Activist investor, Carl Icahn said the current stock value of Apple is $216 per share, and he expects a huge increase in the tech giant’s stock buyback program.
The shares of Apple were trading $66.77 on August 13, 2013. Back then, Icahn revealed its communications with Tim Cook regarding his proposal for the tech giant to take advantage of its excess cash to repurchase its substantially undervalued shares.
For a short period, the stock price of Apple dramatically increased to $122 per share. Icahn believes that “the same opportunity still exists for Apple today.” He still owns 53 million shares of Apple worth around $6.5 billion.
Icahn noted Cook’s recent statement that Apple wants to return cash to shareholders that the company doesn’t need. Cook said, “By and large, my view is, for cash that we don’t need – with some level of buffer – we want to give it back [to shareholders]. It may come across that we are, but we’re not hoarders.”
Icahn used 20% tax rate in computing Apple’s real cash earnings
In a note to his followers on Twitter, Icahn emphasized that he is more confident about his financial model for Apple that the company is poised to achieve robust growth.
Skeptics and bullish analysts at Wall Street questioned his financial model, which he disclosed to Cook on October 9, 2014. Today, Icahn said he is more confident regarding his thesis for tech giant and he increased his estimated EPS for Apple to $9.70 from $9.60 for the fiscal 2015.
Icahn explained that he assumed a 20% tax rate when he calculated the $9.70 EPS target for Apple. He did not use the 26.2% effective tax rate used by the company in computing its real cash earnings.
Icahn said, “We consider this an essential adjustment that many analysts and investors simply fail to understand,” said Icahn. He explained that Apple does not reveal its plans to permanently invest its international earnings unlike many companies like Google.
According to him, since Apple does not state that fact, “accounting rules require Apple on its income statement to accrue for an income tax on unremitted earnings, but it is a non-cash tax since Apple likely will not repatriate the international cash at today’s tax rate.”
Icahn emphasized that the correct way to treat Apple’s non-cash tax for the purpose of valuation is to “add it back to earnings,” which is reflected in his FY2015 EPS target for the tech giant.
Market still values Apple at discounted multiple
Icahn also noted that the market still values Apple at a “significantly discounted multiple of only 10x” compared with the 17x multiple for the S&P 500.
According to him, the discrepancy in the P/E multiple between Apple and the broad market index is” totally irrational,” and the market is “somehow missing a very basic principle of valuation.”
“When a company’s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple,” said Icahn.
He estimated that Apple’s EPS will grow 20% annually for the fiscal 2016 and 2017. If the tech giant launched a TV next year, he expects a 31% annual EPS growth.
He believes that the market should value Apple at $216 per share (at P/E of at least 20x together with a net cash of $22 per share). Icahn said, “This is not a future price target. $216 is what we think Apple is worth today,” said Icahn.
Analyst at JPMorgan raised their price target for Apple to $145 per share, which drove the stock higher by more than 2% to $124.88 per share today.