Apple And The Activists

By Alex Gavrish, Etalon Investment Research and author of “Wall Street Back To Basics”

It is clear that even without recent activist involvement by Carl Icahn in Apple, the stock provided an attractive investment opportunity. As of April 23th 2013, the day Apple announced second quarter results (FY 2013), the stock was trading at $406 per share or a market cap of $365 billion dollars. The basic building block of Apple’s valuation was huge cash holding which stood at about $145 billion as of quarter’s end. Taking this cash into account, enterprise value equaled $220 billion.

In second quarter of FY 2013 Apple generated $12.5 billion in cash flow from operations and $35.9 billion for a period of six months ended March 30th 2013. In fiscal year 2012 cash from operations stood at $51 billion while EBITDA equaled $59 billion. Therefore the market was valuing Apple at an EV/EBITDA multiple of only x3.76. In case one would not be comfortable with Apple’s prospects, a low-case scenario of a 50% decline in EBITDA would still conservatively value the company at x7.46 EV/EBITDA multiple.

Concurrent with its quarterly results, Apple announced a doubling of a capital return program. Apple said that it would return a total of $100 billion cash by the end of calendar 2015 or a period of about two and a half years. The return of capital would consist of a $60 billion share buyback program and $40 billion dollars allocated to dividend payments. Such program would represent an annual yield of about 11%.

As of December 10th 2013 the company’s share price increased 39% to $563 per share, bringing Apple’s market cap to $507 billion dollars from $365 billion in a period of 8 months. It is clear that there was nothing wrong with Apple in the first place, and there probably was no need for an activist shareholder. The company was in an excellent shape, hugely profitable, and was willing to return the profits earned to shareholders.

What can be learned from Apple’s case? The main moral, in my view, that investors can learn in this situation is that it is not always necessary to religiously follow activist shareholders and take their investments as the holy grail of investing. This was definitely the case over the last two years as the financial media was virtually obsessed with coverage of activist shareholders and hedge funds. What is required is a simple common sense, objective analysis, shareholder-friendly management that is willing to return capital to shareholders, and adherence to timeless value investing principles.