unlocking value $aapl

Serious buyback and dividends, along with consistent time frame for value/institutional investors.  Exactly what Apple needed to get a multiple more in-line with the leadership role its maintains.

In conjunction with the expanded return of capital program, the Company plans to borrow and expects to announce more details about this in the near future.

Definitely a shift in direction for Apple, but a needed step to unlock value and place a floor on the stock.

Based on my rough calculations, and the above financial engineering, the stock should be trading (at minimum) toward 477. (More on this later.)

update:

Comparing Q3 2013 guidance vs last year's numbers:

est Q3 2013	Q3 2012
$35,500	$35,023	Revenue
37.0%	42.8%	GM %
$13,135	$14,994	Gross Margins
$3,850	$3,421	Operating Expenses
$9,285.00	$11,573.00	Operating Income
$350	$288	other income
$9,635.00	$11,861.00
26%	26%	tax rate
$7,129.90	$8,824.00
945.00	947.06	diluted shares
$7.54	$9.32	eps

Flat revenue growth, and due to the GM decline, income is projected to decline 19.4%.

This quarter saw a similar income decline, but revenue had 11% growth:

Q2 2013	Q2 2012
$43,603	$39,186	Revenue
37.5%	47.4%	GM %
$16,349	$18,564	Gross Margins
$3,791	$3,180	Operating Expenses
$12,558.00	$15,384	Operating Income
$347	$148	other income
$12,905.00	$15,532
26%	25%	tax rate
$9,547.00	$11,622
946.04	945	diluted shares
$10.09	$12.30	eps

The above is not a good situation for an instrument that investors predicated valuation based on earnings, or rather earnings-per-share.

There is little Apple can do with respect to Gross Margins. The iPad product and iTunes will keep gaining share in the overall revenue stream that will affect the overall GM. The current quarter did see a slight decline in ASP for the iPhone to $613, and did not pick up a reason for why that was the case. (But I was expecting a decline due to the increase new financing push.)

Apple can, and has decided to, control the share count. They have given investors a very detailed look at their intentions: the capability of repurchasing $60B by the end of 2015. This is what a potential $20Billion a year looks like.

	stock price	buy back	shares
2013	$400	$20,000,000,000	50,000,000
2014	$400	$20,000,000,000	50,000,000
2015	$400	$20,000,000,000	50,000,000
		$60,000,000,000	150,000,000

If Apple's stock stays at 400, Apple can theoretically repurchase 150M share. Thats about 15% of the company, and bring the share count to 796M.

For the sake of this exercise, lets ignore the growth of iPad, the consistency and growth of the iPhone, the moat of iTunes/iCloud, the consistency of the Mac, the growth of iTunes via revenue/earnings and the potential of new products and new earnings streams.  The below exercise assumes the above reduction in shares from the above, and flat income from 2013 to 2015. (The income estimate uses Q1, Q2 numbers with Q3 Apple guidance and assumes a 10% decline in Q4 income.)

	yearly earnings	share count	reduction in shares	potential eps
2013	$37,154	946.04	896.04	$41.46
2014	$37,154	896.04	846.04	$43.92
2015	$37,154	846.04	796.04	$46.67

As a baseline, the effect on EPS is pretty clear. But there is also flexibility within their plan facilitating optimal repurchases.

Where the stock goes from here is on Apple and the institutions that follow the buy back.  But $20 billion a year focused on repurchases is a lot of demand for one stock.