Activist investor Carl Icahn this week, [February 11, 2015] gave praise to Apple, saying that Apple’s stock continues to be significantly undervalued by the Market and its Analysts. Apple management agrees whole hardily.
Icahn is extremely confident that his massive investment in $AAPL was at “bargain prices” even though Apple stock price has increased steadily over the past year.
Icahn says Apple’s common stock should be trading at a price of $216/share today. Although today [February 12,2015] $AAPL is trading between a range of $127.44 to $126.05.
Icahn is one of Apple Inc’s ten largest shareholders with an Apple stock portfolio of about 53,000,000 shares, worth around $6.678 Billion Investment at today’s trading range [mid February, 2015]. For anyone’s portfolio, this is “Confidence Exemplified.”
Carl Icahn says a realistic valuation of $AAPL should be 20 times Earnings per share. Taking into consideration Apple’s after-tax cash reserves of $178 Billion, that would compute to a share price of $216/share, yielding a Apple capitalization of $1.3 Trillion, that’s $1300 Billion.
Icahn is assuming a 20% tax rate when he calculated the $9.70 EPS target for Apple. He did not use the 26.2% effective tax rate estimated by the company in computing its real cash earnings held off-shore. Many Investment Bankers have estimated that Apple’s effective Tax rate ranges from 18% to 25%, depending on how Apple utilizes its off-shore retained earnings.
Congress is currently considering Legislation that provides a special Tax Holiday to major US domiciled corporations that sell products globally. If this legislative initiative is enacted, Apple would be able to repatriate some $130 billion back into the USA, at a tax rate of 7% to 9%; this legislation would have the effect of significantly reducing Apple’s effective tax rate.
Icahn said, “We consider this [$AAPL’s huge cash hoard equates to $22/share] 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 Inc
According to Icahn, since Apple does not state that fact, “Generally Accepted Accounting Principles [GAAP] require that Apple [or any similar company] on its income statement, accrue for an income tax on un-remitted earnings.” However, for taxes on Apple’s earnings this provision is a non-cash tax since Apple will likely not repatriate the international cash earnings at today’s [35%] federal tax rate.
Icahn emphasized that the correct way to treat Apple’s non-cash tax for the purpose of valuation is to “add back the effective non-cash tax provision” into Apple’s earnings” which assumption is reflected in Icahn’s FY2015 EPS [earnings per share] target for Apple.
Market Analysts, Traders, and Investors, still values Apple at discounted multiple to earnings. Icahn also noted that the market still values Apple at a “significantly discounted multiple of only 10x” compared with the 17x average multiple for the S&P 500. Is Apple considered an “Average Performer” in anyone’s estimation.
Should $AAPL be trading at the S&P500 average, since Apple’s performance is anything but “average.” For example, currently $GOOG is trading at some 25x earnings, for a great company and certainly just as great as Apple, yet $AAPL trades at 17x multiple, and without any provision for its $22/share for extraordinary Cash held in its balance sheet.
An interested Investor may take $AAPL current earnings per share [EPS] of $7.385/share, then extends the EPS using 25x Earnings Multiple [the same earnings P/E multiple that $GOOG is currently trading] results in a share price of $185/share with no adjustment for Apple’s future earnings growth nor Apple’s vast cash holdings. [the math: $7.385×25=$185/share rounded to nearest whole dollar]. Note that this share price does not take into account Apple’s consistent earnings growth, nor the $22/share Cash Hoard sitting on $AAPL’s balance sheet. This is why Carl Icahn is very “Bullish” on $AAPL.
Lets look at the Numbers. Several days ago, $AAPL was trading at $122/share. If one takes into account Apple’s vast Cash from retained earnings, it equates to $22/share. Its common to remove the Cash from the equation, therefore $AAPL is trading at an effective $100/share discounted for the Cash on Apple’s balance sheet. Investment bankers generally so not apply Earnings Multiples to extraordinary cash reserves.
Compare Apple’s adjusted price per share, $100/share to Apple’s forecasted 2015 forward-earnings of say $9.70/share, this equates to a Price Earnings Ratio of 10.3x. Compare Apple’s P/E Ratio, with the P/E Ratio of the entire S&P 500, whose blended average of all these companies, the S&P500 is trading at 17x.
Carl Icahn says $AAPL is trading at only 60% of the average stock prices of the S&P 500. It is difficult to ignore these figures. In my personal experience, as a Banker, we bought a number of Florida Banks for what’s now known as Bank of Montreal. When we determined xMultiple that we were willing to pay, the Balance Sheet was adjusted for extraordinary levels of Retained Earnings, shown as Cash or Liquid Investments.
Apple is being very aggressive with its Stock Buy-Back plan, as Apple’s management and Board of Directors also feel that $AAPL is “trading” at a significant discount. I’m not an investment advisor, however, as business man it appears to me that $AAPL is “trading” at significantly discounted values.
Investment Bankers [IB firms] that offer [published] Opinions about NYSE and NASDAQ listed Stocks that are widely held, will soon revalue their projections as to $AAPL’s target per-share price point. Recently several of the highly respected IB firms have increased their Target Prices to $135-$145/share.
These Target Prices of $135-$145/share although higher than previously published, remain significantly conservatives. It seems to me that many of the IB firms cannot grasp that $AAPL grows at rates like no other huge company.
Accordingly, the discrepancy in the P/E multiple between Apple and the broad market index is according to Carl Icahn “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.
Icahn estimated that Apple’s EPS, earnings per share, will grow 20% annually for the fiscal 2016 and 2017. If Apple launched a TV next year or the year after, he expects a 31% annual EPS growth. Icahn believes further, that the market should value Apple at $216 per share (at P/E of at least 20x together when taking into account the net cash adjustment of $22 per share). Icahn said, “This is not a future price target. $216 is what we think Apple is worth today,” said Icahn.
============= Previously Reported =============
★★ Apple has hired about 50 employees who previously worked at Tesla, according to LinkedIn postings. Many of these hires were engineers who interned at Tesla. Most of the engineers Apple has hired from Tesla specialize in Mechanics, Manufacturing, and Robotics.
★★ Think of these possibilities. Apple may indeed be building some kind of vehicle, an iCar perhaps, this is outside the company’s core products;
★★ Steve Jobs was Enamored with an iCar in Apple’s future, as is Tim Cook.
★★ Apple is also working on new iPhone-to-Car experiences that will compete with what Tesla presently offers in its vehicles. Apple has an initiative called CarPlay that lets you control certain cars’ entertainment and other systems with your smartphone. CarPlay was supposed to come out in 2014 but has been delayed; it has only just started to emerge in the 2015 Hyundai Sonata.
★★ The Apple employee, whose email was exposed, is talking about using your iPhone to unlock and drive a CarPlay-partner Car without needing a key. Tesla began offering this feature with its 6.0 system update last year. Or perhaps a much deeper set of integrated experiences with navigation, audio, and other systems.
★★ Whether or not Apple is working on the iCar, the company is competing with Tesla for top talent. Tesla has hired about 150 people from Apple so far, according to Bloomberg, and Apple has reportedly tried to appeal to potential Tesla hires with $250,000 signing bonuses and huge salary hikes.
★ The “Juicy Gossip” for 2015 is Elon Musk’s remarks that Apple, believe it…, APPLE is recruiting senior TESLA folks with $250,000 Signing Bonuses coupled with 60% Pay Increases… This is very interesting news, as it’s coming from Tesla’s CEO, and it sets up the next question…
★ Would Apple be interested in Key Tesla employees, other than just attracting great talent, Companies recruit talent all the time, offering senior level positions, pay increases, and yes attractive “signing bonuses” … Is Apple interested in developing a high-technology Green CAR, or simply wants particular talents.
★★ According to a report from Business Insider, an unsolicited email from an employee at Apple read, “Latest project is too exciting to pass up,” and, “I think it will change the landscape and give TESLA a huge run for its money.”
★★ Many TESLA employees are “jumping ship” and choosing to work at Apple with attractive pay-packages, to be a part of this unidentified [automobile] project, according to an internal Apple email, .
★★ You can bet that Apple will Not be discussing this [automotive] project in public until its ready for production; if and when the project is ready for announcement, at the very best 6 to 9 months before its ready to deliver to the marketplace.
★★ Last week there were pictures captured of a “Apple Van” that was rigged with that looks similar to the vehicles created by Google Inc (GOOG) for mapping and have multiple cameras on top of the roof.
★★ There were speculations that the vehicle was running as a part of an unspecified mapping project from Apple, which has been making efforts in recent months to upgrade Maps to stand parallel to Google’s Street View.
★★ Other rumors suggested the company is working on a self-driving car, which seems to be pretty distant given the company’s tendency to work on only a few products at a time, says a report from MacRumors.
★★ “We have zero issue coming up with things we want to do, said Tim Cook last January. “We must focus on the very few that deserve all our energy.”
★★ Bloomberg also has an interesting twist on the story, that focuses not so much on the competitive inter-hiring between the two companies, but on their similarities, which includes drawing parallels between their mercurial or iconoclastic founders. It all makes for fascinating reading, giving insight into the games played between top employers in one of the country’s most competitive job markets.
★★ While Elon Musk was complaining about “its employees being stolen by Apple,” Musk also says his company is hard at work on a new charger that will auto-emerge from the wall of your garage and hook-up to a Model S and commence charging. To make the technology a bit more impressive, Elon Musk claims the system works with all previous and current versions of the company’s electric car.
★ Folks complain about electric cars, the gripes generally focus on the car’s ugly , or range anxiety or the hassle of waiting for the battery to charge. Plugging the vehicle into the charger is seldom that big of a deal. However, for the contingent of customers who find hooking-up their model to be too torturous, Tesla’s CEO, Elon Musk appears to have a bizarre and interesting solution on the way
★ Musk raised the idea of Auto-Charging a Model S, and all prior models, during the Tesla D unveiling by saying… “we will probably do something like that.” He didn’t explain much more at the time, though. There still aren’t many hard details on the scheme, but the idea of having a robotic snake living in the garage is both somewhat nightmarish and amazingly cool. We can’t wait to see this thing in action.
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