Warren Buffett recently appeared on CNBC’s Squawk Box, where the CEO of Berkshire Hathaway gave out some excellent advice to Apple Inc. and their management. Mister Buffett recommended to Tim Cook to buy back shares, spend his time focusing on the business, and forget about what’s happening on Wall Street.
Start a Share Buyback Program
“When Steve [Jobs] called me, I said, is your stock cheap? He said, yes. I said, do you have more cash than you need? He said, a little. I said, then buyback your stock,” said Warren Buffett.
Buffett also made another recommendation. He told Apple Inc. to give back the excess money to the shareholders in the form of a share buyback or a dividend.
But which is the best option?
There is currently a perception that Apple shares are cheap. Apple’s business is currently valued at 6.5 times trailing earnings, backing out of the $173 billion of the cash currently on the balance sheet of the company.
To put this in perspective another way… Apple’s P/E ratio hit bottom at 5.8 during the summer of 2000. At that time, the company was actually nearing bankruptcy. Since Apple is currently creating an amazing amount of cash, and their profits are growing in the double digits, it’s shocking that the discounted share price even exists.
Since the stock is actually trading at a very low valuation, a buyback program would be the best move since the company would be able to buy back shares at a very nice discount compared to intrinsic value.
As Warren Buffett puts it, “… If you can buy dollar bills for 80 cents, it’s a very good thing to do.”
Make the Business the Main Focus
“I would run the business in such a manner as to create the most value over the next 5 to 10 years,” said Warren Buffett.
The management at Apple should seriously focus on finding more opportunities to create added wealth for their shareholders. Here’s a couple of solid ways that they can do this:
invest in new technology – Apple could purchase some of the smaller players working on the bigger problems like sunlight readable screens, longer battery life, and even wideband antennas. By picking up the smaller firms already working on solving major issues, Apple would have a much bigger lead technologically than many of its competitors.
Reinvent the television – if iTV is ever going to be a major success, they need real quality programming. There is a rumor going around that Apple is seriously thinking about buying Netflix. This will give Apple a quick opportunity to pick up exclusive content and a valuable platform for distribution. It would likely cost Apple anywhere from $12 billion-$14 billion to acquire this company, and this is just a tiny fraction of the $50 billion that Apple has on hand in annual free cash flow.
Get your head in the clouds – the iCloud has a rumor surrounding it as a major part of Apple’s long-term growth strategy. One quality move Apple could make to improve its product is to purchase large data centers and applications.
Improve the current supply chain – if they make large advance deals to some of the component suppliers in use by their competitors, Apple could easily corner the hardware market. They can also develop manufacturing techniques that they would patent. This way their rivals would not be able to copy them.
As you know, this is mainly just my thoughts on this topic and nothing more.
Forget about the Share Price
“You can’t run a business to push the stock price up on a daily basis,” said Warren Buffett.
Wall Street always wants a quick bump in share price. It does not matter if it jeopardizes the company’s long-term prospects or not.
Over the last few weeks, we have seen several of these proposals…
Investor David Einhorn has called upon Apple to issue $250 billion in ‘iPrefs,’ which is a perpetual bond like security that pays out a 4% fixed dividend. Barclays also wants the company to issue $50 billion-$100 billion in debt in order to fund a massive share buyback.
Apple did not become the powerhouse company that it is by messing with spreadsheets or Excel formulas. The company succeeded because it creates incredible products loved by all of their customers. Apple would be much better off if they just ignored the investment bankers and their financial suggestions.