Monday, March 4, 2013

Apple, Buybacks and Einhorn

            A decade ago I published an article in the MIT Sloan Management Review arguing that the information that was most important for a company’s Board to discharge its duties was a carefully prepared analysis of the company’s fundamental value.  That is doubly true today for Apple.  Managers and boards are better able to estimate fundamental value because they know the company’s strategic plan.  In Apple’s case that means knowing what products the company plans to develop in the years ahead.

            In previous post, I calculated that if Apple could basically maintain its current position, even without substantial real growth, the stock should be worth around $600 per share.  If that is close to being true, then Apple management has an obvious thing to do with its cash – buy Apple stock.  No less than Warren Buffett has noted that doing so amounts to buying dollars bills for 80 cents.  (Actually 71 cents if the $600 valuation is correct.)  There is no need for complicated preferred shares such as those suggested by David Einhorn, just buying back the stock is the best thing that Apple can do for its shareholders.  Viewed in this light, the fact that the company has not announced a major buyback might be a warning sign.  If management believed the true value of the shares was $350, then buying them back today would be equivalent to paying $1.21 for dollar bills.  I don’t think Mr. Buffett would approve of that.

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