Apple (AAPL) Shareholder Activism Highlights Capital Allocation, But Prefers Traditional Buyback/Dividend - Goldman

February 8, 2013 8:24 AM EST
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Yesterday, Greenlight Capital founder David Einhorn made waves on Apple (NASDAQ: AAPL) after disclosing he has proposed to the company the issuance of a preferred stock in an effort to unlock shareholder value. Mr. Einhorn took his case public and urged shareholders to vote NO on proposal 2 which seeks to eliminate the company's ability to issue preferred stock. Later in the day, the company issued a statement pledging to "thoroughly evaluate" Greenlight Capital's proposal and reiterated its commitment to shareholder value.

Commenting on the development, analysts at Goldman Sachs said the latest example of shareholder activism "serves to highlight Apple's significant capabilities for increased capital allocation."

As of the latest quarter, Apple had $137.1 billion in cash and long-term investments, or $145 per share. Even though just under 70% of this cash is offshore, this still leaves room for substantial incremental capital allocation, the analysts note. "Furthermore, it is still possible that Apple could also capitalize on its overseas cash position with leverage and other mechanisms," according to analyst Bill Shope.

Shope believes significant moves on the capital allocation front could greatly improve sentiment and valuation for Apple, although they continue to focus on the opportunity for a traditional increase in the share buyback authorization and existing dividend.

The firm reiterated its Conviction Buy List rating and price target of $660 on Apple. "We view the company's sticky installed base as a baseline for valuation support, and in addition, we expect new products in coming months (including a refreshed iPhone, a new iPad, and a lower cost iPhone) to reinvigorate new user growth. We also believe Apple could move towards shorter product cycles, which would minimize the volatility we saw last year and add a key source of stabilization to the story."

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $468.22 yesterday.

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