Activist investor Carl Icahn, who owns 53 million shares in Apple, posted a letter to CEO Tim Cook Thursday urging the company to use its cash hoard to increase share repurchases and saying the company’s stock is currently trading at half its value according to his estimates.
“(G)iven the persistently excessive liquidity of $133 billion net cash on Apple’s balance sheet, we ask you to present to the rest of the board our request for the company to make a tender offer, which would meaningfully accelerate and increase the magnitude of share repurchases,” Icahn wrote in a lengthy letter posted on his site.
Icahn added, “We thank you for being receptive to us the last time we requested an increase in share repurchases, and we thank you in advance now for any influence you may choose to have communicating to the rest of the board the degree to which a tender offer would have a positive impact on an EPS basis for all shareholders.”
Icahn said his investment firm, Icahn Capital, will not sell any of its shares if the company expands share buybacks: “We commit to this because we believe Apple remains dramatically undervalued. And we think you and the board agree.”
Apple will grow earnings per share by 30% in each of fiscal year 2016 and 2017, per Icahn’s estimates. Based on that, “we see Apple’s P/E of just 8x our FY 2015 forecast as both irrational and transient in nature, especially since many actively managed mutual funds remain underweight Apple in their portfolios.”
Based on Icahn’s estimated 19X price-to-earnings multiple for fiscal 2015, Apple is worth $203 per share including net cash. Apple stock closed Wednesday at $100.80 per share; in premarket trading Thursday, shares were up 0.9%. [UPDATE: Apple shares closed Thursday up 0.2%, to $101.02 per share, amid a broader market slump.]
In the letter, the investor praised Cook and the Apple management team, and said Apple is “poised to take market share from Google (Android) in the premium device market as iPhone 6 becomes Apple’s flagship device among a growing collection of products and services that work together to form an increasingly dominant mobile ecosystem.”
In addition to other growth areas like the recently announced Apple Watch, Icahn also suggested that the tech giant has an untapped opportunity in the HDTV market. Rumors and speculation that Apple might intro an integrated TV set have percolated for years.
“While Apple has not announced plans for a TV set and may never do so, we believe we have good enough reason to expect the introduction of an Ultra HD TV set in FY 2016,” the investor wrote. The firm’s forecasts anticipate Apple selling 12 million 55- and 65-inch TV sets in fiscal 2016 and 25 million in fiscal 2017 at an average selling price of $1,500. However, Icahn added, even if Apple opts to not to introduce a TV set, that wouldn’t change the investment firm’s projections for Apple’s fiscal 2015 EPS.
He added, “To be totally clear, this letter is in no way intended as a criticism of you as CEO, nor is it intended to be critical of anything you or your team are doing from an operational perspective at Apple. Quite to the contrary, we could not be more supportive of you and your team, and of the excellent work being done at Apple, a company that continues to change the world through technological innovation.”