What's Up With Carl Icahn's About-Face On Apple?

Feb 14 2014, 10:17am CST | by

Has the legendary activist investor thrown in the towel or has he embarked on a crafty strategic plan to gain a sharper edge as one of Apple’s largest stakeholders? Carl Icahn’s investment in Apple (AAPL) has ballooned to about $4 billion but he has yet to sell a share.

Fret not, Apple bulls. As several close Apple watchers and savvy investors see it, the usually  aggressive investor’s surprise change-of-heart is a big positive. They believe it’s his way of staying with Apple for the long haul. And Icahn has said publicly that he hasn’t sold any of his shares.

His private meetings with Apple CEO Tim Cook has given him more of an insider’s insight into what’s going on within the company — and in the mind of the Apple chief. The fact that he hasn’t sold any of his shares after his meetings with Cook validates the belief that he has gained vital and positive information about Apple.

In the many years that I have known Icahn since the early 1980s, one lesson learned is never to underestimate this obstinate but pragmatic investment pro. He has lost some battles but his many wins vastly outnumber the setbacks.

Once known as a ruthless and fearless corporate raider before he worked on changing that image to an ”shareholder-friendly activist investor,” Icahn surprised Wall Street on Monday when  he unexpectedly withdrew his demand that Apple boost to $50 billion its stock repurchases by the end of September.

At first glance, it would appear that the courageous if unpredictable takeover artist was giving up on his quest to influence management into paying more attention to shareholder value. But analysts and investors who watch Apple like a hawk think otherwise.

They believe it’s a clever move on Icahn’s part to convince management that he shouldn’t be regarded as a thorn but as an ally whose interest as a major shareholder is aligned with management’s goals. In that way, he wants to demonstrate that management would be wise to accept him not as a gadfly but as a constructive ally who could help reassure shareholders that Apple is on their side.

Of course, it shouldn’t come as a surprise that it’s all about money and Icahn’s expanding profit ledger. But who can blame him after betting big on Apple as a rich source of  value. To be sure, Icahn’s latest move has focused attention on how Apple is using wisely its massive cash hoard of about $150 billion.

“Icahn’s latest move is a positive,” says Scott Kessler, chief technology analyst at S&P Capital IQ, as it “adds to visibility on Apple’s capital structure, balance sheet, and flexibility” in deploying its financial assets. And with his revised stance on Apple’s buybacks, Icahn will be able to contribute more to enriching shareholder returns, Kessler points out.

To Icahn’s credit, he has come to recognize that Apple’s repurchase of $14 billion of its stock within a two-week period vs. a combined $10 billion in the December and September quarters is “pretty aggressive and shows Apple is ready and willing to be more aggressive and opportunistic” in using its financial resources, notes Kessler.

The analyst says Icahn still sees value in the stock and expresses fresh confidence in the company’s management team in the way it has expanded its stock repurchases and paid continued attention to R&D  towards launching new products.

Kessler says Icahn’s activist role in Apple hasn’t been diminished by his latest decision against pushing his $50 billion share buyback recommendation.

Indeed, Icahn will continue to be an outspoken advocate on behalf of Apple’s shareholders, and that’s a material positive” for the stock and its holders, says Kessler, who reiterates his buy opinion on Apple.

One reason: “We believe the balance sheet will be increasingly employed for dividends and stock repurchases,” says Kessler, and part of the credit goes to Icahn and the activist campaign he launched on that issue.

Kessler has a 12-month price target of $590 a share on the stock, which has traded higher since Icahn’s change-of-heart, currently trading at $543. On the day that Icahn announced the withdrawal of his demand for a $50 billion stock repurchase, Apple’s stock jumped 1.8%, to $528.99 a share.

“We see Apple’s stock as an attractive value,” says Kessler, considering the company’s “significant market position in key hardware and software areas, its high customer satisfaction and switching costs, and substantial cash position.” And higher volumes, its focus on common components and greater emphasis on software and services should aid profitability,” adds the analyst. He also points out that Apple’s price-earnings ratio is about 25% below that of S&P’s technology sector.

Kessler expects Apple to earn $45.58 a share this year, up from 2013’s $39.75 in 2013, which the analyst says reflects an expected re-acceleration in iPad revenue growth for fiscal 2014 and maturing gains related to the iPhone. Kessler forecasts Apple revenues to increase by 6% this year, from last year’s total revenues of $170.9 billion./>/>

Joseph F. Hunt, a principal at Northwest Criterion Asset Management, also remains bullish on Apple which, he notes, trades below the market’s multiples, and has a very solid balance sheet with a global reach.

Hunt is encouraged by its prospects in China and believes Apple’s relationship with China Mobile and its 750 million customers will contribute to Apple’s shareholder value. Its most recent earnings report exceeded market estimates, he notes, reflecting continued financial strength.

Also a big plus, adds Hunt, are the substantial revenues from its iTunes and App Store which continues to expand, in addition to the continued sales growth in Apple’s phones, tablets, and computers. Even after substantial dividend payments and stock buybacks, “Apple is left with a huge stockpile of cash to pursue innovations and acquisitions,” notes Hunt.

The continuing controversy over where Apple’s is headed “offers a great opportunity to own one of history’s most innovative companies at a large discount to the market,” says Hunt.

“Apple’s stock buybacks and dividend payments also make it easier to be patient for the Next Big Thing,”  asserts Hunt.

Source: Forbes Business


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