Carl Icahn Sold Apple Too Soon & It Cost Him $3.7B

Carl Icahn was very visible when he owned Apple shares. He met with Tim Cook, Apple’s CEO, and wrote letters and analysis that he posted on his website. His first public announcement was on August 13, 2013 with two tweets saying he had a large position in Apple, had talked with Cook and that a large buyback should be done now since he believed that the stock was extremely undervalued. While Icahn said his profit was “within a few bucks” of $2 billion when he sold in April last year he left a lot on the table. (Note that I own Apple shares and have sold Put options).

In a letter dated October 24, 2013, Icahn said that he owned 4.73 million shares (pre-split) and reiterated his proposal that Apple should spend $150 billion to buy back its shares with a tender price of $525 ($75 post-split which is what it was trading for). At that time the company had $146.6 billion in cash and investments and only $17 billion in debt. It was also in the early stages of buying back shares (just under $18 billion had been spent) with a cumulative authorization of $60 billion.

On October 9, 2014, just after the launch of the iPhone 6 and 6 Plus Icahn published another letter titled “Sale: Apple Shares at Half Price”. While he was widely optimistic with his forecasts for the Apple Watch and an UltraHD television (which has never been announced) leading to a revenue estimate of over $271 billion in fiscal 2016 (actual was $215.6 billion) and EPS of $12.49 (actual was $8.31) and even higher numbers in fiscal 2017 of $328 billion in revenue (actual was $229 billion) and EPS of $16.28 (actual was $9.21) he wasn’t too far off regarding the title of his letter. On October 8, 2014, Apple’s shares closed at $100.80 and today they closed at $174.67 or an increase of 73%. While it has been three years and wasn’t a double there are few investors that wouldn’t say this is a very good rate of return.

On February 11, 2015, Icahn updated his forecast and reiterated his belief that the shares were worth $216 while the day before they had closed at $122.02. His price target used a 20x PE multiple on his $9.70 fiscal 2015 EPS projection and $22 in net cash.

On May 18, 2015, Icahn lowered his EPS estimates for fiscal 2016 to $12.00 (actual was $8.31) and fiscal 2017 to $15.54 (actual of $9.21) but increased his price target to $240. He got to it by using an 18x PE multiple and $24 in net cash. The stock closed at $128.77 the day before.

Then on April 28, 2016, Icahn announced that he had sold all of his 52 million plus shares making about a $2 billion profit. He said he sold based on concerns regarding China which I delved into. From my calculations on the 52 million plus shares he sold them for about $105.

Icahn was right but left a lot on the table

Icahn was right that Apple should buy back a lot of its shares. He had recommended the company should spend $150 billion in 2013 with a tender price of $75 post-split. Instead Tim Cook and Apple’s Board decided to go on a multi-year program (which they are still doing) and reached $150 billion in the March quarter of this year. If Apple had been able to borrow enough to do that large of a buyback in 2013 it would have wound up buying back a lot more shares than it has.

Unfortunately for Icahn he sold a year plus too early. While the stock traded down to the $90’s just after he sold, the shares have been on an upward move since then as can be seen on the StockCharts.com chart below.

If Icahn had held onto all his shares the difference between what he sold them for, about $5.5 billion, would now be worth $9.2 billion or $3.7 billion in additional profit. The $3.7 billion is a return of 66% over the additional 20 months or about 40% on an annualized basis.