On The Einhorns Of A Dilemma

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

Fancy suing a company when it's making money hand over fist. Such is the situation with Apple (NASDAQ: AAPL) being sued by Greenlight Capital's David Einhorn as he tries to force the company to grab some cash from under its mattress and put it to work.  Einhorn even likened Apple's reluctance to part with its cash hoard to his grandmother's "Depression mentality.” Is Einhorn an ingrate or just impatient?

In most cases investors like to see a company keeps its hands in its pockets rather than relentless expansion and dubious acquisitions. But Apple has too much cash according to Einhorn, $137 billion, and he wants to take $50 billion of that for a perpetual preferred stock issuance yielding 4% or better. Late in the day Apple came out with a statement saying they had already been considering upping the common stock dividend. The Apple statement catalyzed a 3% share price rise just before the February 7 close and rising again on February 8 after Goldman Sachs put out a note approving the public discourse on using Apple's cash hoard.

Does Einhorn Have Apple "Juice"?

Activist shareholders like Einhorn, Icahn, et al. have had some success with other companies implementing their agendas, but we're talking about Apple here. Einhorn is urging fellow shareholders to vote against a proxy proposal that he alleges would effectively deny the Board the ability to offer such a preferred stock class in the future.

Einhorn is dissatisfied also with the $10 billion share repurchase program (with $35 billion more to go). He may have some legal basis for a suit as the Apple shareholder proxy was "bundled" with other corporate governance measures, all too similar to Capitol Hill resolutions, forcing shareholders into an all or nothing position. His legal challenge has some likelihood of winning, too. Apple issued a release categorically stating that the Proposal #2 would not deny future opportunities to issue preferred stock.  The proxy vote is scheduled for the February 27 shareholders meeting.

Einhorn is echoing the views of many of Apple's millions of shareholders as he released, "Greenlight is dissatisfied with Apple's capital allocation strategy. Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money. Greenlight believes that Apple's proposal to eliminate preferred stock from its charter is an unprecedented action to curtail the Board's options. Greenlight is not aware of any other company that has ever taken this step voluntarily."

Einhorn holds over 1.3 million Apple shares, a little more than half what CalPERS (California Public Employees' Retirement System) holds. CalPERS announced it would be backing Apple's side of the proxy battle. There are several advantages to Einhorn's side: it keeps ownership by management undiluted, keeps the $100 billion cash on foreign shores from bearing undue tax burdens when repatriated, and lastly draws value investors into the stock.

It isn't like Apple's cash is uninvested, almost $130 billion is marking time in corporate securities, funds, government securities, MBSs, CDs and almost every flavor of investment any granny would feel comfortable with until Apple decides what to do with it.

Growth Vs Value

This is the fundamental issue for shareholders; do they want Apple to be a value or growth stock. Nobody wants Apple to become like Microsoft (NASDAQ: MSFT) which has been at the lagging edge of tech innovation (except for its gaming system) and share price appreciation. But investors still appreciate the 2.30% yield that they can't get from its closest rival, Google (NASDAQ: GOOG). What's a grandmother to do?

Apple is currently trading at a 10.62 P/E with a PEG of .52 but Apple had dropped some 30% from its September high of $705 seeing increasing competition from Samsung for its phones and Amazon and Google for its tablets. Google is trading at a 24.03 P/E and Microsoft is at a 14.99 P/E and offers a 3.30% yield. Microsoft has an 8.38% five year EPS growth rate, Google a 13.75%, and Apple  the highest at 18.98%.

Apple is still a retail powerhouse but there have been defections from the Apple ecosystem as consumers have a plethora of options. The damage that a preferred stock would garner for Apple's growth image has been debated in numerous media channels since Einhorn's bombshell. Shareholders would be cheered if only laconic C-suite execs would up its spend on accretive and strategic acquisitions and R&D spending, currently at $3 billion, on the innovation pipeline and let them know.

Right now, compared to Microsoft and Google Apple is a growth and value stock. It holds the Number One spot in the US smartphone market, 36.3% and growing according to numbers released by comScore on the same day as the Einhorn news. It still has the most apps, over 25 billion iTunes sold to date, still in the cloud, and it has its fingers in a lot of AAPL pies that are rarely advertised like a recent patent application for a solar iPhone as well as 20 patents granted in 2011 for various solar technology applications for Apple products.

The Cruelest Cut

Einhorn says he is in Apple for the long haul and added to his holdings since his last statement. Almost 2,000 institutions hold Apple not to mention all the retail investors so it all depends on what the majority of these institutions and retail investors really want. Most would probably be happy enough with a raise in the common yield as long as they knew the company could continue to innovate.

As far as Apple shareholders are concerned Google and Microsoft can keep "scroogling" each other in their search and tablet competition. Apple still has impressive growth ahead if they want to spend a little more of the hoard, maybe working on a less expensive (I hesitate to use the word cheaper) iPhone for emerging markets or finally getting a handle on that Apple TV "thing" and a rumored Apple watch. Growth and innovation have been Apple's hallmarks and that is what I think they should blow the cash on.


leglamp has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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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