Apple Inc. (NASDAQ:AAPL) has received much attention due to its precipitous fall in stock price. The fact is Apple is trading at around 7x its trailing P/E ratio ex-cash, compared to roughly double that in the broad market. The company with one of the most valuable brands in the world is trading at a 50% discount on an earnings basis? Obviously, Apple faces unique risks to its earnings due to declining margins and increased competition, but including catalysts is a 50% discount merited?
Regardless, the stock has gotten hammered as of late, and Samsung is in effect getting free press coverage from everyone covering Apple Inc. (NASDAQ:AAPL)’s decline. Normally I would view stock price movements and future earnings potential to be somewhat independent, but in this case there may be some correlation Apple Executives should consider. If it is Apple’s goal to draw new consumers into their ecosystem, the most recent three month stock decline and press coverage have not been catalysts for this proposition. It is hard to argue that consumers would in no way be affected by the coverage. This is the perfect opportunity for Apple Inc. (NASDAQ:AAPL) to show consumers and investors that it believes in its future, and that people are severely underestimating the enterprise.
What of Apple’s $137 Billion Cash-Like Balance?
Many articles I have read are berating Apple for inefficiently using its massive cash balance. They would like to see a dividend boost or a massive share-buyback program. Before I did some research on the nature of the $137 billion cash balance, I at first agreed. However, Apple Inc. (NASDAQ:AAPL) very publicly laid out its plans for its cash balance in March of 2012:
According to Apple’s recent 10Q, of their $137 billion in cash-like assets, $94 billion is in foreign accounts. This means Apple would need to pay between 30-35% (probably around 33%) to repatriate the balance and return the money to shareholders. Put simply, as Apple Inc. (NASDAQ:AAPL) clearly voiced in their conference call last March, they do not want to pay the taxes on this balance. As a shareholder, I have no problem with this. I don’t want them to pay taxes on that balance either.
Now some may assert this idea is somewhat immoral. Given the laws surrounding taxes that are currently in place, Apple must use the laws to their advantage otherwise they would not be acting in the best interest of their shareholders. Apple is by no means the only company that has money stranded abroad. Some estimate $2.0 trillion is sitting in foreign accounts. I am not an expert on the subject, but it seems like the longer companies like Apple hold out, the more leverage they will gain by continually increasing their cash balances to either change tax laws or enact a tax holiday. If Apple brought its money back today and tax laws were changed in a few years, Apple may have missed out on an opportunity to save money for its shareholders.
As Apple claimed on its conference call, they enacted the dividend and buyback policy based on the US cash balance and future US earnings. Apple also told us that they would like to have a safety net of US cash in order to take advantage of opportunities as they present themselves. The $45 billion Apple plans on returning to shareholders over the next three years allows Apple to pay out its US earnings and to have a considerable US cash balance, around $30-45 billion.
Taken together, Apple does not wish to repatriate foreign earnings and has utilized its US earnings. This means Apple’s next likely action to return money to shareholders is through the issuance of inexpensive debt.