Carl Icahn Values Apple at $1.3 Trillion

 

Most weekdays I eat my lunch in front of the T.V. watching CNBC “Fast Money Halftime Report”. This past week hedge fund manager Carl Icahn’s comments regarding his investment in “Apple” was discussed by the panel of trading experts. I like to get both the bull and bear side of a possible investment. The halftime report also keeps track of the trader’s opinions. They are not afraid to put a spot light on both the winner and the loser.

This article regarding Carl Icahn’s comments was posted on the CNBC web site which I found worth sharing.

Investor Carl Icahn said the market is undervaluing Apple and again urged the company to buy back more of its stock.

By David Lumb 

It’s been a huge week for Apple’s financials, as the company became the first in history to break $700 billion in market capitalization. But billionaire investor Carl Icahn says there’s a more realistic valuation that should bump up Apple’s stock price to value the company at $1.3 trillion.

As of this writing, Apple stock hovers around $125, the highest watermark in a trend of dramatic increase since its stock sold for under a dollar in April 2003. But in a letter to his Twitter followers, Icahn said a more realistic valuation would be 20 times Apple’s earnings per share metric (instead of its current valuation of 10 times), and including Apple’s $178 billion in cash reserves, Apple’s stock price should be $216 per share. Ergo, Apple would be valued at $1.3 trillion.

Icahn’s letter also proposes a model of an earnings per share growth of 20% per year—or 31%, if Apple introduces a rumored TV. Icahn again pushed Apple CEO Tim Cook to take advantage of this market undervaluation and have the company buy back shares of its stock. Icahn pushed Cook to increase Apple’s stock buyback program back in August 2013 when Apple stock was trading at just over $66, and again in October 2014 when Apple stock hit $100.

To be fair, Icahn isn’t Apple agnostic—his company is one of Apple’s 10 biggest shareholders, holding $6.5 billion in company stock.

The biggest danger in buying Apple shares is what happens to the stock price if Mr. Icahn decides that he is going to take profits and run? On the other hand, can hitching your investing wagon to a hedge fund manager’s wagon train be profitable?

Check out Icahn Enterprises L.P. which contains all his holdings and trades on NASDAQ ticker IEP. Current dividend yield is close to 6% but it has underperformed the S&P 500 over the past 12 months.

 

Looking at the 5 year chart below, Carl Icahn has had some bad years and some good years.

I am not a big fan of Carl Icahn nor do I think that buying back shares is the best use of company cash. I would prefer Apple to increase  its dividend. However, I have been trading Apple shares in my investment club account using option strategies to protect my members from the price volatility. I recently bought a small position in Apple shares personally. Why, do I believe that Apple could be a good long term investment?

“The U.S. government will begin accepting Apple Pay later this year, said Apple CEO Tim Cook.”

“The company is also exploring working Apple Pay into the credit and procurement cards issued to government employees for expenses.”

Interesting observations on oil prices this week:

Rig counts are down again this past week and oil futures were up again on Friday. Ask yourself, was the news on rig counts or short covering due to the U.S. long weekend that affect the oil price? Wednesday’s inventory numbers are still surprising the experts. They predicted a build-up of 3.75 million barrels of crude and the actual build-up was 4.87 million barrels. The big shocker was the big build-up of diesel fuel which came in at 1.98 million barrels and the experts had predicted only 200,000!

Would you buy Apple stock based on Carl Icahn valuation?

Disclaimer: This post is for discussion purposes only!