Deutsche Bank Comments On Apple In Note 'AAPL: Carl is on to something'

"Carl Icahn has taken a $1.5B position in AAPL and is suggesting the company should raise debt and aggressively buyback shares (we expect Carl to be back in the press with more detailed plans soon). We analyzed the financial impact of this scenario with a sensitivity analysis of share buybacks ranging from $25- 70B at share prices ranging from $500-700. We also assumed a 2% cost of debt, which is modesty above where AAPL's 5 and 10 year notes are trading." "This analysis is incremental to AAPL's current capital return program (i.e. $100B by 2015). As highlighted in Figs 3 and 4, we estimate a $50B buyback at an average price of $500 would boost AAPL's FY14 EPS by ~$4.25 or 10.5%. In addition, for each additional $50 in AAPL's share price, EPS accretion would decline by ~1% (i.e. $50B buyback at $550 is 9.2% EPS accretion). Apple has ample capacity to execute such a buyback with $140 per share of net cash (or ~$129B) and we are modeling $45/ share of FCF generation in FY14." "In addition, a buyback at current levels (i.e. $50B buyback at $500) would be self funding on a cash basis, since the interest expense on the debt at ~2% totaling $1B would be offset by ~$1.2B in lower dividend payments (resulting from the retirement of dividend bearing common stock). As a result, we'd view an accelerated capital return program favorably as it is: 1) self funding, 2) highly accretive to earnings and 3) lowers Apple's cost of capital without decreasing its flexibility."