He started the letter off by referencing Tim Cook’s public statement from Tuesday where he said more or less, the excess cash that Apple doesn’t need – with some level of buffer – the company wants to return to the shareholders.
Potentially this could happen as early as Apple’s capital return program in April, where it is expected to increase share repurchases.
In the letter Mr. Icahn would say:
On August 13, 2013, when Apple was trading at just $66.77, we originally notified our twitter followers of our conversations with Tim Cook and of our request that Apple take advantage of its excess liquidity by repurchasing its dramatically undervalued shares. Despite significant share appreciation over a relatively short timeframe to $122 per share, we believe the same opportunity exists for Apple today. More recently, skeptics (including bullish Wall Street analysts) questioned our financial model’s forecast for robust growth, disclosed in a letter to Tim Cook on October 9, 2014 in which we again urged Apple to increase share repurchases. Since then, we have gained further confidence in our thesis, increasing the forecasted EPS for FY 2015 in our model from $9.60 to $9.70, and now believe the market should value Apple at $216 per share. This is why we continue to own approximately 53 million shares worth $6.5 billion, and why we have not sold a single share.
He would go on to say:
When we compare Apple’s P/E ratio to that of the S&P 500 index on the same basis (but without any tax adjustment to the S&P 500 forecasted FY2015 EPS or P/E), we find that the market continues to value Apple at a significantly discounted multiple of only 10x, compared to 17x for the S&P 500.
Now he would say that the P/E discrepancy between Apple and the broad market index is entirely irrational and that the market is missing a basic principle of valuation:
When a company’s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple. In FY 2016 and FY 2017 we forecast in our model EPS growth of over 20% per year, and if Apple introduces a TV in FY 2016 as we expect, this EPS growth accelerates to over 31% per year in our model. Because of this, we believe the market should value Apple at a P/E of at least 20x, which together with net cash of $22 per share, would value Apple shares today at $216 per share.
To close out the letter Mr. Icahn said:
It is now plainly obvious to us that there will be no stopping Apple’s peerless innovation track record and best-in-class ecosystem of services, software, and hardware, and that Apple will continue dominating the premium smartphone market by continuing to take premium market share from Google’s Android operating system (and Android-device manufacturers) while at the same time maintaining or growing average selling prices and gross margins. We look forward to the introduction of the Apple Watch in April, as well as the launch of other new products in new categories.
Apple shares closed Wednesday up 2.3% at $124.88 after hitting a new all-time high. The stock has a consensus analyst price target of $131.68 and a 52-week trading range of $73.05 to $124.92.
As a reminder it is not uncommon for investors, much less activist investors, to talk up their book.