MorningWord 8/14/13: Icahn Tweet Clearly Now the Rain is Gone $AAPL

by Dan August 14, 2013 9:07 am • Commentary

MorningWord 8/14/13:  Carl Icahn’s Twitter-Bomb yesterday revealing a large stake in AAPL (WSJ reporting worth~$1.5 billion) sent a jolt to the stock just as it sat above a very key technical resistance level for the first time in 2013, and also caused a flurry of short dated call option buying with the Aug 480 calls the second most active single stock option in the entire market, with 56,000 changing hands.  I think it is a safe assumption that Mr. Icahn has already created a nice little buffer for his AAPL investment, as it is likely that he has been buying the stock since it’s Q3 earnings report in late July (or prior) when the stock was below $450. Once the headlines abate he can sit and be a little patient and watch the expected product launches in September.

Last night on CNBC’s Fast Money the panel discussed Icahn’s investment and as an activist what sort of action he was going to push for.  My comment (paraphrasing) is that in the near term we are going to know, based on the consumer reception of the new products this fall, whether AAPL continues to be a financial engineering / value story or a stock that people own for a return to on innovation.  Obviously, there are a few scenarios in between,  but one thing is for certain, Mr. Icahn is the new mouthpiece for unhappy shareholders in the event of any stock re-tracement.

SO what does Icahn want, he wants to lever up AAPL’s balance sheet and buy back a ton more stock.  His comment to the WSJ via Barron’s Online:

“This is a no brainer to go buy stock in a company that can go borrow” at a low rate, Mr. Icahn said. “Buy the company here and even without earnings growth, we think it ought to be worth $625.”  Mr. Icahn’s thesis rests on Apple borrowing at about a 3% interest rate and buying back shares right now, likely at around $525 a piece. That would send shares to $625, Mr. Icahn says, without taking into account any earnings growth.

As if the company hasn’t been doing exactly what Icahn wants, on July 3oth in this space (here), I highlighted just how much stock AAPL bought in the qtr just reported:

One of the most interesting take-aways from AAPL’s Q3 earnings report last week was that the company has been buying back their own stock hand over fist, $4 billion in the last quarter in the open market and maybe as much as $12 billion through and accelerated buyback (here).   If that is true, than AAPL, has nearly completed a quarter of the $60 billion share repurchase announced in April (an additional $50b was announced with increased dividend to existing here).

So in one quarter, a period where the stock had traded at its lowest levels in over a year, AAPL bought back almost a quarter of its outstanding share repurchase authorization. On his ASYMCO blog, noted AAPL watcher Horace Dediu called the accelerated purchase portion, Apple’s Largest Acquisition .  One of Tim Cook’s largest departures from the Steve Jobs way of doing things was his willingness to return cash to shareholders, and if Uncle Sam agreed to a tax holiday for US company’s to repatriate offshore cash, AAPL would have a bit more flexibility in how they finance share repurchases and dividends in what could be a rising rate environment in the quarters to come.   It is very hard to draw any negative conclusions from Icahn’s involvement in the stock, but there is a certain sense of irony that it comes on a day that saw some less than optimistic predictions on AAPL’s future from the likes of ORCL CEO Larry Ellison (here) and from Tech VC Fred Wilson (here).

This isn’t a particularly bold call, but for all of those convinced that AAPL had put in a double bottom, it looks like it has. At least for the near term. And it would likely take a global thermal nuclear war for it to break $400 again anytime in the next couple quarters.

From an Implied Vol standpoint, short dated options spiked yesterday, and will likely stay bid into the expected product launch in early Sept. But as the stock settles into a new range, and the product unknowns get out of the way, Icahn’s involvement, much like the BuyBack and increased dividend in the spring, should be vol dampening. And options strategies in the stock need to take that into account.