Ic­ahn may be too am­bi­tious in his Ap­ple $240 tar­get

Financial Mirror (Cyprus) - - FRONT PAGE - By Chris Lange and Jon C. Ogg

Carl Ic­ahn is back at it again. The 79-year old ac­tivist in­vestor has is­sued an open let­ter to Ap­ple Inc. CEO Tim Cook, with a val­u­a­tion path — driven largely by buy­backs — that would the­o­ret­i­cally make Ap­ple worth a whop­ping $240 per share. The plan sounds op­ti­mistic, but hon­estly it sounds too op­ti­mistic.

In Fe­bru­ary, Ic­ahn orig­i­nally is­sued an open let­ter to Cook and Ap­ple in­vestors re­gard­ing the di­rec­tion and val­u­a­tion that he thinks Ap­ple should have. At that time he called for the share price to rise to $216, con­sid­er­ing Ap­ple im­ple­ment an in­creased share buy­back plan.

Ap­ple re­ported its earn­ings in April and did in fact in­crease its share re­pur­chase plan. The tech gi­ant an­nounced that its board of di­rec­tors has au­tho­rised an in­crease of over 50% to the com­pany’s pro­gramme to re­turn cap­i­tal to share­hold­ers. Un­der the ex­panded pro­gramme, Ap­ple plans to utilise a cu­mu­la­tive to­tal of $200 bln of cash by the end of March 2017.

How­ever, this was just not enough for Ic­ahn. He still be­lieves that, given Ap­ple’s cash and in­vest­ments and pos­i­tive cash flow, the com­pany could do more, but there are no signs Ap­ple plans to do so.

De­spite Ap­ple not nec­es­sar­ily mov­ing in line with Ic­ahn’s plan, he re­vised his price tar­get to a whop­ping $240. Ic­ahn ex­plained his val­u­a­tion of Ap­ple shares in his most re­cent open let­ter to Cook and Ap­ple sent out on May 18:

“To ar­rive at the value of $240 per share, we fore­cast FY2016 EPS of $12.00 (ex­clud­ing net in­ter­est in­come), ap­ply a P/E mul­ti­ple of 18x, and then add $24.44 of net cash per share. Con­sid­er­ing our fore­cast for 30% EPS growth in FY 2017 and our be­lief Ap­ple will soon en­ter two new mar­kets (Tele­vi­sion and the Au­to­mo­bile) with a com­bined ad­dress­able mar­ket size of $2.2 tril­lion, we think a mul­ti­ple of 18x is a very con­ser­va­tive pre­mium to that of the over­all mar­ket. Con­sid­er­ing the mas­sive scope of its growth op­por­tu­ni­ties and track record of dom­i­nat­ing new cat­e­gories, we ac­tu­ally think 18x will ul­ti­mately prove to be too con­ser­va­tive, es­pe­cially since we view the mar­ket in gen­eral as hav­ing much lower growth prospects.”

What you are hear­ing from Ic­ahn is re­ally noth­ing new. He keeps com­ing up with mas­sively higher val­u­a­tions that are based on many “if-then” sce­nar­ios. The one if-then that Ic­ahn is not con­sid­er­ing is that this may gut Ap­ple’s cash bal­ance, and at a time that grow­ing the core busi­ness for what is al­ready the largest com­pany in the world may be dif­fi­cult in the years ahead.

As a re­minder, it is not un­com­mon for in­vestors, much less ac­tivist in­vestors, to talk up their book.

It is worth men­tion­ing that a guy like Carl Ic­ahn might not have to care if he leaves a com­pany like Ap­ple lever­aged up. What if Ap­ple runs into a pe­riod when it be­comes harder and harder to add end­less growth? Con­sid­er­ing that the ram­i­fi­ca­tions could be years in the fu­ture, men in their late sev­en­ties and eight­ies might not think they need to care about long-term ram­i­fi­ca­tions and the fall­out seen there­after.

Ap­ple shares were up 1.3% at $130.48 on Mon­day af­ter­noon. The stock has a con­sen­sus an­a­lyst price tar­get of $148.18 on a 52-week trad­ing range of $85.33 to $134.54. (Source: 24/7 Wall St.com)

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