Apple Inc., which already announced it had been boosting its capital-return program by US$70 billion, should increase its stock buyback, Carl Icahn wrote in a letter to the company.
The market continues to misunderstand the producer of iPhones and iPads and the company\’s shares count US$240, 86 per cent above where they closed Friday, the billionaire activist investor said. That would give Apple an industry value of US$1.4 trillion.
\”With Apple\’s shares trading for just US$128.77 per share versus our valuation of US$240 per share, this is the time for a much larger buyback,\” Icahn wrote Monday within an open letter to Apple Chief Executive Officer Tim Cook.
Apple\’s shares rose 1.1 per cent to US$130.22 at 11:49 a.m. Ny time.
Icahn\’s renewed enthusiasm may come as the market debates whether Apple has enough innovation available to keep driving sales growth. Since April 27, once the company reported that second-quarter profit rose 33 per cent, shares had dropped 2.9 per cent at the close of trading last week.
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The letter is the latest argument by Icahn the Cupertino, California-based company is undervalued. In October, he released a missive to prepare, pushing for Apple to accelerate its buyback. The investor said the company\’s stock was undervalued and should trade at US$203 a share. That price would give Apple a market capitalization of more than US$1 trillion. It closed at a value of a lot more than US$700 billion in February the very first time as investor optimism swelled for that company\’s new iPhones, smartwatch and future products.
Icahn\’s new enthusiasm is driven by his belief that Apple will dominate in two new categories, television and automotive.
\”Apple is poised to go in and in our view dominate two new categories (the tv next year and the automobile by 2020) having a combined addressable market of US$2.2 trillion, a view investors don\’t appear to factor to their valuation at all,\” Icahn wrote.
To get to US$240 a share, Icahn forecast earnings at US$12 a share for fiscal 2016, a price-earnings multiple of 18, then added US$24.44 of net cash per share. Given the company\’s entry into new markets, \”we think a multiple of 18x is an extremely conservative premium to that particular of the overall market,\” he wrote.
Helped by new larger-screened iPhone 6 and 6 Plus, introduced in September, Apple has posted two record quarters and it has forecast that revenue would rise again this period. The new phones especially have because of the company a boost in China, where revenue rose more than 70 per cent in the recent quarter and where iPhone sales outpaced those in the U.S. for the first time.
Apple\’s success has helped its cash pile grow even as it\’s increased its capital-return program. Cash and marketable securities rose to US$193.5 billion after March.
That led Apple to boost its capital-return program through March 2017. The organization said it already returned a lot more than US$112 billion to investors from August 2012 to March 2015. Because US$171 billion of Apple\’s cash is located outside of the U.S., the organization has been tapping debt markets to cover the capital return program to prevent the U.S. goverment tax bill that would include repatriating the money.
Apple intends to review its capital return program around April next year, Chief Financial Officer Luca Maestri told analysts recently.
Beyond the iPhone, Apple last month began selling its first new gadget in five years, the Apple Watch, which starts at approximately US$350 and reaches US$17,000 for a gold version. The new product exposed new possibilities for that consumer-electronics maker in the area of high-end luxury.
Icahn, who first disclosed his stake in Apple in August 2013 and owns about 53 million shares, successfully pressured the company to increase its stock-buyback program in 2014. In February, Icahn issued another letter, saying Apple ought to be trading at US$216 a share.
Apple will face tough year-over-year comparisons in the next fiscal year, when there won\’t be the same pent-up interest in Apple\’s first large-screen iPhones, according to a report by Bloomberg Intelligence.