Einhorn from Greenlight Capital on Apple Inc (NASDAQ:AAPL): “15% fewer shares means 17% higher earnings”

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By Stefan Larson on October 9, 2014 Company, Market, Technology & Software

Apple Inc (NASDAQ:AAPL) has been successful in amassing more cash than any other tech company out there including Microsoft, Google, Cisco, EMC, and Dell. Most companies in other sectors use debt and equity to growth the company or make new investments while tech companies like Apple Inc (NASDAQ:AAPL) have a nice stock pile of cash. Apple Inc (NASDAQ:AAPL) has made a majority of its overseas foreign cash from foreign iPhone, iPad, Macbook sales, particularly in China. Usually when cash is made overseas, it will stay overseas and would rarely be brought back to the United States.

Tech companies are aware that when they are in trouble and need money, Wall Street won’t be there to bail them out. Many industry captains have lost their leadership since they ran out of funds, and could no longer support research and development or their internal staff.

The tech industry is risky, as consumer sentiment change can easily destroy a company’s profits if they’ve invested so much into a technology.

Some companies fear that a recurring dividend is testament to the fact that they’re no longer growing, and have nothing better to do with the cash, and therefore they would like to return it. This signifies weakness in a company, as example with Microsoft who tried to use dividends to retain share holders in the face of rising competition.

Einhorn breaks down Apple Inc (NASDAQ:AAPL)’s as follows:

War Chest: Apple has by far the most amount of money than any of its competitor, with $137 billion in cash and increasing rapidly.
Overseas Funds: Approximately $94 billion or 69% of the war chest is overseas, and bringing back those funds would require paying high taxes.
Discounted Price to Earnings: Apple trades at a low price to earnings – approximately 10x their current earnings and 7x their net cash.

When 1/3rd of your market cap is based on the funds you have, that means the other 2/3rds of the business is based on the future earnings growth of the company. It means the 1/3rd cash balance should be generating a higher Price to Earnings multiplier.

(Source: Shareholder.com)

Einhorn discusses the possibility of shares repurchasing to unlock shareholder value. He states:

“To do a one-time dividend or a large one-time share repurchase, it’s good to know how much cash is

available. Apple currently has $137 billion in cash, $94 billion of which is offshore.

In these scenarios, we assume Apple brings all its foreign cash back to the U.S. and pays the taxes
for repatriating the funds. With $94 billion in foreign cash taxed at 35%, there is $61 billion of cash
brought home. Add the existing $43 billion of domestic cash for a total of $104 billion available.
Please note we are not advocating that Apple repatriate its foreign cash; in fact our proposal later on
will show Apple does not need to do this.

Obviously, Apple isn’t going to deplete its cash reserves to zero, so we made some assumptions
about a large cash reserve. We sought to pick a number that we felt would be more than sufficient
for a rainy day fund. We took one year’s worth of operating expense and capex less depreciation,
and came up with $20 billion. This along with its ongoing franchise should leave Apple well
positioned to execute its business plan, including acquisitions.

While some have suggested that Apple could raise additional cash by selling debt, we believe that
Apple is highly debt averse. Even asking it to reduce the cash balance to $20 billion is probably not
realistic, but for the sake of this example we believe it is a reasonable number. That leaves $84
billion in free cash to use for a one-time dividend, or a one-time self-tender offer for its shares.

15% fewer shares means 17% higher earnings. You can see that EPS goes from $45 to about $53.”