Apple Share Buyback Could Become More Aggressive

Apple Inc. (NASDAQ:AAPL) could start returning more cash to investors, according to analysts at Morgan Stanley (NYSE:MS). The company has been grappling with hedge fund manager, David Einhorn, on the subject, as it considers what to do with the giant stack of cash it’s hoarding at the moment. Einhorn wants Apple to issue preferred stock and has even filed a lawsuit over it.

Meanwhile, Apple CEO, Tim Cook, called the lawsuit “a silly sideshow.” Nonetheless, analysts at Morgan Stanley are fantasizing about what would happen if Apple Inc. (NASDAQ:AAPL) decides to return more cash to investors.

They point out that hardware stocks, which returned more cash to investors, outperformed other hardware stocks. In order to meet the standard of other stocks in the industry, Apple would have to return about $28 billion to investors. They said higher cash return should push the shares of Apple Inc. (NASDAQ:AAPL) higher.

The analysts said on average, S&P 500 IT companies return about 68 percent of their annual free cash flow to investors. That would mean Apple would need to increase its cash return by $13 billion over Morgan Stanley’s estimate of $15 billion. They call that “a viable option” because they estimate Apple Inc. (NASDAQ:AAPL) could return the cash and still end up with $36 billion in free cash at the end of the year.

Morgan Stanley analysts said they believe “more aggressive share buyback” is “likely” because the company’s current buyback rate is much lower than that of its peers. They also said that if Apple Inc. (NASDAQ:AAPL) does choose to improve its cash return, investors would be drawn to the stock.

The analysts say some other near-term catalysts for the company would be new iPhone models, including a lower priced one for emerging markets. They also look for a mid-year iPad refresh and increased carrier partnerships.

Analysts at Morgan Stanley (NYSE:MS) say long-term catalysts would be expanding the company’s store, online and carrier distribution in emerging markets, the launch of a smart TV, and a larger tablet market.

They say current risks to the stock include competition from Android and Windows products and also the way some carriers are lengthening product replacement cycles and lowering their subsidies. They mentioned regulatory and legal risks as Apple increases its profit share.

Morgan Stanley has set its bull case at $980 per share with $70 in earnings per share. This case would be the result of the company continuing to dominate the market and accelerate growth in China.

The analysts’ base case is set at $630 per share and $45 in earnings per share. This case would be the result of Apple continuing to be strong in the mobile device market but not fully developing its partnership with China Mobile or entering into the TV market until late this year or sometime next year.

They have set their bear case at $40 per share and $40 in earnings per share, if Apple begins to lose market share to Windows phones in mature markets and lower-priced devices in emerging markets.

Morgan Stanley (NYSE:MS) analysts have rated shares of Apple Inc. (NASDAQ:AAPL) as Overweight and set their price target at $630 per share. The stock is trading mostly flat on Wednesday.

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