How Apple adds 20% to its share price overnight

Apple CEO Tim Cook

You’re probably all “Apple’d out” now following the blogs on this site, aswell as the literally thousands of comments from other publications this last week. However you slice it though, the results have not been received well with the stock plumbing 52 week lows and, on this occassion, the so called “death cross” actually proving itself correct. Thus far…

We believe the stock fundamentally cheap at $440, problem is we are not a lone voice (pretty much where we prefer to be as it means the buyers have yet to arrive – witness the profits we reaped at Research in Motion and where we are in for free on half our position now as we we almost a dissenting voice during 2012 with our bull call)… That being said, the routing the stock has taken this last week from – down over 15% and on heavy volume, inclines us towards a corrective bounce on pure technicals let alone fundamentals in thr days ahead – likely back to $480 – site of the last low and possibly even a gap fill up at $515. 

We all know the valuation metrics – Free cash flow yield of 16%, just under $140bn of cash backing, a shade over 6 times  earnings for 2013 adjusted for the cash… But, with a great deal of hedge funds and mutuals in here and likely underwater now, Tim Cook needs to pull something out of the bag to arrest this spiral of forced selling – which is likely what is occuring now.

Here, Mr Cook is how you add 30%+ to the share price and get the stock back over $600 – 

1. Increase the stock buy back from the current committed $10bn over 3 years to a fixed amount of 30% of free cash flow or even a stipulated amount of say $15bn p.a. At the current valuation it would be massively EPS enhancing.

2. Make a special dividend payment  of around $20/share – equivalent to around $19bn – hardly making a dent in the cash pile but appeasing those clamouring for a return of cash.

3. Split the stock 10:1. Don’t ask me why investors are irrational, but a lower priced stock does encourage a higher valuation in the short term, as those who were reluctant to pay $450 are seemingly prepared to pay $45 – even though the value of the company is entirely the same!

4. Insider buying – Cook et al should show their faith and purchase stock at this price – always encouraging to investors.

5. The divident payment should be increased to $4 per quarter and which would put the stock on a yield just shy of 4% and be sure to attract income funds. If a commitment to raise the divi in line with free cash flow growth or at a payout ratio of one third of EPS was made – this would likely be transformative on the stock price and bring a whole new class of investor in.

6. Update the market as to exactly where they are with the key China Mobile distribution deal – this is a very big growth opportunity for the company and investors badly need a new story to latch on to.

7. Leading on from point 6 re a new story to latch on to – let investors know where they are with the Apple TV product – the market here is absolutely huge and this could be Cook’s own “baby” that restores some faith in him.

8. From a balance shee capital efficiency perspective, if 1,2 & 4 were all carried out then issuing around $20bn of 10 yr bonds at a likely debt cost of 3%, and so locking in the current very low borrowing capability of strong corporates, is also sensible.

I wouldn’t be surprised to see some of these enacted over the next few weeks/months.