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.
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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.”
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
We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.
— Carl Icahn (@Carl_C_Icahn) August 13, 2013
Had a nice conversation with Tim Cook today. Discussed my opinion that a larger buyback should be done now. We plan to speak again shortly.
— Carl Icahn (@Carl_C_Icahn) August 13, 2013
Spoke to Tim. Planning dinner in September. Tim believes in buyback and is doing one. What will be discussed is magnitude.
— Carl Icahn (@Carl_C_Icahn) August 22, 2013
Had a cordial dinner with Tim last night. We pushed hard for a 150 billion buyback. We decided to continue dialogue in about three weeks.
— Carl Icahn (@Carl_C_Icahn) October 1, 2013
Just sent a letter to Tim Cook. Full letter will be disclosed on my website, the Shareholders’ Square Table, which will be launched tomorrow
— Carl Icahn (@Carl_C_Icahn) October 23, 2013
We’ll be talking more about the website and Apple with @ScottWapnerCNBC Wapner at noon on CNBC.
— Carl Icahn (@Carl_C_Icahn) October 24, 2013
Visit http://t.co/kAuEwYCpdU for my personal views concerning media reports on my remarks re markets and AAPL from Reuters Summit
— Carl Icahn (@Carl_C_Icahn) November 19, 2013
Gave $AAPL notice we’ll be making a precatory proposal to call for vote to increase buyback program, although not at $150 billion level.
— Carl Icahn (@Carl_C_Icahn) December 4, 2013