Comments on: Counterparties: Not so golden, still delicious http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: y2kurtus http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45708 Wed, 30 Jan 2013 01:35:38 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45708 My few cents on AAPL:

#1 no way no how do they ever repatriate that foreign cash for anything like a 20% rate. Why on earth would they pay 20 billion in taxes to uncle Sam on iphones built and sold outside of America? Unless the laws change the foreign cash will stay where it lays.

#2 one off the wall idea I could see Apple wasting/investing some big money on would be to lock up their own spectrum. If I was running AAPL I would have bought Clearwire when it was at $2 and then used the spectrum exclusively to deliver paid iTunes content.

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By: realist50 http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45704 Tue, 29 Jan 2013 19:24:07 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45704 TFF – you are correct that Apple’s cash is well in excess of any corporate use for it other than an acquisition. None of Fifth Decade’s arguments about Apple’s need for that much cash hold water when examined versus Apple’s actual financial results.

Huge forward orders of parts? Maybe Apple does so on occasion, but in total it consistently operates with negative working capital – looking at non-cash current assets less accounts payable – meaning that on the whole Apple’s suppliers finance it, not vice versa. Not surprising since Apple turns inventory very quickly and obviously has plenty of power to negotiate favorable terms with suppliers, including payment terms. It’s a testament to Apple doing a good job running its supply chain.

As for cap ex, that was $2.4 billion in the most recent quarter, and $8.3 billion in the latest fiscal year. That’s compared to cash flow from operations of $23.4 billion in the latest quarter and $50.9 billion in the latest fiscal year. Apple’s cash flow from operations could fund somewhere between a 6x and 10x increase its cap ex. Bear in mind that this massive increase in cap ex wouldn’t even put a dent in Apple’s cash pile – it would just stop its cash pile from growing. Apple’s dividend of $2.5 billion per quarter barely alters this equation.

As for R&D, that’s an expense item that is already take into account in calculating net income or cash flow from operations.

Having that much cash, and generating still more, is a high-class problem to have, but still doesn’t mean that Apple should just sit on the cash. As profitable as the company is, I’m taking it as a given that Apple is pursuing any R&D or cap ex spending that it thinks would earn a reasonable return.

As for acquisitions, I don’t see any logical ones that would use tens of billions of cash. Apple’s history has been relatively small acquisitions with specific interesting technology and a limited number of employees. It’s tough for me to see Apple buying a company with thousands, or tens of thousands, of employees. Integration of a business of that size would be a new experience for Apple and a distraction for management.

Let’s say Apple decided to return $120 billion of its cash – still leaving it with $17 billion on its balance sheet. Conservatively assume a 20% incremental tax rate to repatriate the cash, leaving $96 billion to distibute. 939 million shares outstanding, so that’s either a $100 per share special dividend or a massive share buyback – such a large share buyback that it’s likely not feasible without moving the stock.

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By: craigyk http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45702 Tue, 29 Jan 2013 18:29:35 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45702 TFF17, I’m sometimes not sure the cash pile is actually big enough for what Apple would really like to do.

What do I think they would like to do with it? I think they would like to get out from under the thumb of the carriers, or otherwise commoditize them. Imagine what would happen if Apple sold data plans for their devices at only a slight profit, like they do with their online stores (which still pull in 2B). I’m talking about 200B is where this might start being feasible.

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By: TFF17 http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45695 Tue, 29 Jan 2013 13:53:08 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45695 So Fifth, you are telling me that they need $150B of cash for capital expenses and forward orders? I’m not buying it… That’s an argument for a $30B cushion, not a $150B cushion.

Your third suggestion, “to buy any company it wants” is more intriguing. Especially since it HASN’T been using (wasting?) its cash that way. What do you think Apple might be saving up its pennies to buy? What SHOULD they be aiming to buy?

Will repeat myself: at some point you have to wonder what that cash is good for? Arguments that supported $30B of cash in 2009 don’t make much sense in the face of a $150B hoard.

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By: FifthDecade http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45692 Tue, 29 Jan 2013 02:53:12 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45692 Amazing how few analysts really understand why Apple is successful. Without understanding the company at all (just overlaying a standardised model that has not made any other tech company half as successful as Apple) recent quotes from analysts include (just before the price dropped) “Apple could go over $1,000 a share” and “Apple needs to launch a cheaper phone to fight for market share”.

Then you read about problems for all other phone makers due to insufficient profits, which come from selling too many models at too low prices in the fight for market share. Have the analysts forgotten that “sales are vanity; profits are sanity”? Have they also forgotten that it wasn’t so long ago that Apple was nearly bankrupt and had to be rescued by Microsoft money? Or that that near-bankruptcy was caused by the actions of John Sculley, the market darling who ousted Steve Jobs so he could do what the analysts said the company needed to do?

As for calculating the net return on the cash pile, well, that’s just barmy. Investors are investing into the Apple model, not a cherry picked part of it. Having a high cash pile allows Apple to place huge forward orders on parts; to buy any company it wants, when it wants or needs to; to invest in the machinery in the factories that build its equipment – Apple might not own the factories, or run them, but they do own a lot of the machines inside them.

Apple doesn’t just screw computer parts together – it invents the machines and processes needed to make better computers more cheaply. Having cash around allows the company to be more adventurous in research, knowing it can launch a product out of the mould that might flop, or might be a star – and all without risking the company.

When analysts stop talking rubbish, I might take them more seriously.

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By: TFF http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45690 Tue, 29 Jan 2013 00:40:16 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45690 I hadn’t been an Apple shareholder in quite a while, but couldn’t resist $440. The company would need to completely fall apart to make THAT a bad purchase.

They’ve got the free cash flow to support a $20/share dividend, which could help to support an $800 price. Failure to pay out that hoarded cash could easily be interpreted as uncertainty about how long these boom times will last.

At some point you have to wonder what that cash is good for?

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By: WilliamCowie http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45689 Mon, 28 Jan 2013 23:40:46 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45689 What is Apple doing with $90 billion in cash? They’re not paying it out in dividends and they’re not buying back stock. They’re not putting it to any productive use, which is why the cash is just sitting there. And while it’s just sitting there, it’s earning a whole lot less than stockholders can earn if management would give the money back (to its rightful owners). I understand keeping a reserve for unforeseen circumstances, but $90 billion is over the top.

As long as the company was pumping out new products investors didn’t mind so much. Now, though, things are different. The company certainly isn’t broke, that’s for sure, but it’s telling that management has no use its cash, but is being a dog in the manger to keep it away from stockholders.

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By: realist50 http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45688 Mon, 28 Jan 2013 23:16:08 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45688 I pretty much agree with KenG’s points (and am also an Apple shareholder). I differ a bit in that I wouldn’t mind if the company buys back shares, though I don’t have any huge preference for that move relative to a big special dividend. Just the latter or a mix of the two would be fine with me.

I don’t think that Apple management should spend an inordinate amount of time fretting about where the stock trades day-to-day. They should, however, think about judicious use of capital. Apple’s cash and equivalents at 12/31/12 totals $137.1 billion (I’m adding together Apple’s reported cash, short-term marketable securities, and long-term marketable securities). Apple earns minimal returns on this money: assuming that Apple’s $462 million in other income/expense for the latest quarter is all interest, Apple is earning something like 1.3% on an annual basis. That number involves a bit of an estimate, but in the current interest rate environment it seems reasonable assuming that Apple is investing in government bonds and high-rated corporate bonds with maturities of a few years or less. Even if one adjusts this return relative to what would end up with shareholders post-tax through dividends or stock buybacks, the return on this cash hoard is pretty anemic. (Assume incremental corporate taxes for Apple to bring the money on-shore, and a 20% individual dividend/cap gains rate, and Apple’s return on that cash is still no more 2% to 3%). Seems to me that Apple could send $100 billion of this cash to shareholders and still have more than enough spare cash for any reasonably likely corporate initiatives, so the Apple board and management are deciding to accept a sub-3% return on a huge pile of invested capital. I like Apple’s business, especially at the current share price, but I’d like to be able to buy stock in that business without also purchasing the short-term bond fund that’s presently attached to the business.

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By: Zdneal http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45687 Mon, 28 Jan 2013 20:22:14 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45687 Aapl vs. Amzn is all that needs to be said about the ridiculousness of the stock market.

For the record, I am deeply ensconced in the Amzn eco-system and am less than thrilled with my iPhone. Still, how can a company making that much money go down in value. It’s ridiculous.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2013/01/28/counterparties-not-so-golden-still-delicious/comment-page-1/#comment-45686 Mon, 28 Jan 2013 19:57:09 +0000 http://blogs.reuters.com/felix-salmon/?p=20324#comment-45686 Apple’s revenues actually grew more than 18%; the last quarter was a week shorter than the same one in 2011, and given that it was in the busiest (holiday) quarter, revenue could have easily been 8% higher, which means it really grew more than 25%.

Calling them a broken company is absurd, for even though the customer upgrade cycle has slowed to where it is probably more than the length of a 2 year contract, they are still attracting new customers. They are priced like a bank or utility, even though their profits and growth are like a software growth company.

Ben is right, lots of shareholders want Apple to focus on share price, but they’ve never done that since Jobs returned, and I don’t think (or hope) Cook will care, either. Apple also doesn’t care about market share to the point where they will lower prices and margins just to get a bigger share; they’re just not that short-sighted.

As an Apple shareholder, I do hope they don’t buy back shares. I would rather they increase their dividend, which would be more likely to put some of their cash hoard back into circulation than a buyback. It would also have a more immediate impact on the share price.

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