In a recent appearance on CNBC's Squawk Box, Berkshire Hathaway's (NYSE: BRK-A) CEO Warren Buffett gave some timeless advice to Apple's (NASDAQ: AAPL)management. Buffett's recommendation for Tim Cook; buyback shares, focus on the business, and ignore Wall Street.
Initiate a share buyback program
"When Steve [Jobs] called me, I said, Is your stock cheap? He said, yes. I said, Do you have more cash than you need? He said, a little. I said, then buy back your stock." Warren Buffett
Buffett recommended Apple return excess cash to shareholders in the form of a dividend or share buyback.
But which one?
There's a perception that Apple is cheap. Backing out the $137 billion in cash on the company's balance sheet, Apple's business is valued at 6.5 times trailing earnings. To put that number in perspecitve, Apple's P/E ratio bottomed at 5.8 in December, 2000 when the company was on the verge of bankruptcy. Given that Apple today is generating a remarkable amount of cash and is growing profits at a double-digit clip, this discount is baffling.
With the stock trading at such a low valuation a buyback program would be ideal as management would be buying shares at a discount to intrinsic value.
As Buffett put it, "...if you can buy dollar bills for 80 cents, it's a very good thing to do."
Focus on the business
"I would run the business in such a manner as to create the most value over the next five to 10 years." Warren Buffett
Apple's management should focus on spotting opportunities to create wealth for shareholders. Here're a few ways they could do that:
Invest in New Tech: Apple could acquire small players that are working on major problems like battery life, sunlight readable screens, or wide-band antennas. By snapping up small firms working to solve these issues, Apple would gain a technological lead over competitors.
Reinvent Television: What's needed to make iTV a success is programming. Apple is rumored to be considering buying Netflix (NASDAQ: NFLX) which would allow Apple to quickly acquire exclusive content and a valuable distribution platform. Netflix would likely cost $12-$14 billion to acquire, a fraction of Apple's $50 billion annual free cash flow.
Build the Cloud: iCloud is rumored to be critical to the company's long term strategy. Apple could make several moves to improve its standing in this department by purchasing of big data centers and applications.
Improve the Supply Chain: By making big advance deals to component suppliers that its competitors use, Apple would corner the hardware market. The company could also develop patented manufacturing techniques that rivals couldn't copy.
Of course, I'm just playing armchair executive here.
Ignore the share price
"You can't run a business to push the stock price up on a daily basis." Warren Buffett
Wall Street is and always looking for a quick bump in the share price regardless of whether it jeopardizes the long-term prospects of the company.
In recent weeks we've seen several such proposals. David Einhorn has called on the company to issue $250 billion in 'iPrefs,' perpetual bond-like securities that would pay a fixed 4% dividend. Barclays has proposed the company issue $50-$100 billion in debt to fund a massive share buyback.
But Apple didn't become a great company by tinkering with excel formulas in spreadsheets. The company focused on creating amazing products that customers loved. Apple would be best to just ignore the investment bankers and their financial shenanigans.
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