Apple (NYSE: AAPL.US)’s shares rose 5% last week when Carl Icahn revealed on Twitter that he held a “large position” (believed to be around $1bn) and thought the company was “extremely undervalued”. He had a “nice conversation” with CEO Tim Cook about his desire for a bigger share buyback.
Engineering, sentiment, discipline
Mr Icahn has a reputation as a short-term investor and arbitrageur, which doesn’t always sit nicely with long-term investors. But there are three good reasons why his intervention should prove remunerative for Apple shareholders: financial engineering, shareholder sentiment and management discipline.
Firstly, his influence is likely to accelerate Apple’s return of surplus capital to shareholders, one way or another. Apple doesn’t need a massive cash pile, and the financial engineering of making its balance sheet more efficient should boost the share value.
Secondly, Mr Icahn’s high-profile involvement adds momentum at a time when investor sentiment is poised to turn positive. The hiatus in product launches may soon be ending and some analysts, at least, are bullish about the prospects for the new low-cost iPhone. Few mega-cap companies can be so prone to scuttlebutt — the rumours and gossip that more commonly affect the share price of small caps. But a few bits of good news flow can improve sentiment just as a few bits of bad news destroy it.
Thirdly, if Mr Icahn is no natural ally of long-term investors, he’s even less welcome in boardrooms. Having apparently seen off David Einhorn’s challenge, Mr Cook now has an even more formidable activist investor to deal with. But that’s a good discipline if it forces management to concentrate on maximising the share price and cut through sclerotic corporate thinking (such as holding so much rainy-day cash). Perhaps Mr Icahn may liberate Tim Cook from the legacy of Steve Jobs.
Fundamentally, Apple is a value share. It’s easy to make the bear case: the pace of innovation has slowed after the loss of its inspirational leader, competition is tougher with Samsung beating it on handsets and Google on apps, and market growth is tailing off.
But these are the symptoms of a maturing industry, and are why Apple’s P/E ratio declined from 55 times in 2004 to 40 times in 2007, 20 times in 2012, and 12 times today. At a little over half the S&P average I think that rating has overshot, so it’s encouraging to hear Mr Icahn describe the shares as “extremely undervalued”.
Nevertheless, the fate of Blackberry is proof that technological leadership and a loyal following aren’t a guarantee against failure. There’s risk in Apple shares — but spotting value, and balancing risk, is what investment is all about.
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> Tony owns shares in Apple but no other shares mentioned in this article. The Motley Fool owns shares in Apple and Google.