Icahn's Latest Letter to Tim Cook

Thursday, Carl Icahn published his letter to Tim Cook on the Shareholders' Square Table website. The letter was written following a dinner with

CEO at the end of September. The Chairman of Icahn Enterprises was very clear to state his support of the “innovative spirit” of Apple. Icahn's only concern regarded “the size and timeframe of Apple's buyback program.” Icahn noted that his and his affiliate's shares increased by 22%, a number that seems undervalued in comparison to S&P 500. He wrote, “The S&P 500 trades at roughly 14x forward earnings. After backing off net cash, Apple trades at just 9x (not factoring into account that the company has a significantly lower cash tax rate than the rate Wall Street analysts use). This discount (cash adjusted) becomes even more compelling given our confidence that Apple will grow earnings per share at a rate well in excess of the S&P 500 for the foreseeable future.” Icahn reinstated his proposal, originally spoken on over dinner, to have Apple borrow $150B at a 3% interest rate. The math equates to $525 per share, a 33% increase in earnings per share. Icahn continued his thesis and reported “Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT.” The letter concludes that that Apple's Board of Directors lacks an investment professional, and thus “lack of expertise” on a buyback proposal. John Buckingham of Al Frank Asset Management remarked on the “financial alchemy” of a potential Apple buyback on an interview with CNBC. He further commented that Apple “can finance debt on a big buyback.” Noting other company buybacks, such as IBM, Buckingham said, “there is nothing wrong with that.”