updated 05:15 pm EDT, Wed October 29, 2008
Bernstein on Apple reserve
Apple should be using its massive cash reserve for a stock buyback, argues Toni Sacconaghi of Bernstein Research. The analyst notes that Apple stock is trading at approximately 15 to 18 times earnings -- an unusually low ratio for the company -- and it thus has the rare opportunity to create a substantial EPS payoff for investors. "Mathematically," says Sacconaghi, "share buybacks boost EPS only if a stock's P/E multiple is lower than the reciprocal of the after-tax interest rate earned on cash."
Apple's cash reserves are currently valued at $24.5 billion, and generating approximately 1.55 percent in interest after taxes. Because Apple is hoarding it, however, Sacconaghi suggests that it is accomplishing very little. He proposes that by spending $10 billion of its reserves on a buyback, Apple could raise its GAAP EPS by 4 percent. By spending $20 billion, EPS could jump by as much as 9 to 15 percent, the latter figure depending on a front-loaded deal that would only complete in the first fiscal quarter of 2009.
The company's alternatives are said to be limited, such as a special dividend payment, which could actually backfire for shareholders by harming earnings growth. A better option could be a major acquisition, according to Sacconaghi, but Apple is believed to prefer purchasing small companies, which it can better coerce into following its goals. CEO Steve Jobs has hinted that Apple will make some form of investment in order to take advantage of the global economic crisis.