carl Icahn filed a Schedule 14A with the SEC that included a Tweet that read as follows: “Gave $AAPL notice we’ll be making a precatory proposal to call for vote to increase buyback program, although not at $150 billion level.” Whatever level Carl Icahn is thinking about, analysts at one research firm believe it will be welcomed by investors.

Furthermore, The Wall Street Journal reported that Apple Inc. (NASDAQ:AAPL) has signed a deal with China Mobile, another positive for Apple Inc. (NASDAQ:AAPL)’s valuation, in Cantor Fitzgerald’s view.

Carl Icahn Apple

Carl Icahn Back To Polish Up Apple’s Valuation

In firm’s analysts view, Carl Icahn’s eye for value, long investment experience and reputation for tenacity makes him an ideal activist investor to provide the friction necessary to polish up Apple Inc. (NASDAQ:AAPL)’s valuation. They believe Apple Inc. (NASDAQ:AAPL) has made tremendous progress in its capital allocation strategy over the past several quarters, which began with a major cash distribution announcement in March 2012 and was expanded further in April 2013; however, the stock is still trading at what analysts view as an insulting valuation at just 9.1x (ex-cash) firm’s CY:14 EPS estimate.


Apple’s Multiple Contraction Relative to S&P Is Unwarranted

Given the expansion and contraction of the market P/E over different periods of time, analysts believe analyzing multiples relative to S&P 500 Index provides a valuation check. Since 2007, Apple Inc. (NASDAQ:AAPL)’s P/E multiple relative to the S&P 500 (INDEXSP:.INX) Index has contracted by approximately 60%; however, analysts estimate Apple Inc. (NASDAQ:AAPL) will have grown EPS by 43% per annum over the past six calendar years through CY:13E versus just a 4% annual increase for the S&P 500 Index. Given Apple’s iconic brand, position in the mobile Internet ramp, history of growth, balance sheet, and big free cash flow generation, a 60% contraction relative to the S&P 500 Index is difficult to accept.

Apple’s Big Free Cash Flow Generation

Over the past six fiscal years, Apple Inc. (NASDAQ:AAPL) has grown free cash flow by 46% per annum and generated $45.5 billion in FY:13 alone.

The research report says, “Even if we assume Apple Inc. (NASDAQ:AAPL)  grows free cash flow by just over 2% per year into the future, our discounted cash flow model yields a stock price that approaches our $777 price target. Even if we assume 0% growth, our discounted cash flow model yields a stock price that is nearly 14% above current levels.”

Apple’s Valuation

Research firm’s $777 price target is based on nearly 14x their CY:14 pro forma EPS estimate (adjusted for interest income/expense), plus Apple Inc. (NASDAQ:AAPL)’s net cash per share of $142.77.

Series of Icahn’s Tweets on Apple