Apple (NASDAQ: AAPL) announced this week it would not use its $20 billion cash hoard for dividend or share buyback in the open market. Some thought this was a good move, some, a mistake. Let me add my voice to those who agree with Apple's management decision.
Apple has been a rocket ship these past three to four years, rising from $12 to over $200 on the strength of popular consumer products. Recently, the company guided to the low end of the Street expectations for the March 31t quarter, and the stock has sold off almost 35%. So, would a share buyback really help? No, I don't think so and here's why.
Like most superbly run companies, Apple is a victim to a slowing economy. There would have been no gain to Apple had it maintained its March quarterly estimates in tact. No gain from being gallant here in this environment. Apple took the occassion to re-set the already raised bar on its expecations. Apple had beaten expectations five of the last six quarters, and analysts were raising the bar habitually. With the share price having suffered in January from the market's selloff, Apple took the opportunity to re-set its own bar.
The fundamental business at Apple is as in-tact as it's ever been. iPod has sold over 140 million units since its introduction in late 2002. With share of the MP3 market at 75%, Apple's positioning is unquestionable. The iPhone is selling wonderfully and remember -- it's a revenue building story -- as Apple recognizes revenues over 24 months. The new Mac is on fire and continues to receive rave reviews.
Throw this in the mix of a superbly run retail store system, global acceptance of all product lines and expanding gross and operating margins and there is no reason to initiate a defensive buy back program.
Ask Microsoft (NASDAQ: MSFT) if it would like to have back the multi-billions of dollars its dispersed in dividends and share buybacks these past three to four years? In view of its intention to buy Yahoo! (NASDAQ: YHOO), Microsoft will need to take on debt for the first time if the transaction goes through.
With Apple's share price at $125, subtract the net cash per share of $21, it leaves an enterprise value of about $104. With September 2008 consensus earnings per share at $5.13, Apple's P/E ratio is at 20x. A share buy back program, a positive step for many companies viewing prolonged growth extraction, is not necessary for Apple.
Georges Yareds' new Report "7 Reasons Apple Will Double" is available free at GameOn.com. He is CIO of Yared Investment Research
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Reader Comments (Page 1 of 1)
3-07-2008 @ 11:51AM
Beltway Greg said...
You can put anything in a forward looking equation and get just about any number that you'd like but it still would've been a nice show of solidarity to drop a quick billion, two or three into the stock. Even if the bloody thing only goes to Sheldon's $160.00 a 33% return isn't that bad and if it goes much higher so much the better. They could even have the Geico Gecko do a quick podcast talking about how reducing the float actually saves you money and saving you money is a good thing isn't it mate? It's like Steve Jobs calling and giving you the choice to come to Cuppertino or meet him at the Apple Store on 5th Ave. Either way you're shopping with the king.
Beltway Greg