Wednesday, August 27, 2008

Cashing In At Apple

A few years ago, before Apple shares kissed and were rejected by 200, the company's growing cash pile attracted some interesting news. Apple incorporated a Nevada entity called Braeburn Capital Inc., ostensibly to make money with Apple's recently-doubled stockpile of cash.

Now, Apple's nearly-$9Billion has grown to about $9.4Billion and stands next to a $11.4Billion portfolio of short-term investments (current assets have grown from $10.3Billion to $28Billion since the end of Apple's fiscal 2005). So, the cash management plan worked, right?

Well, maybe not.

Apple has created a ton of cash selling hardware, even as it accounts for some of the revenues over a 24-month period. Apple's cash management remains boring. There is no evidence Apple is doing anything creative -- or lucrative -- with its substantial liquid wealth. Was Apple really expected to do better? A careful read of the BusinessWeek article on Braeburn's position in the Apple business shows that the "job" of the senior and junior financial officer is to find managers to park cash in fixed-income vehicles with 1-5 year maturities. Um, why does it take two FTEs to find a fund manager with so narrow an investment objective? If Apple has decided the right way to employ its cash is to use fixed instruments with expirations between one and five years, exactly how much more work does one need to do just to hire outsiders to implement the plan?

On the one hand, the job posting could have been bogus, and reflect nothing at all of Apple's plans for Braeburn -- instead being a vehicle to attract applications by people without a lot of excitement for fanciful investing schemes. The fact that Apple's officers are Braeburn's listed directors leaves outsiders without much idea who's been hired to "run" Braeburn (if taking dictation from Cupertino can be called "running" a company), and thus little notion what Braeburn is doing, but the end-of-quarter reports don't show anything interesting happening at Apple's investment subsidiary. Just, you know, more T-bills.

It may be true that being famous for having cash can land Apple the first bite at interesting tech sales, and puts it in the front of the line when it enters acquisitions, but nothing Apple has shown interest in acquiring has involved the kind of cash Apple is stockpiling. The freedom to buy back shares during Apple's dips -- and at a company whose shares trade with the volatility of Apple, these aren't trivial -- might really add to the per-share metrics over time. The disinclination to make the kinds of investments that would provide Apple the sort of returns for which Apple's shareholders buy the stock seems to run contrary to shareholders' interest.

On the other hand, Apple's officers have weathered some lean times in earlier years, and one can understand management wanting to be able to survive a couple of hungry winters. Let's face it, though: twenty billion smackers is more than you need to survive a couple of years of dim sales, unless you insist on heating Apple's new campus by setting fire to the cash and short-term securities. Shareholders who want large cash positions presumably have them, and ultraconservatism isn't the strategy they would want their investments applying to their whole liquid worth.

Apple's ginormous cash pile is starting to make Apple look like a Depression-survivor miser, scared of banks, hoarding cash in a secret hole under the floorboards. The difference is that Apple's T-bills and federally-insured bank deposits, though providing a nonzero taxable return, are providing what is probably a zero-or-worse inflation-adjusted return. Anyone with insight into Apple's management of funds produced by ordinary operations is invited to tell me why I shouldn't be irked with Apple for not doing something more interesting with its money.

Berkshire Hathaway, which has regular need to pay out insurance claims all year long as its employees finish investigating claims made when cars collide or hurricanes slam its insureds' property, also has to manage cash. Berkshire Hathaway knows it could have horrendous claims in a given year, and can't be locked into 30-year investments with its whole portfolio. On the other hand, Berkshire knows that in order to make the best return it can, it needs to consider how to make prudent investments with the funds it won't need soon.

Apple needs to identify the money it won't need soon and either develop a plan to invest the money pending future need (ARM Holdings was a great example, but one Apple didn't repeat), or (a tax-inefficient solution) admit it's got no competence in funds management and consider giving to Apple's owners the money Apple can't productively employ. Personally, I think the opportunity to find competent managers is excellent with a portfolio of that size -- and the opportunities to find mispriced investments isn't likely to get better than in an economic downswing like the one we've got now. There are answers out there -- managers or individual investments -- with excellent track records for growing net assets per share over long periods, or producing income, or accomplishing whatever other objective Apple might properly set for funds it won't need in the next few years.

Given Apple's current assets, I hazard to guess most of its liquid worth won't need to be liquid in the next five years. On the contrary, I expect Apple's liquid asset position to become more and more as it is, as Apple sells more and more hardware, software, and services around the globe.

While that's great to see, it's frankly dismal to see Apple show such poor performance year after year managing for profit its enormous and growing liquid assets. Folks who value Apple by subtracting the cash per share from the share price and then working out whether the remaining "price" is justified are utterly ignoring that a cash dollar in Apple's possession performs worse than, and is not as valuable as, a cash dollar in the hands of an investor able to prudently apportion investments more broadly than into T-bills. Apple's cash is, ironically, a drain on its value. Apple needs to something more productive with its liquid net worth.

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