Unlocking Apple's Shareholder Value

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The majority of investors know the price of everything but the value of nothing. Indeed, when Apple (NASDAQ: AAPL) was trading at $700 per share, many people thought it was going to hit $1000 per share. However, when it dropped below $500, many thought it was worth only $400 per share, or $300 per share, or even lower. Think about it: Apple lost more than $200 billion in market cap within just six months. The difficulty for investors is to define the range of Apple’s intrinsic value.

A Perpetual Preferred Stock to Unlock Shareholders’ Value

David Einhorn, a successful hedge fund manager, had stated that he was dissatisfied with Apple’s capital allocation strategy for its huge cash pile of $137 billion, or $145 per share. Even though Apple has been paying a dividend and initiating a share buyback program, Apple could do much more for its shareholders. In the recent letter to Apple’s shareholders, he recommended the idea of distributing a perpetual, high yield preferred stock to shareholders at no cost. As this type of distribution would require no immediate use of cash other than continuing dividends, it could maintain Apple’s financial flexibility while making use of market’s appetite for yield. For instance, Apple could distribute $50 billion of perpetual preferred stock, with a 4% annual cash dividend. He estimated that if Apple’s P/E stayed at 10x, every $50 billion perpetual stock distribution would unlock around $30 billion, or $32 per share. In addition, as more money was returned to shareholders, the market would place a much higher valuation on Apple’s stock price.

Apple is Facing More Competition

Actually, Einhorn has been quite bullish on Apple. In the middle of 2012, he explained why Apple’s market cap could reach $1 trillion. Apple is not a hardware company--it is a software company that sold high margin devices running on its own operating system. In order to use the App store and iTunes, users must have an Apple device. According to Einhorn, it “monetizes value through the repeated sales of high-margin software." However, Apple’s operating system is facing growing competitions from Android of Google (NASDAQ: GOOG) and the operating system of Blackberry (NASDAQ: BBRY). According to IDC, Android was the leading operating system globally, with a 68.3% market share in 2012. Apple’s iOS ranked second with an 18.8% market share, while the market share of Blackberry’s operating system was 4.7%. Recently, Blackberry has launched a new operating system, the Blackberry 10. Blackberry 10 has several interesting figures, including Blackberry hub to gather all messages from different accounts, Blackberry flow for better users’ experience, time shift camera app for better picture shooting, and Blackberry balance to firewall data between work and personal uses. 

Peer Comparison

Let’s quickly look at Apple’s valuation. Apple is trading at $468 per share, with a total market cap of nearly $439.7 billion. Trailing twelve months, Apple generated nearly $164.7 billion in revenue and $41.75 billion in net income, while the EPS came in at $44.09. Thus, Apple is valued at around 10.6x trailing earnings and 3.4x P/B.

Apple is known as a cash cow. Since 2003, its free cash flow has grown significantly, from $125 million to $41.45 billion. According to Yahoo! Finance, the market is valuing Apple at nearly 6.6x EV/EBITDA. However, I personally think this figure is much lower. With $137 billion in cash and no debt, Apple’s enterprise value is only $303 billion. As Apple generated $59.3 billion in EBITDA over the last twelve months, Apple’s EV multiples is around 5.1x.

Google, with a total market cap of $255.14 billion, is trading at nearly $774 per share. Google also had a huge cash balance. As of December 2012, Google had $71.5 billion in total stockholders’ equity, $4.5 billion in debt and $48 billion in cash. Thus, the cash balance accounted for nearly 19% of Google’s total market cap. Blackberry’s cash on hand, $2.73 billion, accounted for more than 31% of Blackberry’s total market cap. It is the cheapest company among the three. With $8.73 billion in market cap, Blackberry is valued at only 3.56x EV/EBITDA.

Foolish Bottom Line

I think a lot of pessimism has been reflected into Apple’s stock price. With the huge cash on hand and low valuation, Apple is a good value stock to hold for a long-term. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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