JP Morgan: Apple may be on brink of major debt issuance

“J.P. Morgan hardware analyst Mark Moskowitz today reflects upon what could restore the ‘What’s Next?’ appeal of Apple (AAPL), after a 24% year-to-date drop in the shares (actually almost 27% with today’s decline), and concludes that large debt issuance could be a part of it as some point,” Tiernan Ray reports for Barron’s.

“‘Investor concerns related to revenue deceleration, increasing competition, gross margin deterioration, and there being no ‘what’s next?’ have impaired the stock’s risk-reward profile,’ given that ‘what’s next’ was robbed from the start of this year by a flurry of new product in the fall of last year, as he sees it,” Ray reports. “Moskowitz also joins a chorus of those suggesting Apple could do a large debt issuance in order to boost dividends or buybacks: ‘In our view, we think that Apple could be on the brink of driving a major leveraging up. With the company’s cash pile growing and historically low borrowing rates, we think that investors should start to consider what the expanded cash uses could be if Apple takes on $15 billion, if not $20-25 billion, in unsecured debt in the near to mid term.'”

Read more in the full article here.

[Thanks to MacDailyNews Reader “Fred Mertz” for the heads up.]

60 Comments

    1. What! Making Wall Street rich? Having a cash hoard of 130 billion dollars and still wanting to take on a huge debt to serve Wall Street’s greed is the most stupidest thing that Apple could commit. If Tim Cook wants the easy way out and thinks that Wall Street is its savior, then he is not the right CEO to lead Apple.

    2. While taking financial advise from Wall Street is like learning how to stop drinking from a drunk — best done by observing, not following.

      There are some interesting nuances here that may make debt the right choice. 1) most of Apple’s cash hoard is overseas. Repatriating it to pay dividends or otherwise use it in the US would invoke taxes. 2) Apple’s income on the cash hoard is very thin because of the conservative investments they choose. 3) The corporate interest rate is pretty low. 4) Interest on debt is tax deductible.

      As to what Apple might do with borrowed money? Well at current prices, Apple’s dividend yield is over 2.5%. Probably a wash with the after tax cost of debt. It would be an astute move to borrow and buy back stock.

      This would be hugely accretive to earnings growth per share.

      1. You are assuming their main focus with their cash should be their short term share price. The problem with your line of thinking is two fold.

        First you are making the commonly held myth that the cash itself belongs to the share holders which is false. The cash belongs to Apple the company which is a legally protected entity. Companies are constitutionally protected in a manner similar to individuals.

        The second major flaw is in terms of thinking of Apple as some run of the mill blue chip stock almost like a utility with some boring products. Also further you assume the only way Apple makes money on its cash is through interest. You are missing two key facts. The presence of that cash gives Apple breathing room to take much larger risks with new product development and to further acquire the tools to build their ecosystem. Those tools are likely to include expertise on maps, cloud systems, networking, and mass manufacturing and distributing.

        The point is that Apple has uses for that money you can’t possibly see, and even if they did not, it’s Apple’s money so it really does not matter what you or I think.

        1. Agreed that Apple Management is in the best position to determine Apple’s best interest in deploying the cash. This is not about supporting the stock, but rather the highest and best use of “excess” cash. While it is up to management to decide what constitutes excess, it is difficult to conceive of investment opportunities available to them for that much cash.

          Consider which and how many companies they are in a position to buy outright. How many of them had gross margins of 38.6% last quarter, when Apple was slammed by Wall Street?

          No when the interest they are earning on the cash is less than the dividend they are paying on the stock, and Apple’s income and margin per share are as high as they are, it is difficult to see why they are not purchasing shares more aggressively, while still maintaining over $100,000,000,000 in cash. Heck, Apple could very easily take the company private in short order making Wall Street’s games moot.

      2. You seem to make it more complicated than it may be.

        To me, it seems pretty simple: The banks are pissed off. Or so it would seem.

        Banks don’t make money unless they lend it. A company without debt is not their friend.

        Apple is probably saying to themselves.. “Hey, if we borrow a billion, and pay 0.4% interest on it, who can we make rich and get them to back the hell off?!”

    3. Uhm, while I agree Apple is unlikely to take on debt, your comment makes no sense. Taking on debt is actually ridiculously cheap right now for a company with a high quality rating like Apple. Issuing debt to pay a higher dividend may be a smarter strategy than bringing back foreign cash, which would require paying US corp taxes, if that foreign cash may eventually be brought back for a far lower rate.

      1. remember – JP Morgan was bailed out by the US government – saving the company – whom committed in robbing the public with the dividend scandal & housing loans.

        so who gonna listen to ya JP? who? rollover and play dead,
        JP Morgue-again.

        1. Actually, you have it backward: JP Morgan bailed out the US Treasury. JP Morgan didn’t need the TARP money, not even to take over Bear Stearns for the Treasury. There were banks holding out because of the stigma of TARP and Hank Paulson begged JP Morgan and a few others to take the money so that no major bank could say they didn’t. It’s easy to find Jamie Dimon’s congressional testimony stating this very fact.

            1. So, did you not read that NY Times article? Or did you just not understand it?

              Also, did you not read Sarasota’s comment? Or did you just not understand it?

    1. JP says that for one reason and one reason only. They want to be the one who loans them the money because its the most secure investment return ever.

      They say that only because of their own greed period.

      1. JPM isn’t going to lend Apple any money. When a company issues debt, the bonds are held by investors. They are lending the money to debt issuers, not the bank. Banks make money on debt issuance because they charge an underwriting fee, not because they hold the loan.

  1. Let the cat out of the bag with that one, they did. “WHAT NEXt” APPEAL? Never mind revenues, never mind fundamentals, never mind market expansion, never mind profit share, never mind consumer surveys, never mind common blinking sense. Wall Street types are an unnatural animal to be sure, skilled at valuing “normal” companies so called, yet treating Apple like some kind of dancing Yeti or Loch Ness Monster. We are feeling fed up in Flanders.

  2. This is how the big banks and Wall Street think. Evaluate Apple just like other companies. Stock is going down so the company must be in trouble (which, of course, it is probably not). Loan large amount of money to “failing” company so all its execs can take the money and run, right before the ship sinks. Who knows how much of these monies make it back to the bankers who approved them, either under the table or in the form of bonuses, etc. This just shows how crooked and stupid J.P. Morgan really is.

    1. This is totally NOT what they are doing. Issuing debt has NOTHING to do with a company failing. It has everything to do with cash being cheap. Right now, holding cash is not earning Apple any money, about 1%. Borrowing cash for a high-quality company like Apple is historically cheap. The idea is that this is a way for Apple to raise its dividend, without having to bring back their foreign cash, which would require paying US corporate taxes. Why not pay those taxes? Because there’s the possibility that the US might declare a tax holiday, and then the company would look stupid for having paid taxes now, when they could have avoided it if they had waited.

  3. I would like to see Apple use the cash to lend money to their clients, via an Apple Credit card.
    Inject a little bit if ethic in this business, boost their revenue with more clients buying their products with the card like students and Apple would make a reasonable interest rate, at least more than their highly secured cash investments.

    Banks would be mad and I would be ready to bet that the default rate would be less than other cards. If I had to default, I would default on my Amex first…

    Phil

  4. concerns related to revenue deceleration
    BOLLOX
    , increasing competition,
    BOLLOX
    gross margin deterioration,
    BOLLOX
    and there being no ‘what’s next?’
    BOLLOX!

    It’s all manufactured bollox and the real reason is simply:
    STOCKMARKET MANIPULATION

    1. Bollox?

      Anglo-Saxon word, meaning “testicles”.

      Hiberno-English, as a noun to mean “nonsense”,

      Conversely, the word also figures in idiomatic phrases such as “the dog’s bollocks”, “top bollock(s)”, or more simply “the bollocks” (as opposed to just “bollocks”), which will refer to something which is admired, approved of or well-respected.

      Enzos, are you referring to Bollox in terms of well-respected?

      doh !

  5. Must remember that, more than other companies, Apple is a company that survives on selling cachet e.g. being cool, being seen carrying a computing device that is an art object.

    For those of you who rebutted the above article exclusively with dollar-drive arguments, I remind you to also submit your arguments regarding Apple’s intangible ability to make people happy to pay more for similar function.

    I’m not sure how old the general readership of this website is, but I remind you that back in the late 1990’s, SONY had a slogan “because it’s a SONY”. Those were the days were the media reported that people like me we willing to pay a premium to get a SONY product. I did it many times. I paid more.

    Does SONY have that cachet today in 2013? No.

    A note to MDN editor: every time you state your mantra: “No company is invincible. Not even Microsoft.” — I think the evidence points to the MDN readership not realising that that applies to Apple as well.

    Remember, the tipping point for Apple’s fall is not when its profits slide, or when it hasn’t brought out a knockout new genre for a while No, the tipping point is when the magical vapor evaporates and it is no longer seen as the company where people are willing to pay more, simply because it’s an Apple. Sony had it in the late 1990’s. Apple has it in the late 2000’s. Don’t take it for granted that it lasts forever.

    I suspect MDN readers will not buy into this advice, simply because it is human nature to think that we are invincible. Teenagers and 20’s think they’re invincible by eating junk food and stuffing their health, thinking there are no consequences.

    In my view, Apple is close to a tipping point. In my circle of techie friends, I can name a few people who have “gone back from Apple”. Do you people think this is not significant? Do you not realise that for decades, it was a mantra that, once you go to Apple, you never leave. But I am seeing many people do exactly that. People leaving Apple going back to PC.

    People, the magic is in trouble. I’m not saying it is evaporating, but it is sufficiently in trouble for people like MDN’s editor to public affirm that, just like Microsoft, no company is invincible, including Apple. I need MDN’s editor to say that, because if he/she cannot utter those words, then this site is not a news site, but a shrine to Apple-worship that shamelessly writes one-eyed pieces. That sort of news site is no help to Apple because, if ever Apple needs a wakeup call, it is the Apple faithful who must issue the wakeup call.

    I close with this forceful reminder: back in the late 90’s, people were so willing to buy SONY that there was a slogan, “because it’s a SONY”.

    You flock who constantly beam in admiration of Apple, whilst not having the majority marketshare, still have the lions share of profit — don’t you realise that that is a manifestation of the “because it’s a SONY aura” — the ability to make people pay more for similarly-costing hardware. And that, my friends, is the thing that is starting to crack.

    1. People are not throwing away Apple products and buying new PCs that run on Windows 8.

      It is the other way around. People are ignoring the Windows 8 PCs and buying Apple products instead. PC sales just dropped about 15% last quarter, year over year and you want us to believe that Apple users are buying Windows PCs.

      Do you work for Samsung or what?

    2. There’s a fundamental difference between the Sony of yesteryear and the Apple of today… platform. Sony made very nice, high quality consumer products that were single-sell items. Yes, there was some interchange between their devices, but all consumer electronic devices at the time did this as well.

      Apple doesn’t sell consumer electronics devices, per se. They sell a computing/media platform that reaches beyond computers to phones, portable media players, set-top box, and tablets. The CE industry has never seen anything like this on this scale before.

      As we’ve witnessed with Windows, computing platforms have a much stronger hold on their users, usually due to invested interest; time, money, etc. Whereas with consumer electronics, people are fickle; always going for the next “greatest” thing, because the investment is in the content/media, not the platform. This is the problem with Android smartphones, people are buying phones and only investing in contracts/phone service, not in the platform. This allows them to move more freely among carriers, brands, and “platforms” and they usually do.

      1. You hit the nail on the square on the head. Apple sells an ecosystem. Over the years they will attach more and more devices and services to this ecosystem. The ecosystem will follow you around the office, through shopping malls, in your car and back to your living room. And the more stuff you buy then the less likely you are to move to something else.

    3. Sorry MM.

      Apple isn’t Sony. Not even close.

      Apple is more like Porsche for comparison’s sake. Porsche continuously pushes technology, design, and efficiency. Their cars are very expensive but they sell very well.

      Also for comparison’s sake, an analysts would be condemning Porsche for not selling as much as Ford and would be predicting the downfall of Porsche already. It is all perception or deception.

      Think about it.

    4. Does SONY have that cachet today in 2013? No.

      …because Sony lost sight of the importance of product quality. They let it slip, and that’s why they’re where they are today. Apple doesn’t have that problem.

      -jcr

    5. A new survey from 451 Research’s ChangeWave service shows exceptionally strong consumer interest in an Apple “iWatch” device.
      “Apple’s track record of delivering ultra-convenient, easy to use products with a perceived ‘cool factor’ is driving pre-release demand for the rumored Apple ‘iWatch,’” said Andy Golub of 451 Research’s ChangeWave service, in a statement.

      This is a 100% contradiction of your blubbering. What on earth are you talking about?

    6. Wow, interesting nonsense. Apple’s success has nothing to do with “magic” and it’s nothing like Sony.

      It’s the people who don’t understand Apple who think Apple does it with “magic”.

    7. MM: This is the single most LONG WINDED piece of FUD I’ve encountered this year.

      Reminder: There are no more discerning computer and electronics fanatics than Apple fanatics. When Apple bungle, we let them know it.

      Many of us here, such as me, let SONY have it when they fell on their arse. I remain entirely critical of their current CEO. The LAST thing SONY needs right now is some marketing dweeb pretending to lead the company. Not gonna happen. Expect rough waters for Sony to continue unabated.

      Meanwhile Apple continues to rule the waves with no sign of demented leadership, despite all the FUD from haters like you. 😛

  6. This sounds like something Microsoft would do…

    Actually, I think Microsoft did do something like this, with “historically low borrowing rates” (a few years ago), for many of the same the reasons outlined by JP Moron.

  7. WTF. These guys are seriously delusional.

    I really think they decided, Hey we got away with the credit crunch disaster and the govt picked up the tab. How else can we screw with people and get their money? Hey look Apple’s a sure deal, lets mess with the stock even though there is nothing wrong with it.

  8. Banker says Apple should take out a massive debt! What a complete crock.

    Apple has no shortage of cash for anything they could possibly want to do.

    -jcr

  9. Jesus H. Christ, these a-holes in New York are so bound and determined to make Apple another typical American company that fucks themselves up like Microsoft and GM and Sony (oh, wait, they aren’t American) so they can pounce on them, eat their cash and give he royal finger to the rest of the world from their yacht in Bimini or something. Not that I ave a strong view! I wish ths BS would just not be published anymore. And PLEASE don’disappoint on Tuesday, Apple.

    1. Again: My theory, quite seriously, is mass cocaine addition.

      The maniacal crap coming out of the mouths of Wall Street analcysts sounds exactly like coke addicts on a high. Not kidding. Soon to follow: Burn out.

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