Carl Icahn’s Letter to Twitter Followers Regarding Apple

Carl Icahn issued a letter to his Twitter followers today regarding Apple.  He is looking for 84 percent from today’s price if the market begins to value Apple’s stock correctly.

Here are the money quotes:

When we compare Apple’s P/E ratio to that of the S&P 500 index on the same basis (but without any tax adjustment to the S&P 500 forecasted FY2015 EPS or P/E), we find that the market continues to value Apple at a significantly discounted multiple of only 10x, compared to 17x for the S&P 500:

aapl_1

We believe this P/E multiple discrepancy between Apple and the broad market index is totally irrational. It seems to us the market is somehow missing a very basic principle of valuation: when a company’s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple. In FY 2016 and FY 2017 we forecast in our model EPS growth of over 20% per year, and if Apple introduces a TV in FY 2016 as we expect, this EPS growth accelerates to over 31% per year in our model. Because of this, we believe the market should value Apple at a P/E of at least 20x, which together with net cash of $22 per share, would value Apple shares today at $216 per share. This is not a future price target. $216 is what we think Apple is worth TODAY. Also, to the extent Apple introduces a TV in FY 2016 or FY 2017, we believe this 20x multiple is conservative.

Given that our estimated value for Apple (excluding the introduction of a television) represents an 84% price appreciation from where the common shares trade today, we continue to hope that Tim Cook and Apple’s Board of Directors, on behalf of all shareholders, take advantage of this dramatic market value anomaly and increase the magnitude and rate of share repurchases while this remarkable opportunity still exists.

Feb11_Apple(click here if chart is not observable)

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