Is Apple ‘Wagging the Dog’ With Stock Buyback?
Earlier this week, Apple (NASDAQ:AAPL) CEO Tim Cook told the Wall Street Journal that the company had recently repurchased $14 billion of its own shares in an “opportunistic” move that took advantage of a decrease in the share price following its disappointing earnings results. The move appeared to please most Apple investors and many analysts subsequently adjusted their earnings per share estimates for Apple’s current quarter based on the impact of the stock buyback.
According to Barron’s, Barclays analyst Ben Reitzes estimated that the $14 billion buyback would boost EPS by “a little over 2 percent,” while BMO Capital Markets analyst Keith Bachman added about nine cents to his previous EPS estimate. The move also likely pleased activist investor Carl Icahn, who has been aggressively pushing Apple to expand its share repurchase program by another $50 billion.
However, not every analyst was enamored by Apple’s accelerated share repurchase activity. In a recent note to investors, J.P. Morgan analyst Mark Moskowitz argued that Apple’s stock buyback failed to resolve more pressing issues facing the company. “We think event-driven and capital- focused investors could cheer the news of Apple’s buyback bonanza,” wrote Moskowitz in a note obtained by Barron’s. “However, we do not think this buyback activity overcomes the slowdown in the all-important iPhone business.”
“The last two iPhone launches have not resulted in multi-quarter sales growth spurts as previously seen,” added the J.P. Morgan analyst. “We think this lack of follow-through indicates end users are slowing their refresh rates, and recent technology advancements have not been enough to change that. This dynamic is the bigger issue, in our view, and likely will remain so after any near-term excitement related to the buyback.”
In other words, while Apple’s recent share repurchases provide investors with short-term benefits, the company must still address serious long-term issues that threaten its core business. The lack of an iPhone “sales growth spurt” was also recently noted by Asymco’s Horace Dediu. According to Dediu’s calculations, the iPhone only delivered 6 percent sales growth last quarter, despite the launch of two new iPhone models. Per Barron’s, Moskowitz noted that, “We would prefer to see Apple assert a more balanced use of cash, across M&A, stock buybacks, and dividends. Stock buyback is a not lasting tonic.”
In this sense, Apple’s stock buyback could be interpreted as a case of “wagging the dog;” when something of lesser importance diverts attention from something of greater importance. While Moskowitz had a mixed view on the benefits of Apple’s share repurchase program, he also saw some positive signs in Apple’s future.
“We think Apple still has 2014 catalysts that could restore meaningful, above-peer revenue growth to the model,” wrote Moskowitz per CNET. “The China Mobile (NYSE:CHL) launch stands to set the stage for a larger-sized iPhone rollout later this year, which could boost unit sales. Another silver lining is that we think Apple’s crossover to 64-bit processors, ahead of the competition, could usher in new features, potentially jumpstarting growth in the next 12 to 18 months.”
Here’s how Apple traded on Friday.
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