David Evanson and Oliver Pursche
Forbes.com, Winter, 2012
As a kid, I always loved the opening monologue of the TV show, The Outer Limits. Remember?
There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper.
And The Outer Limits is just about where we’ve gotten with Apple AAPL +1.18% (AAPL) shares. Let me be out front: I own shares in the GMG Defensive Beta Fund, which I co-manage, and we are buying more.
The reason we’ve reached the outer limits though—not in our buying but in the Street’s perception of the shares—are the “problems” that the company has and how, in my view, they are undermining the performance of the shares.
First there’s Apple’s profits. They were $13.1 billion. To put this problem into context, here’s a list of the 10 most profitable companies provided by Statistica for the last quarter:
While Apple’s profit has been well reported, I feel it understates its performance. Cash flow from operations was $23.4 billion.
Then there’s Apple’s public relations problem. It’s gotten in a nasty public fight with hedge fund Greenlight Capital and its outspoken founder David Einhorn.
To Einhorn I would counsel patience. Specifically, there’s this chart demonstrating Apple’s share price performance:
And then there is this one:
Apple is one of the few companies ever faulted for having too much cash. I will concede it’s a lot of cash, but I will also offer that no company in history has ever faced a “problem” of this magnitude, and deciding how best to use it to optimize shareholder value takes time.
Giving it to the shareholders is the obvious answer, but not necessarily the right one. My view is Apple’s mountain of cash will unlock shareholder value, just not today.
Then there’s Apple’s valuation problem. It’s trading at 8.6x the September 2014 consensus forecast and 9.8x the September 2013 consensus forecast. You would think it is making automobiles instead of iPhones.
Stripping out the cash per share figure of about $145 per share, means that at today’s price of about $452, the Apple franchise is valued at about $307 a share, or 6.7x the September 2013 consensus forecast and 5.8 the September 2014 consensus forecast.
While I would posit that stripping out the cash might be a preposterous notion, with Apple, it’s within the realm of possibility. Specifically, while generating $23 billion in cash flow from operations in the fourth quarter of 2012, Apple used $13.5 billion in cash from investing activities, and another $4.5 billion in financing activities, for a net cash increase of $5.3 billion.
Technically, then, ceteris paribus (which presumably is the fly in the ointment) Apple could give away all its’ cash, finance it’s operations with a three-month loan, and still come out ahead with perhaps a few billion dollars.
Of course these realities—or in the case of the cash “give-away” above, I’ll concede, near realities—are no match for the imaginations of bears and naysayers who believe that having too much cash is tantamount to the sky falling. However, until fantasy takes hold again, I’m happy to continue buying shares from The Outer Limits.