Since the end of September, shares of Apple (AAPL) have risen by nearly $100 per share, driven largely by renewed momentum from sales of the new family of iPhones, specifically the iPhone 5S and the iPhone 5C, and more recently by the news that the smartphone maker has finally reached a deal with China Mobile (CHL). With the iPad Air and the latest MacBook Pro successfully playing supporting roles to Apple's top products, the holiday season seems to be off to a favorable start thus far. With activist investor and billionaire Carl Icahn again tweeting and agitating for a more aggressive share repurchase plan from Cupertino, investors should be asking if the push will help or hurt shares.
The Chinese iPhone
Before turning to the full implications of Icahn's latest push, it will be important to put the China Mobile deal into the proper context. This has been one of the most discussed and long-anticipated deals in smartphone history, largely because China Mobile is believed to have about 700 million subscribers. Access to that size market could prove very lucrative for Apple in continuing to drive sales of its best-selling product. The Wall Street Journal broke the story, giving it a definite level of credibility, but the existence of this alliance has been rumored for years without substance. Apple shares were up on the news, but seem to have been taking a cautious approach. This is definitely a story to watch for Apple shareholders; no details as to numbers or timing are yet available.
Icahn's Holiday Wish List
While Icahn has backed his request down from its original $150 billion to a "more reasonable" $50 billion, he has maintained his position that the company is sitting on cash that should be returned to investors. Earlier this year, Apple already announced a plan to return $100 billion to shareholders, marking the largest such plan in history. Still, Icahn thinks it is not sufficient.
An Apple spokesperson said: "As part of our regular review process, we are once again actively seeking our shareholders' input on our program, and as we said in October, the management team and our board are engaged in an ongoing discussion about it which is thoughtful and deliberate." At the time of Icahn's original push, Apple was sitting on roughly $150 billion of cash.
On the other side of the argument, Moody's recently warned that Apple should not over-extend its borrowing to meet Icahn's demands. The rating agency's Gerald Granovsky said: "Despite its massive and growing cash balance, Apple would face heightened credit risk if it were to issue significantly more debt to accommodate calls to boost shareholder returns." While it is nice to see that an agency that brought you such great calls as the safety of Bear Stearns and Lehman Brothers swinging the pendulum to ultra-conservative, the idea that "going materially over the $37 billion to $42 billion in total debt expected by 2015 would increase credit risk" seems extreme given Apple's prospects. Apple is currently rated Aa1.
The Icahn Effect
While there are reasonable arguments on both sides, the renewed push from Icahn - who owns roughly 0.5% of the company - has the effect of providing continued visibility to just how well the company is doing. When he made his first push, shares were trading such that his suggested $525 per share looked attractive. Now with shares trading above $560 per share, more press is likely to be a net positive for the iPhone maker. If details of the China Mobile deal materialize and prove favorable, Apple will have gained a huge new market into which in can hurl iPhones. While shareholders, particularly high-profile ones like Icahn, may wish to see more of those profits in their hands, Apple seems to be on solid footing. As such, despite the run in share price, I would be a buyer here and believe $600 per share is attainable.