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Time for Apple to Listen to Carl Icahn

Stocks in this article: AAPL GOOG SPY

NEW YORK (TheStreet) -- Shares of Apple AAPL sank on Monday, as investors collectively booed the 51 million iPhones sold and second-quarter guidance.

You could argue that perhaps the company was sandbagging guidance -- or intentionally lowering estimates to make it an easier bar to hurdle next quarter -- but management already stated last year that it was not going to do that anymore.

The problem is, people keep looking at Apple as some sort of magician-like company. They expect the $450 billion market cap company to grow like it has a $50 billion market cap. 

 
Those people ignore the nice dividend and share buyback, rock-solid balance sheet, and high-end brand recognition. Instead, they choose to whine about iPhone sales -- which again, still topped 50 million units in the quarter! -- and cry about Apple not acquiring a smoke alarm company (e.g.: Google's GOOG acquisition of Nest).

Never mind that Apple just opened the doors to the biggest smartphone market in the world with Asia, or that CEO Tim Cook confirmed new product introductions for 2014 in the most recent conference call.

Shareholders are still confused. They don't get it. Apple, right now, is no longer a high-growth company. Earnings per share increased, but net profit didn't. EPS increased due to the company's share buyback. So is it time for more? Should the company listen to hedge fund manager Carl Icahn?

The problem seems to be that investors don't want to see their company get bullied by a guy like Icahn. Even if he's right, investors don't want to see how easily the company they own shares in caves to an activist investor, no matter how loud he or she may yell.

Back in November, I wrote Apple's Surplus Bag of Cash: What to Do With It?, which detailed the catch-22 that Cook has with the proposal from Icahn.

At the time, Icahn was vying for a massive $150 billion share buyback. Also at the time, I supported the notion that Apple should consider doing a smaller buyback in the ballpark of $80 billion to $100 billion.

Currently, the company has a $60 billion buyback plan in place, with nearly $37 billion remaining. In the latest quarter, it was revealed that Apple's cash hoard swelled to $158.8 billion, an 18% increase from the previous quarter.

Both Cook and Icahn view the company as undervalued, but this may never change. In his recent letter, Icahn argues that Apple is valued at a 72% discount to the S&P 500 on a price-to-earnings basis. Of course, this doesn't mean it will ever be given a fair market value.

But with nearly $160 billion in the bank, the company simply has too much cash.

Great problem, or at least it used to be.

Not to satisfy Icahn and not to satisfy the whiny-and-not-sure-what-they-truly-want shareholders, Apple should boost the buyback by $100 billion. That would leave $137 billion in the program, less the amount that was potentially deployed in the past several trading sessions.

I don't say this because I believe Icahn should get what he wants or because Apple missed the quarter. And it certainly isn't, Oh, Apple clearly can't figure out what to do, time to try Icahn's plan.

As noted, I agreed with a larger buyback a few months ago.

Think about it... What the hell is Apple going to buy with $160 billion?! I honestly can't tell you. It'll never be able to chew through that money in research and development, marketing or anything else.

It could buy out its suppliers or bail out Turkey, but neither of those makes sense.

The best investment Apple can make at this point is in itself. It will likely never get a fair market value and always be considered "cheap" by value investors. Management isn't going to get burned buying the stock.

Go ahead, argue that X% of its cash is overseas and Y% can't be touched for whatever reason. Rates are still low enough for the company to borrow the money and pay it back as it continues to rake in billions of dollars each quarter.

Bottom line is this: The company has too much cash not to buy back more shares and to not be buying them back more aggressively.

Unless Apple plans on taking over a huge company, buying up its suppliers or bailing out an ailing country, it needs to do something more meaningful with its money.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

At the time of publication, the author was long AAPL. 

-- Written by Bret Kenwell in Petoskey, Mich.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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