Billionaire activist investor says Apple worth 86% more than share price

Apple Inc., which already announced it was boosting its capital-return program by $70 billion, should increase its stock buyback, Carl Icahn wrote in a letter to the company.
The market continues to misunderstand the maker of iPhones and iPads and the company’s shares are worth $240, 86% above where they closed Friday, the billionaire activist investor said. That would give Apple a market value of $1.4 trillion.
“With Apple’s shares trading for just $128.77 per share versus our valuation of $240 per share, now is the time for a much larger buyback,” Mr. Icahn wrote Monday in an open letter to Apple Chief Executive Officer Tim Cook.
Apple’s shares were up 1.4% to $130.57 Monday afternoon New York time.
Mr. Icahn’s renewed enthusiasm comes as the market debates whether Apple has enough innovation in store to keep driving sales growth. Since April 27, when the company reported that second-quarter profit rose 33%, shares had dropped 2.9% at the close of trading last week.
EXTENDED CAMPAIGN
The letter is the latest argument by Mr. Icahn that the Cupertino, Calif.-based company is undervalued. In October, he released a missive to Mr. Cook, pushing for Apple to accelerate its buyback. The investor said the company’s stock was undervalued and should trade at $203 a share. That price would give Apple a market capitalization of more than $1 trillion. It closed at a value of more than $700 billion in February for the first time as investor optimism swelled for the company’s new iPhones, smartwatch and future products.
(More: Apple could crush Swiss watch industry)
Mr. Icahn’s new enthusiasm is driven by his belief that Apple will dominate in two new categories, television and automotive.
“Apple is poised to enter and in our view dominate two new categories (the television next year and the automobile by 2020) with a combined addressable market of $2.2 trillion, a view investors don’t appear to factor into their valuation at all,” Mr. Icahn wrote.
To arrive at $240 a share, Mr. Icahn forecast earnings at $12 a share for fiscal 2016, a price-earnings multiple of 18, then added $24.44 of net cash per share. Given the company’s entry into new markets, “we think a multiple of 18x is a very conservative premium to that of the overall market,” he wrote.
CHINA FACTOR
Helped by new larger-screened iPhone 6 and 6 Plus, introduced in September, Apple has posted two record quarters and has forecast that revenue would rise again this period. The new phones especially have given the company a boost in China, where revenue rose more than 70% in the recent quarter and where iPhone sales outpaced those in the U.S. for the first time.
Apple’s success has helped its cash pile grow even as it’s increased its capital-return program. Cash and marketable securities rose to $193.5 billion at the end of March.
That led Apple to boost its capital-return program through March 2017. The company said it already returned more than $112 billion to investors from August 2012 to March 2015. Because $171 billion of Apple’s cash is located outside of the U.S., the company has been tapping debt markets to pay for the capital return program to avoid the U.S. tax bill that would come with repatriating the money.
Apple plans to review its capital return program around April next year, Chief Financial Officer Luca Maestri told analysts last month.
APPLE WATCH
Beyond the iPhone, Apple last month began selling its first new gadget in five years, the Apple Watch, which starts at about $350 and reaches $17,000 for a gold version. The new product opened up new possibilities for the consumer-electronics maker in the area of high-end luxury.
Mr. Icahn, who first disclosed his stake in Apple in August 2013 and owns about 53 million shares, successfully pressured the company to increase its stock-buyback program in 2014. In February, Mr. Icahn issued another letter, saying Apple should be trading at $216 a share.
Apple will face tough year-over-year comparisons in the next fiscal year, when there won’t be the same pent-up demand for Apple’s first large-screen iPhones, according to a report by Bloomberg Intelligence.