Apple Needs To Put A Leash On Carl Icahn

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Apple Inc. (NASDAQ: AAPL) recently reported its Q4 earnings. As we reported, the earnings stirred mixed reactions. Ostensibly, they were impressive. However, beyond the numbers, the earnings highlighted a disturbing trend; Apple’s momentum is slowing.

Earnings Recap

Just as a recap, earnings during the fourth quarter came in at $7.5 billion on sales of $37.5 billion. This year’s fourth quarter bottom line pales in comparison to the year-ago quarter, which came in at $8.2 billion. Judging from movement on the stock market after the earnings, investors’ zeal for Apple is fizzling out.

While thinning margins have partly contributed to investor apathy, activist investor Carl Icahn’s continued push for share buybacks and increased dividend payments could make things worse.

Icahn’s Financial Engineering Not A Priority

Billionaire Carl Icahn has intensified his push for a share buyback program. Unlike before, he is now evidently more aggressive as displayed by his recent decision to up his stake in the Cupertino-based tech Goliath. In late October, he boosted his investment in Apple by 22 percent to 4.73 million shares, effectively pushing his stake in the company up to 0.5 percent.

Icahn is using his position to push for buybacks that he says are part of his long term strategy for Apple. “There is nothing short term about my intentions here,” he said in a letter sent to Apple CEO Tim Cook. The same letter iterates his earlier August request for a $150 billion share buyback, confirming that the initial request was not a gambit.

Although it’s not openly stated, Icahn wants Apple to embrace financial engineering. Despite Apple’s huge $147 billion cash hoard, Icahn wants Apple to borrow $150 billion at a cheap interest rate of 3 percent to commence a tender at $525 a share. He says that such an undertaking could boost Apple’s EPS by 33 percent. Not to mention, the tech giant’s strong cash position will still embellish the balance sheet.

Admittedly, reduced shares outstanding will make it easier to raise dividend payouts, as will increased EPS make the company more attractive. But will Apple’s value still remain intact?

Sadly, financial engineering will erode Apple’s value. The stock is held in high regard not because of financial engineering, but rather its ability to disrupt the market and present evolutionary products. Investors looking to go for the long haul will certainly rethink their decision if Apple decides to sign off on Icahn’s offer.

Apple Should Focus On Innovation

For now what Apple needs to do is fix the cracks on the wall before the empire caves in. In the past quarter, iPhone shipments came in at 33.8 million units, ahead of analysts’ estimates of 32 million units. The only visible drag on its performance for now is the iPad. Apple’s iPads shipments in the past quarter came in at 14.1 million units, missing consensus estimates of 15 million units. The iPad’s unimpressive performance reflects the underlying competition from Android tablets. The new iPad Air should renew interest and correct the slip in iPad market share.

Apple’s future on the stock market depends on how it will handle Carl Icahn’s unrelenting push for increased buybacks. Investors should definitely watch.
The stock is currently trading at $525.70, down $1.05, or 0.20 percent.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.