David Einhorn is getting frustrated with the current capital allocation strategy of Apple Inc. (NASDAQ:AAPL). While its share price keeps falling, Apple is still sitting on a huge cash balance and doing nothing to unlock shareholders’ value. Einhorn suggested that Apple should make a much better use of its cash balance by distributing perpetual, high yield preferred stocks to shareholders at no cost. Let’s see what Apple might be potentially worth if it follows Einhorn’s idea.
Apple – 78% Upside Potential
As of December 2012, the company’s cash balance was around $137 billion. As Apple had 947.2 million shares outstanding, the cash per share was nearly $145. Analysts estimated that Apple would earn $44.75 per share in fiscal year 2013. At the current trading price of $475 per share, Apple’s total market capitalization is $446 billion. The market is valuing Apple at only 10.6x forward earnings. Net of cash, Apple is valued at only 7.37x forward P/E.
David Einhorn thought that if Apple used around half of its earnings for the preferred stock distribution program with the annual dividend rate of 4%, Apple would be able to issue around $500 billion in face value of preferred stocks, or $528 per share. The annual preferred dividends would be $20 billion, or $21.1 per share. After the preferred dividends are distributed, its adjusted 2013 EPS will be $23.65. Applying the current forward earnings valuation on the adjusted 2013 EPS, the value to common equity would be $174.30 per share. Apple’s total value per share would be the sum of the value to common equity ($174.30 per share) plus the value of preferred issues ($528 per share) and its net cash ($145). Thus, Apple’s potential value per share would be around $847 per share. The upside potential would be 78%.
Dell Inc. (NASDAQ:DELL) – A $25 Billion Offer is Low
David Einhorn thought that the same idea might be applied to Apple’s peers as well, including Dell and Microsoft Corporation (NASDAQ:MSFT). As of October 2012, Dell had around $5.15 billion in net cash. With the total 1.74 billion shares outstanding, net cash per share was around $3 per share. Dell is expected to earn $1.67 per share in fiscal year 2014. With the current trading price of $13.60 per share, Dell is valued at 8.15x forward earnings. Net of cash, the forward P/E becomes only 6.35x. If we assume that Dell pays half of its earnings in preferred stock dividends with the annual dividend rate of 5%, Dell could issue $25 billion, or $14.40 per share in face value of preferred stocks. The annual preferred distribution would be $1.3 billion, or $0.75 per share. The adjusted EPS in fiscal 2014 would be $0.92. With 6.35x forward earnings, the value to common equity is $5.84 per share. Thus, Dell’s potential value would be $23.24 per share.