Carl Icahn is at it again. The activist shareholder has been pestering Apple (AAPL) management for years to increase its buyback program, stating that its shares are worth more than double what they are right now. Last October, Icahn wrote an open letter to CEO Tim Cook with a valuation showing that Apple stock is worth $203 a share. At the time, Apple stock was sitting at $101.80 a share.
Fast forward seven months and Icahn has penned another open letter to Tim Cook, this time opining that the company’s stock is worth $240 a share — shares are now selling at $130.07. The basis for Icahn’s valuation?
“It is our belief that large institutional investors, Wall Street analysts and the news media alike continue to misunderstand Apple and generally fail to value Apple’s net cash separately from its business, fail to adjust earnings to reflect Apple’s real cash tax rate, fail to recognize the growth prospects of Apple entering new categories, and fail to recognize that Apple will maintain pricing and margins, despite significant evidence to the contrary. Collectively, these failures have caused Apple’s earnings multiple to stay irrationally discounted, in our view.
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.”
Icahn good for Apple
Before we jump into the actual valuation, let me say that Carl Icahn has been a good force for Apple. When he started pushing management two years ago to initiate a large buyback program when operations were down, the company did, injecting an optimism that it couldn’t organically produce.
After that, he has pushed Apple to do greater buybacks, and the company has responded, continuing to add value to shareholders. There was also a stock split in there. When Icahn wrote his letter last October, no one knew what kind of Q4 the company would have — yet Apple set records. Even Q1 in 2015 set records for the company. So does Icahn have it right? Will Apple continue to fire on all cylinders and drive this stock to $240?
