Friday, June 1, 2012

Quarterly Letters: Greenlight Capital & Third Point on Apple

Below are some comments by David Einhorn and Daniel Loeb on Apple (AAPL) that were made in their latest quarterly letters.

At its recent price, if Apple's stock doubled the company would be valued at more than $ 1 trillion. David Einhorn's Greenlight Capital 1st Quarter 2012 letter to partners noted that some seem convinced that no company could actually end up being worth that much.

His response to that concern?

We've scoured the Nasdaq listing rules, reviewed the Securities Exchange Act of 1934, and engaged a leading numerologist. We can't find any prohibition on trillion dollar market capitalizations.

Greenlight Capital has a sizable position in Apple (at least they did as recently as the end of March) according to its most recent 13F.

The letter also makes the point that Apple doesn't need to grow to justify the current valuation. The stock at its current multiple of earnings really isn't priced for growth.

More from the letter:

...because AAPL embeds its software into its hardware, it doesn't face Microsoft's piracy problem. If the Chinese want AAPL, they have to buy AAPL. Rather than view AAPL as a hardware company, we see it as a software company that monetizes its value through the repeated sales of high margin hardware.

We continue to hold AAPL. Not only do we think the skeptics are misguided, we believe the shares remain cheap. AAPL trades at a lower multiple than the average company in the S&P 500. A below-market multiple implies that this is a below-average company. We have a hard time seeing how anyone ranks AAPL as below average.

Daniel Loeb's Third Point also has a position in Apple according to recent filings. The latest letter generally has favorable things to say about the stock.

An excerpt from Third Point's 1st Quarter 2012 investor letter:

Due to its favorable working capital cycle and deferred revenue contribution, Apple has been churning out cash flow at close to 120% of earnings (actually 128% in FY2012). Looking forward to CY2012, that rate suggests cash flow in excess of $50 per share in 2012.

Apple does have a fine working capital model but I'm not willing to use that $ 50+/share number as the basis of the company's valuation.

Still, using the somewhat more conservative $ 45/share that the company is expected to earn this year, Apple hardly seems expensive.

So near the current price, Apple is selling at roughly 10 to 11 times earnings adjusting for net cash on the balance sheet. That kind of valuation will only end up making sense if there's no growth or worse.

Some other notable investors with meaningful positions in Apple include: Julian Robertson, Leon Cooperman, and David Tepper. Each added to their positions based on the latest 13F filings.

In general, I'm still never going to be a big fan of any technology business but, at the very least, Apple and quite a few other large tech stocks still sell at earnings multiples that are lower than the market in general.

Certain anointed high-flying stocks continue to maintain very high valuations (even if not as extreme as was the norm a little over a decade ago) but there are plenty that, if not cheap, are still not all that expensive.

Adam

Long position in Apple established at a much lower price; no plan to add shares near the current price.
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