Moody’s to Apple: Don’t Listen to Carl Icahn

Apple campusMoody’s ratings firm analyst Gerald Granovsky recently offered his perspective on Apple’s (NASDAQ:AAPL) credit rating in a note that warned the tech company to avoid “significantly more debt” or “face heightened credit risk,” reports Barron’s. Although Granovsky believes that Apple is in a good position to handle its current share buyback program and dividend obligations, the analyst cautioned against taking on “more debt to accommodate calls to boost shareholder returns.”

In April, Apple announced a $60 billion expansion to its share repurchase program. However, billionaire investor Carl Icahn has been pushing for a substantial increase to the buyback program. According to an unnamed source cited by CNBC, Icahn most recently proposed that Apple repurchase $50 billion worth of its stock. In an open letter to CEO Tim Cook in October, Icahn proposed that Apple expand its share buyback program by $150 billion by borrowing funds at a 3 percent interest rate.

Granovsky believes Apple will “raise gross debt by another $20 billion to $25 billion through 2015 to complete its announced shareholder return program.” However, the analyst noted that going beyond that level “would affect the company’s financial flexibility at its current rating level.” As noted by Barron’s, Apple currently has an “Aa1 long-term credit rating at Moody’s, with a ‘stable’ outlook.”

Although Apple has a “massive and growing cash balance of $147 billion,” the analyst noted that all tech companies face common “risks of rapid obsolescence and value destruction.” Regardless of the current size of its cash hoard, Moody’s believes that, “Too much debt on the balance sheet would increase credit risk for the company.”

Granovsky also noted that smartphone and tablet competition will increasingly shift to emerging markets due to the saturation of developed markets. That shift will likely lead to a decline in revenue for tablet and smartphone makers. “Apple’s revenues grew at a compounded annual growth rate (CAGR) of 41 percent from fiscal 2009 to fiscal 2013, and we expect the CAGR to fall to about 4 percent over the next four years,” wrote Granovsky via Barron’s.

However, despite a declining rate of revenue growth, Granovsky expects a “strong” $25 billion in Apple’s free cash flow per year “even as sales growth slows” over the next three years. However, it should also be noted that this cash generation estimate does not include any new revenue streams that could potentially be derived from new product categories.

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