In a recent appearance on CNBC’s Squawk Box, Berkshire Hathaway’s CEO Warren Buffett gave some timeless advice to Apple Inc. (NASDAQ:AAPL)’s management. Buffett’s recommendation for Tim Cook; buyback shares, focus on the business, and ignore Wall Street.
Initiate a share buyback program
“When Steve [Jobs] called me, I said, Is your stock cheap? He said, yes. I said, Do you have more cash than you need? He said, a little. I said, then buy back your stock.” Warren Buffett
Buffett recommended Apple Inc. (NASDAQ:AAPL) return excess cash to shareholders in the form of a dividend or share buyback.
But which one?
There’s a perception that Apple is cheap. Backing out the $137 billion in cash on the company’s balance sheet, Apple’s business is valued at 6.5 times trailing earnings. To put that number in perspecitve, Apple’s P/E ratio bottomed at 5.8 in December, 2000 when the company was on the verge of bankruptcy. Given that Apple Inc. (NASDAQ:AAPL) today is generating a remarkable amount of cash and is growing profits at a double-digit clip, this discount is baffling.
With the stock trading at such a low valuation a buyback program would be ideal as management would be buying shares at a discount to intrinsic value.
As Buffett put it, “…if you can buy dollar bills for 80 cents, it’s a very good thing to do.”
Focus on the business
“I would run the business in such a manner as to create the most value over the next five to 10 years.” Warren Buffett
Apple’s management should focus on spotting opportunities to create wealth for shareholders. Here’re a few ways they could do that:
Invest in New Tech: Apple could acquire small players that are working on major problems like battery life, sunlight readable screens, or wide-band antennas. By snapping up small firms working to solve these issues, Apple would gain a technological lead over competitors.
Reinvent Television: What’s needed to make iTV a success is programming. Apple is rumored to be considering buying Netflix, Inc. (NASDAQ:NFLX) which would allow Apple to quickly acquire exclusive content and a valuable distribution platform. Netflix would likely cost $12-$14 billion to acquire, a fraction of Apple’s $50 billion annual free cash flow.