Apple, Buy Back This Stock

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Hypothetical Case

Let's stick with nice even numbers: A $10 billion repurchase would be enough to buy back about 10% of Apple's stock. Considering Apple's current valuation of about $110 billion, that would boost earnings per share by a healthy 10%. Analysts currently expect Apple to report earnings per share of $5.14 in fiscal 2008. How about $5.65? Or given Apple's tendency to beat estimates (BusinessWeek.com, 12/10/07), an even $6 a share?

A $10 billion repurchase would leave plenty of money lying around as a hedge for opportunistic acquisitions, though I don't see large ones on Apple's immediate horizon. As I've argued in the case of Microsoft and Yahoo (BusinessWeek.com, 2/8/08), big mergers don't work, and there are virtually no huge companies out there that Apple should consider acquiring in the first place.

Adobe (ADBE) is a name that gets tossed around once in awhile as a potential acquisition target. But with Adobe at $20 billion and change, it's too expensive; Apple would have to take on debt to pay a sufficient premium. What's more, there's practically no value to the combination. Apple's current professional software offerings overlap with Adobe's offerings. Plus Adobe sells a good deal of its software to Windows users.

On its face, an acquisition of TiVo (TIVO) might make a little sense. Currently valued at less than $1 billion, TiVo could be snapped up by Apple for a song—say, $1.5 billion—and TiVo's features combined with those of AppleTV. But why bother? Adding TV recording capabilities shouldn't be all that hard for Apple, and why would it want to support Tivo's existing subscription and set-top business, especially when it's losing money? In fiscal 2007, TiVo lost $52 million, on $258 million in sales, and when it next reports earnings it's expected to report a fourth year of losses. Apple management could probably right the listing TiVo ship, but why take focus away from building the iPhone, Mac, iPod, and AppleTV business lines?

When Apple buys companies, it tends to grab very small operations that are focused on developing a single product. The deals are usually so small they aren't reported until Apple files its 10K.

Flexible Enough

A $10 billion buyback would also leave plenty for Apple to use in negotiating its huge component supply deals with companies such as Samsung and Toshiba. It's not as if Apple is ever going to need to buy $8 billion worth of flash memory at one go. There would even be enough left over to start that venture capital fund I've been urging for about a year now (BusinessWeek.com, 3/1/07).

A buyback seems a better option than letting the cash, growing at a pace of $1 billion to $2 billion a quarter, sit all but idle, invested in treasury instruments, corporate paper, and other low-yield investments, especially in light of declining interest rates.

While I'm the first to praise Apple management for the smart way it has run the business over the last several years, its lack of plans for its cash is starting to ring hollow. CFO Peter Oppenheimer said during a Jan. 22 conference call that the company's preference is for maintaining a "strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions"

How much more flexibility does Apple need? And how much bigger does that pile of cash need to be before it's enough?

Business Exchange related topics:
Apple
U.S. Stock Market
Buying Stocks
Stock Research
High Tech Electronics

Hesseldahl is a reporter for BusinessWeek.com.