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Icahn Gazes Beyond Known World With $1.2 Trillion Apple

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IMAGE: Carl Icahn »


Carl Icahn’s forecast for Apple Inc. (AAPL) would swell the world’s biggest market capitalization beyond the economy of Argentinato heights never seen in public markets.

The billionaire activist says Apple should trade at $203, twice its current price, an estimate that would push it to $1.2 trillion. He’s asking that of a stock that has gained more than 3,500 percent in the past decade and became the most valuable company in U.S. history two years ago, before adjusting for inflation.

Based on profits, Icahn envisions an unusual though not unprecedented valuation for the Cupertino, California-based company. Boosting Apple’s price-earnings ratio to match the average in the Nasdaq 100 Index would send its stock to $147 and its value to $880 billion. Going by history, it’s another story. Only one company has ever topped $1 trillion, PetroChina (601857) Co., which tripled after its November 2007 debut in Shanghai. The 13-digit sojourn lasted exactly one day.

“That doesn’t happen very often,” Jon Burnham, a New York-based fund manager for Burnham Asset Management Corp., which oversees about $2 billion, including Apple shares, said by phone. At the same time, “this is a very cheap stock in earnings and revenues or any other way you’d want to look at it. I own it and I expect to make much more money over the next coming years so I agree with everything that’s being said.”

Accelerating Earnings

Analysts tracked by Bloomberg predict the stock will climb 10 percent in the next 12 months, or the equivalent of $669 billion. Its current market value is $609.9 billion, having peaked last month at $658 billion.

In his letter, Icahn said Apple products including the iPhone, iPad and Apple Watch will help accelerate earnings growth. The recently introduced iPhone 6 positions the company to take market share from Google Inc. (GOOG)’s Android, he said.

With Google as Apple’s “only real competitor,” Icahn said he believes a revenue and earnings per share forecast of 25 percent and 44 percent growth, respectively, is justified for Apple in fiscal year 2015.

Icahn said he thinks Apple is worth 19 times his forecast for fiscal 2015 earnings, valuing the company at $203 a share. The stock now trades at a price-earnings ratio of 13.8 relative to analysts’ average estimate for 2015 profit, according to data compiled by Bloomberg.

Trillion Dollars

Icahn is hardly the first to predict a trillion-dollar market value. In February 2000, Paul Weinstein, an analyst at Credit Suisse First Boston, raised the possibility that Cisco Systems Inc. would get there in two years -- a feat that would’ve also required the stock to double. Instead it fell more than 70 percent as the dot-com bubble popped.

Companies aspiring to the trillion-dollar threshold start bumping into the limits of the global economy, according to David Baskin, president of Baskin Financial Services Inc. in Toronto. A valuation of $1.2 trillion would be about 1.6 percent of $74.9 trillion, the global gross domestic product as compiled by the World Bank.

“You have to be a company with huge global sales to get there,” said Baskin, whose firm manages about C$700 million ($627 million), including shares of Apple. “Ten years ago, you would’ve guessed General Electric, but it never got there. Can Apple get to $1 trillion? What’s the world GDP? Can a company get to 1 percent of world GDP?”

PetroChina, Exxon

PetroChina, the country’s biggest oil and natural gas producer, surpassed $1 trillion in market value for only one day, on Nov. 5, 2007. The stock has since lost about three quarters of its value.

Exxon Mobil Corp., currently the world’s second-biggest company with a market value $200 billion below Apple’s at $393 billion, peaked at $527 billion in October 2007. General Electric Co. (GE) reached its highest level the same month, at $432 billion.

“To get Apple, with the size it is now, to double its P/E, I have trouble doing that math,” Bob Landry, a portfolio manager who helps oversee $22.3 billion at USAA Investment Management Co. in San Antonio, said by phone. “It’s all about figuring out a way to enhance their returns on capital that could result in multiple expansion, through business growth and innovation or shrinking the share count significantly.”

Getting Big

Were Apple at $1.2 trillion today, it would represent 7.4 percent of the S&P 500 (SPX), more than double its current share and bigger than all 100 smallest companies in the index combined, data compiled by S&P Dow Jones Indices show. Since 1980, there have been only two companies whose weightings in the S&P 500 have exceeded 5 percent, International Business Machines Corp. and AT&T Inc. The biggest share was IBM, when the technology company commanded 6.4 percent of the S&P 500 in 1985.

“When you get that big, it’s hard for a company to grow that much,” Howard Silverblatt, an index analyst at S&P in New York, said in a phone interview. “For a company to go from $100 billion to $200 billion, it’s one thing. For a company to grow from $600 billion to $1.2 trillion, that’s a lot more movement in the economy and their sales. They have to create another industry to reinvent so much of the market and control it.”

50 Cents

Apple has consistently defied skeptics. Its shares lost half their value in 1993 and posted annual losses averaging 30 percent between 1995 and 1997 as concern mounted about the popularity of its personal computers. Adjusted for splits the stock fell below 50 cents in 1997. It’s risen in 13 of the 16 subsequent years, including rallies exceeding 100 percent in six of those.

The historical obstacles to getting to $1 trillion are less daunting when past market capitalizations are adjusted for inflation. Microsoft’s December 1999 peak of $613 billion comes out to $875 billion in today’s dollars, while Cisco’s $552 billion zenith translates to $762 billion.

“I have a very substantial position in Apple,” said Burnham of Burnham Asset Management. “I’ve never sold a share of the stock and I’ve owned it since 2005. It’s about the cheapest stock I know of. They’re earning huge amounts of money with large profit margins and sitting with incredible amounts of cash,” he said. “Tim Cook says they have incredible products down the road and I believe him.”

Article Credit: Bloomberg

Updated 5 Years ago

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Tags:     Apple Inc.     Carl Icahn     Jon Burnham     Google Inc     Paul Weinstein     Exxon Mobil Corp.     Bob Landry     Tim Cook