Apple drops Earnings Per Share guidance because outstanding shares are in flux

Posted:
in AAPL Investors edited January 2014
Apple didn't provide any Earnings Per Share guidance for the coming quarter. The reason: the company has plans to buy back billions of dollars worth of its own shares. And currently, "they don't know how many shares they will buy back."

In addition to Apple's announcement of changes in how it will report software revenues, Global Equities Research analyst Trip Chowdhry noted a separate change related to Earnings Per Share guidance.

While Apple reported $13.81 EPS in the last quarter that beat The Street's consensus of $13.48, it didn't offer an EPS guidance for the coming quarter. The simple reason, notes Chowdhry, is that Apple doesn't know how many shares will be outstanding because "they don't know how many shares they will buy back."



In part, that's because the wild fluctuation in Apple's share price is having an unpredictable impact on the number of shares the company can afford to buy with its initial allocation. The company could also decide to take advantage of severely discounted stock prices to accelerate its stock buyback program.

Because the number of outstanding shares is subject to unpredictable change, Apple can't confidently report guidance on its Earnings Per Share going forward. Apple originally announced having "authorized a $10 billion share repurchase program commencing in the Company?s fiscal 2013, which begins on September 30, 2012. The repurchase program is expected to be executed over three years."

In early October, just after the program was slated to begin, Apple's share price reached above $670. If the company had bought up shares using the first third of its $10 billion buyback fund, it would have been able to buy 4,975,000 shares. If the company waited and spent the same $3.33 billion buying shares after its earnings call, it could have instead afforded to buy over 7,593,000 shares.

If the company accelerates its buyback program, it could spend even more of its $10 billion in allocated cash to swoop up shares. For the last quarter, the company stated it had already deducted $2 billion from its from its cash pile for stock buyback, in addition to $2.5 billion allocated for quarterly dividend payments, both of which were separate from its reported cash reserves now totaling $137.1 billion, a $16 billion increase over the previous quarter. In total, Apple generated cash flow of $23.4 billion in the winter quarter.

Blowing its entire $10 billion stock buyback allocation early, it could theoretically take almost 22 million shares off the market, out of the company's 939 million outstanding shares. This would have an impact not only on EPS going forward but also on Apple's market cap.

While it would subtract $10 billion from the company's calculated market cap right now, once its shares reach back up to previous highs that $10 billion bite would grow along with share prices, essentially requiring the share price to grow higher just to hit the same market valuation.
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Comments

  • Reply 1 of 103
    If their stock continues to get downward pressure (maybe as low as $425/share?), Tim and company should drop some serious coin, not just the pledged $10 billion....

    How about $30-40 billion?
  • Reply 2 of 103
    Last weekend, this site was MingChingInsider.

    Looks like this weekend is ChowdryInsider time. :-)
  • Reply 3 of 103
    If their stock continues to get downward pressure (maybe as low as $425/share?), Tim and company should drop some serious coin, not just the pledged $10 billion....

    How about $30-40 billion?

    My recommendation would be well north of that. Go nuclear.
  • Reply 4 of 103
    quinneyquinney Posts: 2,528member
    If Apple would borrow about $50 billion to repurchase shares, that would send a message about how they felt about the future (with the delightful
    side-effect of causing great pain to short-side game players).
  • Reply 5 of 103

    Quote:

    Originally Posted by anantksundaram View Post





    My recommendation would be well north of that. Go nuclear.


     


    Of course, it would have been far more prudent to buy their own stock during the worst of the recent stock market crash instead... Aren't there any allowances for a company to act on it's own behalf in such emergencies? Apple buying AAPL at $70 makes much more sense than buying AAPL at $425.

  • Reply 6 of 103
    stelligentstelligent Posts: 2,680member
    Share buyback is a gimmick for companies with a troubled pipeline but still strong cash reserves, IMO. Long term value is grown by building a company's product line and hiring great people, not using financial firecrackers.
  • Reply 7 of 103
    jragostajragosta Posts: 10,473member
    stelligent wrote: »
    Share buyback is a gimmick for companies with a troubled pipeline but still strong cash reserves, IMO. Long term value is grown by building a company's product line and hiring great people, not using financial firecrackers.

    That's ridiculous.

    Apple has plenty of cash to do all the new product development that their company can handle. Buying back shares has absolutely no impact on the product line,.

    The purpose of a stock buy-back is when a company believes that its stock is so undervalued that the return on buying back its own stock is greater than the return on other things it could do with the money. That appears to be true for AAPL.
  • Reply 8 of 103
    jragostajragosta Posts: 10,473member
    Of course, it would have been far more prudent to buy their own stock during the worst of the recent stock market crash instead... Aren't there any allowances for a company to act on it's own behalf in such emergencies? Apple buying AAPL at $70 makes much more sense than buying AAPL at $425.

    Just what the heck are you talking about?

    The last time AAPL was $70 a share was in 2006 - and Apple didn't have > $100 B to spend at the time.
  • Reply 9 of 103
    Dan_DilgerDan_Dilger Posts: 1,583member


    Yes, stock buyback is typically what a company does when it runs out of ideas, essentially a statement that its shareholders can do better with its cash than the company can itself.


     


    Jobs was historically opposed to doling out Apple's cash reserves (either as dividends or via a share buyback), but the reason Apple agreed to do it was because it ended up having so much cash that it doesn't really have any way to spend it fast enough.


     


    Spending money is easy for people who don't have any. When you have a lot, it becomes a huge responsibility.


     


    If Apple had the cash of Microsoft, it would signal a lack of vision for it to be distributing its cash to shareholders. But Apple has so much cash that it has to put it somewhere, so giving a piddling 1/60 of its cash back to shareholders isn't a big thing. It just changes how numbers will be reported.

  • Reply 10 of 103
    Dan_DilgerDan_Dilger Posts: 1,583member


    If you mean that Apple should make up its own share price (or perhaps coin new shares?) then you need to know that share buyback means buying shares off the market (where Apple doesn't set the price). 


     


    Apple is already coining its own new shares for stock-based compensation. That effectively waters down the value of the rest of the outstanding shares already in the market. Buying shares back at market prices is an attempt to counteract that effect. Doing so when the market is down is just a good time to buy.

  • Reply 11 of 103
    The issue about the number of shares is a poor excuse by Chowdhry. Apple could have issued EARNINGS guidance without EPS guidance. In other words, they could have guided how much money they expected to earn without dividing that number by the outstanding shares.
  • Reply 12 of 103
    On the call they also indicated that with the new range of guidance it didn't make sense to provide eps estimatie as so many other items could be in flux lime revenue, gross margins, etc. so they gave guidance on those and eps is a calculation of other factors anyway.
  • Reply 13 of 103
    The number of shares issue is a poor explanation by Chowdhry. Apple could have provided EARNINGS guidance without providing EPS guidance. In other words, Apple could have guided how much money it will earn total, without dividing the total by the number of shares.
  • Reply 14 of 103
    sflocalsflocal Posts: 6,092member

    Quote:

    Originally Posted by stelligent View Post



    Share buyback is a gimmick for companies with a troubled pipeline but still strong cash reserves, IMO. Long term value is grown by building a company's product line and hiring great people, not using financial firecrackers.




    The above is a classic example of an armchair-analyst that pretends to know what they are talking about.

  • Reply 15 of 103
    smalmsmalm Posts: 677member


    Number of shares was already up to round about 941 Mio. - is now down to 939 Mio.

  • Reply 16 of 103
    quinney wrote: »
    If Apple would borrow about $50 billion to repurchase shares, that would send a message about how they felt about the future (with the delightful
    side-effect of causing great pain to short-side game players).

    Borrow!?

    Initiating a dividend already has put it in the value stock column. Taking on that kind of debt will simply shout that out from the rooftops, and confirm that "Apple's growth is behind it" in the market's mind.
  • Reply 17 of 103
    jragosta wrote: »
    That's ridiculous.

    Apple has plenty of cash to do all the new product development that their company can handle. Buying back shares has absolutely no impact on the product line,.

    The purpose of a stock buy-back is when a company believes that its stock is so undervalued that the return on buying back its own stock is greater than the return on other things it could do with the money. That appears to be true for AAPL.

    Exactly. And keep it as treasury stock to hand out against future employee option exercise at higher prices (assuming, of course, the price goes up over time), helping to mitigate dilution.
  • Reply 18 of 103
    stelligentstelligent Posts: 2,680member

    Quote:

    Originally Posted by jragosta View Post





    That's ridiculous.



    Apple has plenty of cash to do all the new product development that their company can handle. Buying back shares has absolutely no impact on the product line,.

     


    I didn't say it did. Read much?


     


    Quote:

    Originally Posted by jragosta View Post



    The purpose of a stock buy-back is when a company believes that its stock is so undervalued that the return on buying back its own stock is greater than the return on other things it could do with the money. That appears to be true for AAPL.


     


    1. That works in the short term.


    2. Share buyback was announced before this precipitous drop in $AAPL.


     


    You are thinking with your wallet, and want to support anything that might rescue your shares. The only rational argument is that, with fewer shares at large, EPS will be artificially inflated. But, we are talking about < 2.5%. Can you cite numerous examples where share price recovers significantly for good because of financial manipulation by the company (and yes, this is financial manipulation)?

  • Reply 19 of 103
    stelligentstelligent Posts: 2,680member

    Quote:

    Originally Posted by anantksundaram View Post





    Exactly. And keep it as treasury stock to hand out against future employee option exercise at higher prices (assuming, of course, the price goes up over time), helping to mitigate dilution.




    Now that is a reasonable argument.

  • Reply 20 of 103
    stelligentstelligent Posts: 2,680member

    Quote:

    Originally Posted by sflocal View Post




    The above is a classic example of an armchair-analyst that pretends to know what they are talking about.





    Ah yes, as opposed to a real expert like you.


     


    I am here to learn: please cite 5 proven examples where share price of a example climbed significantly and stayed at that level for good entirely because of share buyback. I am all ears/eyes.

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