updated 10:35 am EST, Thu December 28, 2006
Shaw Wu on options news
The recent news concerning Apple's stock options investigation alongside Steve Jobs' decision to hire legal counsel came as no surprise to senior analyst Shaw Wu of American Technology Research, who saw the dip in stock pricing as an opportunity for nimble investors. "We have been looking for a pull-back in Apple shares to get more aggressive on the long side," Wu wrote in a research note obtained by MacNN. "For those who missed yesterday's window, we do not think it is too late to step in." Apple CEO Steve Jobs' decision to seek legal counsel is long overdue, according to Wu, despite the fact that the compensation committee at Apple is run by an independent board that is not comprised of Apple employees. Shaw Wu reiterated his 'buy' rating with a $99 price target based on checks of strong December quarter momentum and a strong product pipeline in 2007.
American Technology Research recently consulted with trusted sources -- one of whom has nearly a decade of Wall Street experience, is Harvard-law educated, and has worked at the Securities & Exchange Commission -- on the options investigation and the 'options problem' overall. Those sources estimate that options backdating is a widespread and commonplace problem in the Fortune 500, affecting potentially as many as 30-35 percent of companies.
"Given the widespread nature, we doubt the SEC and Department of Justice will pursue a broad 'witchhunt' forcing key executives to step down that would undermine the recovery of the U.S. economy," said Wu. "We do not believe it makes sense for the U.S. government to nail Apple and Steve Jobs, one of the most respected American companies and businessmen of the past 100 years. [...] We believe a more likely scenario by the U.S. government is tighter enforcement on options backdating to ensure it doesn't happen again."
The analyst admits, however, that the recent report from The Recorder may hold significance if the prosecutors discovered a documentary 'smoking gun,' or a document that was clearly forged which would make their case much easier to prosecute than if they were relying solely on oral testimony from those involved. Wu also notes that prosecutors are unlikely to leak this evidence at this stage of the investigation, and that speculation about the strength of the case based on this type of information alone is imprudent.
"The bottom line is that 'falsification of documents' and 'options backdating' are serious yet closely inter-related, and we do not think it is likely that Apple will be used to make an example by the government," Wu said.
Apple is likely to file its 10-Q and 10-K filings by the end of the calendar year in compliance with SEC and NASDAQ listing requirements, according to the analyst, which signifies a positive catalyst as well as a big step forward in bringing the options investigation to a close. Wu also remains comfortable with his December forecast of $6.4 billion in revenue, $0.79 in earnings-per-share, and 15.5 million iPods vs. guidance of $6.0-6.2 billion and $0.70-0.73 earnings-per-share.
"We have noticed that consensus at $6.38 billion and $0.78 has moved closer to our forecast over the past few weeks."