Friday, May 25, 2018
Business

Apple's stock price not changing company's outlook

After soaring to more than $705 a share in September, Apple stock entered a months-long slide, closing Monday below $419. The reasons for the slide aren't secret and they aren't crazy: Samsung has proved it can produce excellent smartphones that people like, Amazon is making tablets, and Apple's iconic CEO is dead.

The past few months of modestly bad news and increased competition really have no bearing on the all-important question of whether the company can or will develop new blockbuster products in the years to come. But the recent weakness has opened the company's management up to second-guessing not only about its products but about corporate strategy—particularly its staggering $135 billion in accumulated cash and other short-term investments.

That's an awful lot of money. All the outstanding shares of Amazon combined, for example, are only worth $124 billion. McDonald's is worth $94 billion.

That's what makes the fall in share price so strange. One simple way of assessing a company's stock is to look at what's called the price-to-earnings ratio — the value of all its stock divided by a year's worth of profits. Apple's current PE ratio is 9.5, which is on the lowish side. That is the kind of ratio expected from a business that's sound but with a weak growth outlook.

But a simple PE ratio doesn't consider the value of cash on hand. If you assume each $1 that Apple has in the bank is worth $1, then the entire rest of the company — the patents, the personnel, the brand, the stores, the supplier relationships — is worth only $265 billion. That gives the business, viewed as an ongoing enterprise, a PE ratio of about 6.3. That's preposterously low. To look at it another way, you can take the inverse of a stock's PE ratio and get the earnings yield—the profits you would pocket if you bought the whole company. Excluding cash, Apple has an earnings yield of almost 16 percent. That's insanely high at a time when junk bonds are yielding less than 7 percent. Taken literally, that reflects an extraordinarily pessimistic view of a company that continues to offer the world's most popular smartphone, most popular tablet and a growing PC business.

Which probably shows that we shouldn't take the stock price literally. The markets are sharply discounting the value of Apple's cash: They actually think it is worth less than face value. And that's why some Apple shareholders are increasingly vocal about the idea that they'd like some of it.

One idea is hedge-fund manager David Einhorn's proposal for Apple to issue preferred shares with a guaranteed lifetime dividend, cutely dubbed "iPrefs." Morgan Stanley's Katy Huberty thinks Apple can and will use its strong cash position to borrow money and pay shareholders. Warren Buffett has the most straightforward proposal of all: If Apple's large cash heap is causing its stock to be undervalued, why doesn't Apple spend the money on buying Apple stock?

These proposals all have different advantages and disadvantages, but Apple management deflects them all with vague allusions to strategic flexibility and the sensible observation that it's important to stay focused on the actual products rather than managing the share price.

This still raises the question of why piling up short-term securities is what Tim Cook wants to do with his profits. He could go out and spend it on sexy acquisitions to build strength in online services where the company is weak. He could follow in the footsteps of the rich tech companies of yesteryear and acquire content companies.

A more boring option would be to cut price and deliberately sacrifice short-term earnings for market share. Apple allegedly sells all the iPhones it can make, but it seems very likely that people would buy more Macs if they were cheaper. Apple's 30 percent cut of app sales seems steep, and it'd be easy to imagine deliberately sacrificing that revenue and other content sales commissions as a worthwhile investment in the overall strength of the platform.

Yet the sobering thought for Apple shareholders (a group that, full disclosure, includes me in a minor way) should be that if management doesn't want to do anything with the cash, nobody can stop them. A $40 billion company with $13.5 billion cash on hand and a 9.5 PE ratio would be a tempting leveraged-buyout target for a daring corporate raider. But with the largest buyout in history having topped off at an inflation-adjusted $57 billion way back in 1989, Apple is much too large to swallow. And unlike at Google or Amazon or Facebook, nobody involved in running Apple owns a large share of it, so they have no particularly compelling reason to care what shareholders think. And the very size of the cash stockpile means there's no plausible scenario under which they'd need to turn to financial markets for investment funds of any kind. Apple executives are free to do whatever they want with that money and essentially always will be. And that growing realization is likely exactly what's turned markets against the company.

Comments
Is the Lightning’s Jeff Vinik the best owner in professional sports?

Is the Lightning’s Jeff Vinik the best owner in professional sports?

Hope of another Stanley Cup has dissolved, and soon the ice will follow. Yet even if sorrow is the price of devotion, the true hockey fans will still buy in when the next season comes around.That concept may not be unique to Tampa Bay, but it does se...
Published: 05/26/18
Five members of 69ers motorcycle gang indicted on federal charges

Five members of 69ers motorcycle gang indicted on federal charges

Last year three members of the 69ers Motorcycle Club gang were implicated in the execution of a rival gang leader in the middle of rush hour traffic in Pasco County.Now those three and two other 69ers members have been indicted on federal charges tha...
Published: 05/25/18
With makeover, ZooTampa at Lowry Park takes a page from the theme parks

With makeover, ZooTampa at Lowry Park takes a page from the theme parks

TAMPA — Behind the construction walls near the carousel at ZooTampa at Lowry Park, hammers, saws and power drills made a racket in the blazing Friday heat. A raft full of 100-pound water jugs took test trips on the new Roaring Springs ride set ...
Published: 05/25/18
U.S. news outlets block European readers over new privacy rules

U.S. news outlets block European readers over new privacy rules

LONDON — U.S. news outlets including The Chicago Tribune, The Los Angeles Times, The Orlando Sentinel and The Arizona Daily Star abruptly blocked access to their websites from Europe on Friday, choosing to black out readers rather than comply with a ...
Published: 05/25/18
Tampa Electric appeals OSHA findings for October accident

Tampa Electric appeals OSHA findings for October accident

TAMPA — Tampa Electric Co. is appealing a recent citation by federal regulators. The Occupational Safety and Health Administration hit the utility with a $76,050 fine and a "serious" violation in April following its investigation into an accident in ...
Published: 05/25/18
Fiat Chrysler recalls 4.8 million cars, warning owners: Don’t use the cruise control

Fiat Chrysler recalls 4.8 million cars, warning owners: Don’t use the cruise control

Associated PressDETROIT — Fiat Chrysler is recalling 4.8 million vehicles in the U.S. because in rare but terrifying circumstances, drivers may not be able to turn off the cruise control. The company is warning owners not to use cruise control until...
Published: 05/25/18
Federal Reserve chairman warns his agency must be free from political pressure

Federal Reserve chairman warns his agency must be free from political pressure

Associated PressFederal Reserve Chairman Jerome Powell warned Friday that the Fed’s independence from political pressure must be respected if it is to succeed in controlling inflation, maximizing employment and regulating the financial system. His re...
Published: 05/25/18
Restaurants like Ford’s Garage use the experience to get you in the door

Restaurants like Ford’s Garage use the experience to get you in the door

Tim Butler’s first car was a Ford Model A pick-up truck — a pearl fawn and cherry red pick-up he got his senior year in high school from his dad, who renovates antique cars. That’s why as Butler waited for a table at the Ford’...
Published: 05/25/18
St. Petersburg man fined $507,513 in penny stock scheme

St. Petersburg man fined $507,513 in penny stock scheme

TAMPA — A St. Petersburg man was fined $507,513 and permanently barred from participating in the offering of a penny stock in a case involving a scheme to manipulate the price of Aureus, a penny stock company incorporated in Nevada, officials said Fr...
Published: 05/25/18
Broadcom’s CEO tops highest-paid list with a $103 million payout

Broadcom’s CEO tops highest-paid list with a $103 million payout

Times staff and wiresNEW YORK — Chief executives at the biggest public companies got an 8.5 percent raise last year, bringing the median pay package for CEOs to $11.7 million. Across the S&P 500, compensation for CEOs is often hundreds of times highe...
Published: 05/25/18