Apple and a Monster Stock Buyback (AAPL)

By Douglas A. McIntyre Updated Apr 27, 4:14PM EDT · Published Oct 29, 11:15AM EDT

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Applelogo1 Apple Inc. (NASDAQ: AAPL) is doing well today on word that the company "may" do a share buyback. This comes after a Bernstein report from this morning titled "Apple: Time for a Buyback?" from analyst Toni Sacconaghi, Jr.

Bernstein believes that the current combination of a depressed P/E multiple, low interest rates, and a burgeoning cash balance all combined makes a strong case for Apple to initiate a substantial share repurchase program.

Bernstein estimates that if Apple spends $10 billion on buybacks during FY09, its full-year GAAP EPS would be approximately 4% higher than the firm’s current estimate, but if Apple were to spend $20 billion on buybacks then its EPS would be ~9% higher. It further notes that the EPS accretion could be greater if the buybacks are front-loaded.

We believe a share repurchase represents the best use of (at least part of) Apple’s ~$25B in cash; in
our view, it would be more favorable to shareholders than the alternatives of either a major
acquisition or a substantial dividend. Apple also has the option of keeping the cash in its coffers –
but with free cash flow of $8B+ per year, the question of what it plans to do with its cash will likely only get louder.

Apple’s market cap is now "only" $93.6 billion and the company crossed over the $20 billion cash and equivalents threshold in the June quarter. Steve Jobs and friends have very low debt levels. With next year’s estimates of $37+ billion in revenues and targets of over $5.30 EPS in earnings, the company could easily fund this.

The experiment would definitely shrink the float and boost the earnings per share. But it might also send the signal that the massive growth days and major opportunities are in the past.

Steve Jobs could easily do this, but you have to wonder if he’d risk it. Shares are up 5% at $105.25 today and that is off of recent lows of $85.00+ during the heightened October panic selling. Its 52-week range is $85.00 to $202.96.

Jon C. Ogg
October 29, 2008

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.