Ron Johnson served as an Apple senior Vice President from 2000 to 2011 and oversaw the launch of the Apple Stores that were critical in turning Apple (NASDAQ:AAPL) into the success it is today. After a prolific tenure, Johnson joined J. C. Penney (NYSE:JCP) in a high-profile corporate move. At the time, JCP was trading for approximately $30 per share and since then it has lost more than half of its value. Earlier this month J.C. Penney's board said enough was enough and parted ways with Ron Johnson. As soon as I saw the news that Ron Johnson was a free agent, I wondering how long it would take for Apple rumors to start. The answer was not very long as they started to crop the same day.
Analysts have been extremely critical of Ron Johnson due to J.C. Penney's decline but I believe it is premature to write-off everything that Johnson achieved at Apple. It is true that Steve Jobs was the visionary behind the Apple Stores but Johnson had success at Target and also has a Harvard MBA and Stamford undergraduate degree in Economics. Just as Tim Cook was Jobs' supply chain and logistical expert, Johnson was Jobs' man responsible for building out the Apple Store vision. What J.C. Penney has indicated to investors is that Johnson lacks the vision to chart an entirely new course for a company. Having said this, you may be wondering why I do not want Apple to hire Ron Johnson back. I just said that he is an excellent operational executive who can take an existing plan and execute it. After the ill-fated tenure of John Browett at SVP of Retail Operations, it certainly looks like Apple needs a replacement who will fit with Apple. The simple reason why I do not believe Apple should rehire Ron Johnson is that the Apple does not need any more distractions. Since the iPhone 5 launched, Apple's great investment thesis has been muddled by numerous distractions.
First you had Apple Maps, which was a misstep by Apple but not the complete disaster that the media portrayed it as. By Tim Cook's own admission, the software was not ready for primetime but this size of the error was vastly overshadowed by the magnitude of the critical response. Approximately one month later, Apple had a significant management shakeup that saw Scott Forstall effectively ousted from Apple and remaining key executives given more latitude. This likely stemmed from the Apple Maps letdown but it painted a very poor picture of Apple. The company was portrayed as in chaos with Steve Jobs' executives at odds with Tim Cook's preferred employees.
Next we have had David Einhorn suing Apple regarding its corporate governance policies and urging the company to issued 'iPrefs' to share its growing cash stockpile with shareholders. Most recently, Tim Cook apologized again about "arrogance" in China due to criticism from Chinese controlled media. All of these activities have done one thing and that is make investors forget that Apple is a $400B company with $42B in TTM net income, a 2.5% dividend yield, no debt, and an extremely innovate team that has been responsible for countless breakthrough products that have shaped our lives. The stock is trading at its lowest TTM P/E ratio in at least the past five years, without even adjusting for the $137B "cash plus" on the balance sheet. If you back-out the $146 per share in cash from the price, you are left with a TTM P/E of only 6.5. I challenge my readers to find a stock with Apple's growth and financial position trading at such a low multiple. Furthermore, the price/sales ratio has declined to the lowest point since 2009, despite sales that have tripled over the period. It is clear that Apple is cheap but these distractions have been keeping investors away. Really, who can blame them?
While Rocco Pendola said he would buy a personal computer if Apple rehires Ron Johnson, I will go a step further and say that I would strongly have to consider selling my shares in Apple, at least for the short-term, if Johnson is rehired. Overall, I believe he is a qualified candidate and will find a job that is a better fir than JCP was but the time is not right for him to rejoin Apple. I have written that 2013 will be a very challenging year for Apple and that it is almost dead money until it announces a breakthrough product or changes its cash policy. Ron Johnson was always the story at J.C. Penney, rather than what the company was doing, and that was a drag on the company's efforts to revitalize itself. Apple needs to hunker-down and just execute on its product strategy with as few distractions as possible. If Apple executes internally and follows its pipeline (a good majority of which it is believed that Steve Jobs was personally involved in), the stock should recovery. One more distraction and investors, myself included, may hit their breaking point.
Additional disclosure: Long AAPL June $500 Calls. Please refer to profile page for disclaimers.