Apple and a Monster Stock Buyback (AAPL)

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Apple Inc. (NASDAQ: AAPL) is doing well today on word that the company "may" do a share buyback.  This comes after a Bernstein report from this morning titled "Apple: Time for a Buyback?" from analyst Toni Sacconaghi, Jr.

Bernstein  believes that the current combination of a depressed P/E multiple, low interest rates, and a burgeoning cash balance all combined makes a strong case for Apple to initiate a substantial share repurchase program.

Bernstein estimates that if Apple spends $10 billion on buybacks during FY09, its full-year GAAP EPS would be approximately 4% higher than the firm’s current estimate, but if Apple were to spend $20 billion on buybacks then its EPS would be ~9% higher. It further notes that the EPS accretion could be greater if the buybacks are front-loaded.

We believe a share repurchase represents the best use of (at least part of) Apple’s ~$25B in cash; in
our view, it would be more favorable to shareholders than the alternatives of either a major
acquisition or a substantial dividend. Apple also has the option of keeping the cash in its coffers –
but with free cash flow of $8B+ per year, the question of what it plans to do with its cash will likely only get louder.

Apple’s market cap is now "only" $93.6 billion and the company crossed over the $20 billion cash and equivalents threshold in the June quarter.  Steve Jobs and friends have very low debt levels.  With next year’s estimates of $37+ billion in revenues and targets of over $5.30 EPS in earnings, the company could easily fund this.

The experiment would definitely shrink the float and boost the earnings per share.  But it might also send the signal that the massive growth days and major opportunities are in the past.

Steve Jobs could easily do this, but you have to wonder if he’d risk it.  Shares are up 5% at $105.25 today and that is off of recent lows of $85.00+ during the heightened October panic selling.  Its 52-week range is $85.00 to $202.96.

Jon C. Ogg
October 29, 2008