Since the release of the iPhone 5, it has been a roller coaster ride for Apple ($AAPL) shareholders. When the excitement about the iPhone hit full force, the stock reached it’s all time high of $705.
Sell side analysts, a group that was universally bullish, maintained that Apple was a major buy and continued to raise their lofty price targets. Topeka Capital’s analyst Brian White went so far as to set a whopping price target of $1,111 on Apple shares.
Despite the universally bullish sentiment towards Apple from the sell-side analyst community, expectations took a big hit when the company announced a weak earnings report on January 24th.
Apple’s disappointing earnings report and subpar iPhone 5 sales have weighed on the company in recent weeks, as shares have continued to slide. Shares of Apple are down 27.17% in the last 3 months and down 12.49% in the last 5 trading sessions.
So what could possibly turn the tide for Apple? What’s the solution?
Surprisingly, the solution does not involve developing an entirely new product line or creating a new market.
Applying the basic principles of corporate finance would provide an instant boost to Apple’s stock price.
For a corporate treasurer, this market is extremely desirable from a lending perspective given the interest rate environment. Companies can borrow at lower levels than ever and Unilever recently sold $550M of 5 year corporate notes with a coupon of 0.85.
As you can see from the chart, companies can now borrow more than ever at record-low interest rates.
Now just imagine the desirable terms Apple could get given their strong balance sheet- with $137B in cash and $0 debt….
So how could Apple enhance the value of their shares by utilizing the capital markets?
It’s pretty simple: Apple could sell debt and buy stock aggressively.
By selling debt and buying stock, Apple would provide considerable support to their shaky share price and the market would definitely interpret the move as a positive signal.
Share purchases by a company, more often than not, are an signal that the company views its shares as undervalued in the market.
When a company reduces the number of shares outstanding, each share becomes more valuable and represents a larger percentage of equity in the business. If Apple were to introduce an aggressive buyback program, EPS would increase as a result since there were less shares outstanding. It may be Corporate Finance 101, but it would provide an instant lift to Apple shares and EPS.
Since debt financing is available at such low rates, selling debt would actually serve to decrease Apple’s weighted cost of capital as well. Their current WAC is 10.44% and would decrease to 10.06% if they sold $20B worth of debt at 3.00%, which is a very conservative assumption.
Securities analysts frequently utilize WAC to evaluate the valuation of a business. In discounted cash flow analysis, for instance, weighted cost of capital serves at a discount rate that is applied to future cash flows when calculating net present value (NPV).
So not only would this move boost Apple’s stock price, but it would also lower their cost of capital and provide a more optimal corporate structure. Stock buyback programs can be huge sources of long-term profit potential for companies when they are done under the right conditions.
Given the recent slump in Apple shares and the advantageous borrowing environment, the company should seriously consider selling debt and rolling out an aggressive buyback program.
If Apple announced this move tomorrow, it would provide an instant lift to shares and could even spark a rally.
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Rob a.k.a. Techinsidr has been trading stocks and following the stock market since 1997. He formerly worked at Intel Corporation in a Financial Analyst role, responsible for overseeing an annual budget of $160M... More »