Apple Inc. suffers from a Steve Jobs discount, and it’s not fair.
Ever since Jobs, the chief executive officer, disclosed that he had a rare form of pancreatic cancer in August 2004, Apple’s stock has been underpriced. That assertion may seem absurd, given that the shares have risen more than 2,000 percent since then and the company’s market value of $325 billion is second only to that of Exxon Mobil Corp. Apple’s share price is now hovering at about $355.
It should be much higher. Since 2004, Apple earnings have gained 134 percent a year on average. In 2009, net income rose 35 percent, during the biggest economic collapse since the Great Depression. And they increased 70 percent last year. Yet Apple’s price-earnings ratio based on expected earnings in fiscal 2012 is only 11, compared with the Standard & Poor’s 500 Index’s average of 15. Trading at the S&P 500 multiple, Apple’s stock should be more like $480.
Although Chief Operating Officer Tim Cook is regarded as a very capable successor, many see Jobs like some sort of shaman, impossible to replace. Most pundits point out that Apple’s product plans are probably set for the next four years at least. But that reassurance is a back-handed compliment, suggesting that all bets are off on product innovation after that.
Recently, the Central Laborers’ Pension Fund of Jacksonville, Illinois, put a proposal on Apple’s proxy asking the company to more specifically spell out its succession plan, the Financial Times reported. The influential shareholder advisory service, Institutional Shareholder Services, backed the proposal. And on the day of the shareholder vote two weeks ago, judging by the media coverage that morning, you would have thought the vote’s approval was a done deal. (It wasn’t. It was voted down by a 2-to-1 margin.)
The intense speculation about the nature of Jobs’s health and the calls for Apple’s board to release his medical records to the public are macabre and unprecedented in the corporate world. It speaks to the high regard with which he is held. But this anxiety has also weighed on the stock.
Why is it assumed that Apple doesn’t have a succession plan, though? Just because it hasn’t disclosed it doesn’t mean one doesn’t exist. Almost every corporate board these days sees it as one of their primary jobs to know what they would do if the CEO was hit by a bus. Given the performance of the company in the last 10 years and the outside directors on Apple’s board ― including Bill Campbell of Intuit Inc., Mickey Drexler of J. Crew Group Inc., Andrea Jung of Avon Products Inc., Art Levinson of Genentech Inc., Ron Sugar of Northrop Grumman Corp., and former U.S. Vice President Al Gore ― it would seem they have earned the benefit of the doubt on this.
What I find remarkable is that while the business media often refer to Jobs as a control-freak obsessing over minor details of products and marketing campaigns, they assume he isn’t equally focused on who will succeed him. Given his attention to detail ― and his personal experience of watching how former Apple CEO Gil Amelio almost killed the company Jobs started ― I would assume Jobs has the CEO spot, as well as all other key management positions at Apple, mapped out for the next decade just in case something ever happened to him.
There is real management talent at Apple that gets overlooked due to our fascination with Jobs: Cook, Jonathan Ive, Philip Schiller, Scott Forstall, Ron Johnson and Peter Oppenheimer. These are all very capable managers who have been with Apple for at least a decade. All have various strengths. None is a replacement for Jobs, but that’s an impossible task.
Apple has always held its product plans, communications and thoughts on management succession close to the vest. This shouldn’t be a surprise. Critics have previously complained that Apple’s retail-store strategy would fail. We now see how the iPad is able to compete so effectively on price with its competitors partly because of its network of retail stores.
People complained that Apple wasn’t doing anything with its cash reserves, which amounted to $60 billion at the end of last year. Now, we know the company has been using its cash to sign long-term supplier contracts for the iPad, enabling it to dominate the tablet market. Last year, Steve Jobs said that Apple TV was a “hobby” and cautioned against expecting much. Today, it is obvious the company sees that product as a core part of its future strategy.
With Jobs’s appearance last week at the iPad 2 kick-off event, investors paid more attention to him than the other Apple executives in attendance. But, if past is prologue, his final act as leader of Apple, whenever that may be, is likely to be an unexpectedly masterful succession plan, not a killer app.
By Eric Jackson
Eric Jackson, an investor in Apple shares, is the founder and managing member of Naples, Florida-based hedge fund Ironfire Capital LLC. The opinions expressed are his own. ― Ed.