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Tech Check
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CNBC.com |
Back in March, I posted an open letter to Steve Jobs: Mr. Jobs: Buy Back Apple's Stock.
It was right before the company's annual shareholder meeting and the stock had suffered a shellacking, down to a paltry $125 a share, the company sat on what was then a whopping $18.5 billion in cash, and was generating $1 billion in cash a quarter.
I suggested then that the company could easily afford to reduce its outstanding 906 million shares by as much as 10 percent and still have plenty—and I mean PLENTY of cash left over.
The message would be clear: Apple [AAPL
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]was investing in its future, increasing its earnings per share, would drive the stock even higher, and reassure investors that Apple was minding the store and doing what it could to prop up the stock, even if short-sighted shorts on Wall Street continued to have their way with the company.
Alas, the shareholder meeting came and went, no stock repurchase, and since then, Apple's shares have been through the wringer. Down to the high 70s for a spell, continuing to generate enormous sums of cash, now sitting on a $25 billion cash fortune and shares today are finally, solidly over $100 again. Also today, a new report, with many of the same themes, was released by Bernstein analyst Toni Sacconaghi, who brings a lot more math to the buyback equation and comes to many of the same conclusions. It just makes sense. And lots of dollars too.
Sacconaghi argues that Apple's massive cash position is earning about 1.55 percent in interest after taxes. That's pretty poor when you consider Apple's multiple right now sits at lows this company hasn't seen in years. Apple, he says, has been trading at up to 40 times earnings recently, making a buyback of any kind prohibitively risky. But at today's 18 times next year's earnings, a buyback becomes far more reasonable.
He says if Apple were to spend $10 billion on a buyback, the move could boost earnings per share by 4 percent. Double that and the increase could hit 9 percent. Hardly insignificant.
The speculation of a stock repurchase is one key reason why Apple shares are jumping today. That first time around, when I broached this topic in March, the comments were evenly—and surprisingly—split as to whether then would be a good time for a buyback. However, the hardly scientific online poll back then had 68 percent of you in favor of a stock repurchase. With recession looming and ongoing concern about who would buy expensive gadgets from Apple, a heavy cash position helps insulate the company from a downturn, some of you wrote. Cash is king, others wrote, and Apple was wise to hoard it. What do you think today?
My take: There's a line between hoarding cash, and having a fiduciary responsibility to return some of that wealth to the people who really own this company: its shareholders. Apple shares are among the most manipulated I have ever seen. Fundamentals be damned, this company seems to get crushed just for sport. And Apple is in a position to mitigate that. And should.
The fact is, I agree with Steve Jobs, that Apple should have a huge cash position to stave off tough times, and remain nimble enough to buy what it wants. Apple has been cash-strapped in the past, and probably never wants to feel like it needs a handout for survival again. But $25 billion? At what price investor reassurance? At what price silencing the shorts because the company itself is stepping up to tell the world that if anyone should know what a great investment Apple is, it's Apple itself?
A buyback made sense back in March. With Apple's cash generation since, and the non-GAAP megabucks iPhone's generating now, a buyback makes exponentially more sense today.
Questions? Comments?
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