Is Apple Really Defenseless?
The Rotten Apple
Another day and another Apple (NASDAQ: AAPL) selloff. Seems like business as usual these days. Apple now trades for less then 9 times Enterprise Value / TTM Earnings. Trailing PE is a paltry 13.49 and PEG at 0.61 if you believe analysts conservative forward growth numbers. It would seem there is no bottom in sight for Apple these days. Investors can’t seem to get rid of their shares fast enough. The stock is now almost 100 points off its all time high of 644/share and now sits 16% off this record at 552 a stub.
Has anything changed for Apple? Well not much new information has changed since their blowout quarter which ran the stock up. We are however getting closer to the iPhone 5 launch which is a positive catalyst. Also the July quarter coming up, Apple will start paying a dividend to shareholders at the rate of 10.65/share.
Sterne Agee Analyst Cuts iPhone estimates. But Look at his Track Record!
Sterne Agee’s Shaw Wu came out today and cut his iPhone estimates. This was the same Mr. Wu that bumped his iPhone estimates for the March quarter, Apple’s second fiscal quarter, to 28.2 million on March 20th, up from 26 million. Apple ended up selling 35.1 million iPhones. He was off by 9 million. That is a missed estimate of 35%. Are investors listening to him today? Would you listen to him with that track record? I’m not.
Right now Apple simply isn’t “working” for bullish investors. Working means going up. When something isn’t “working” then these same investors don’t want it. Ironically when stocks are unloved and cheap that is exactly the time to accumulate them for the long haul.
Is Apple Defenseless Against the Bear Mauling
Apple has done little to defend its stock since it reported earnings. It did issue a buyback but this is not a defense as it only will offset stock option grants. It is a paltry $10 billion that according to the company will be spent over three years. Share count will be held steady but will not shrink.
Excess cash on the balance sheet these days is risky. It is guaranteed to lose purchasing power each year from inflation. According to Warren Buffett it is the riskiest of all investments now. Apple could deploy more cash to shrink the share count and at least provide a floor to the stock. Short sellers know Apple won’t defend the stock so they can take shots all day long knowing Cook and Co. won’t be taking any defensive action against them. $10 billion over three years is all they are up against here.
The dividend is too small at the current stock price to provide a floor. Not until it yields over 3% will it start to defend the stock price just a little bit. That 3% target would put Apple down to about $350/share. Even at that price a 3% yield is not a hard stop. A safe 5% yield might be more protection against market hysteria. Apple would have to be $200/share to yield 5%. Not much defense there either as the stock would have to drop over 50% from current levels to get that yield. Could Apple raise the dividend? They could but investors should not expect this until the one year anniversary of the first dividend this July. Apple is overly conservative when it comes to their cash.
Earnings are another defense. Apple wins kudos here by putting up incredible earnings and growth each quarter. The stock will only get so cheap before earnings actually do have an effect. For example if Apple has $110/share in cash and earns $75/share for 2013 I would think it is unlikely for Apple to trade for today’s $552. That would be a PE net of cash of about 6!!! Could it happen? Anything is possible and if Apple refuses to defend their stock in any way it could become reality.
A stock split might help investor psychology and provide some tailwinds for the stock. Investors gravitate towards cheaper share prices as high share prices are perceived as “expensive”. Additionally, option strategies that allow investors to hedge 100 shares of Apple come into the grasp of a larger investing pool. A split could do no harm so I am continually in amazement that Apple has not pursued this. It worked incredibly well for Chinese search titan BIDU. There is a reason Fortune 500 companies don’t reverse split to get their stocks above $500/share. They certainly could do this but there are proven reasons why high dollar share prices are not the best at maximizing shareholder value.
What Will the Big Apple Do?
Will Apple ever step up and defend its stock or just hope that Mr. Market recognizes its earnings and growth someday? Will they rely on Mr. Market to regain his sanity or will they get fed up with him and start to take matters into their own hands? Apple could use their incredible balance sheet to better serve shareholders. The cash they have keeps losing purchasing power year after year. Unless they are saving up for a $100 billion acquisition they should utilize the cash to provide for the highest return. Right now the best bet is on themselves. That means something more then the $10 billion buyback over three years. If they did authorize a substantial buyback that shrinks share count it would provide a floor and at today’s fire sale prices it would be highly accretive to earnings each quarter.