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Education is in finance and economics. Seek long term strategic trends while keeping an eye open for short-term tactical opportunities. Pay close attention to cash-flow statements and the allocation of capital. Prefer management and board that return monies to owners via dividends. Warning... More
  • Apple Out Of The Box Cash Uses 0 comments
    Feb 13, 2013 2:39 PM | about stocks: AAPL

    Might Apple (NASDAQ:AAPL) enjoy a better return by spending $10 billion of its cash balance not on share repurchases but rather invested in Best Buy (NYSE:BBY) and or JC Penney (NYSE:JCP) by way of debt purchase or a preferred equity position? Think of the PR and press that could result as the investment might help two struggling firms and possibly save and or create thousands of jobs.

    Both Best Buy and JC Penney's are facing headwinds with bonds offering rather juicy yields.

    According to the FINRA website indicates that Best Buy has an issue with a 5.50% coupon maturing in 2021 with a 6.2% yield, the last price was 95.472. JC Penney's an issue with a 7.95% coupon maturing in 2017 with a yield of 9.6%, the last price was 94.375. If Apple could entice either or both firms to issue say a convertible preferred issue with an 8.0% coupon and a minimal conversion premium it might be an interesting use of cash and a lower cost retail expansion.

    Apple has products that are currently sold in Best Buy and keeping it in business may help sales of various future iProducts. JC Penney's is attempting to remake the shopping experience with a boutique setting, if I understand the story correctly. Apple might be able to expand its retail footprint within JC Penney locations by offering iPhones and iPads. With the rumored iWatch and or Apple TV it might be a good fit within the new JCP and in Best Buy.

    Are the current Apple stores large enough to properly display a rumored Apple TV? The store nearby seems rather small to display a large screen television or media device. Having space in a Best Buy and or JC Penney might provide a better consumer experience. In the case of Best Buy, should an Apple TV appear consumers could be instantly compare it to the competition.

    There would be risks with this strategy but investing in the bonds of Best Buy and JC Penney's could help reduce the financial impact. Granted this could be a very high risk strategy and might reduce the attractiveness of its standalone retail stores. However given the low earnings on cash, the idea could be slowly rolled out by only making use of the cash-flow generated from the fixed income investment.

    Another idea would be to explore if the Best Buy and or JC Penney would, or could, issue a new convertible preferred issue, say a $2.5 billion investment in each with a 7.0% coupon. That could throw off $350 million a year in cash-flow and help fund numerous pilot store locations. And possibly expand the locations selling Apple products. Apple could staff the stores with Apple trained retail staff to ensure the customer experience.

    Or Apple could use its cash to buy back its stock by spending a $1 to add pennies to earnings per share. This seems to be the favorite solution of Wall Street and many analysts. How many firms can you name that created shareholder value since 1999 via the repurchase of shares?

    The choice of how to spend the cash could boil down to whether Apple wants to invest in its business by creating jobs and or developing venues to distribute its products or shrink the business by repurchasing its stock. Repurchasing stock suggests the firm has no investment opportunities and does not want its owners to have the opportunity of reinvesting the cash as they see fit; either back into the company, buying company products and or investing in other opportunities.

    I would have more interest in Apple stock if it used its cash in an out of the box fashion and no interest if it continues providing owner's cash to departing owners. The old adage about follow the money suggest a share repurchase is an incentive to sell, not a reason to buy. Besides how is an investor to know if the cash received from selling stock comes for the company? About the only way they could know is if the firm did a Dutch tender giving all owners the opportunity to exchange shares for the firm's cash.

    There are many ways Apple can use its cash. Time will tell what happens.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: AAPL
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