On July 8 I wrote an article that examined what Apple (AAPL) would look like at $500 per share. The conclusion was that while some investors might get shy given the absolute size of Apple at that price on a multiples basis the valuation seems quite reasonable. Taken a step further, if presented with all of the data except the market cap, many investors would be very interesting in the financial profile of Apple at $500.
So why is Apple trading at approximately $360 per share, almost 40% below a perfectly reasonable price given the financial metrics? One reason is the Steve Jobs factor. Mr. Jobs' poor health is a tragedy and my thoughts go out to him and his family. The purpose of this article is not to argue for or against what information a company should be required to make available regarding the health of senior executives, nor is it about Apple’s success plan should Mr. Jobs not be able to return to Apple full-time.
What I wanted to think about was the stock-reaction if it was announced that Mr. Jobs would not be returning and what Apple’s response could be to a negative reaction.
Apple has $65 billion of cash, short-term, and long-term marketable securities on its balance sheet as of March 31, 2011. Further, in the March quarter Apple produced another $5.6 billion in free cash flow and has generated more than $23 billion in free cash flow over the past 4 quarters. It is not a stretch to assume it will continue to generate massive amounts of cash over the next few years. It has done little with this cash. Now assume Apple’s stock price fell due to a negative announcement such as the announcement that Mr. Jobs will not be returning to the company. Apple could then use this cash hoard to buy back shares.
Assuming a share price decline of 25% to approximately $270 per share and a $50 billion buyback Apple’s 2011 consensus EPS would go from $25.12 (per Bloomberg) to $30.01 given the lower share count. Apple currently trades at 14.3x consensus 2011 EPS. If that multiple remained constant, at the new higher EPS, Apple would trade at $428 per share. I have assumed that Apple generates 2% on its cash in this analysis. If you assumed a $20 billion buyback, instead of $50 billion, the share price would go to $383 based on a pro forma 2011E EPS of $26.82.
This is illustrative “back of the napkin” analysis and all it really says is that given the low opportunity cost of using cash to buy back shares a buyback would be significantly accretive to EPS especially at a lower stock price caused by an announcement that has nothing to do with the current operating performance of the company.
This is yet another reason that Apple feels inexpensive at its current levels.