What Steve Jobs' Medical Leave Means For Apple Investors (AAPL) ~ market folly

Tuesday, January 18, 2011

What Steve Jobs' Medical Leave Means For Apple Investors (AAPL)

Apple (AAPL) CEO Steve Jobs emailed Apple employees to let them know he would be taking a medical leave of absence. Given that this is one of the largest companies in the world, we figured we'd examine what this means for the company and its investors. After all, according to Goldman Sachs, Apple is the stock that matters most to hedge funds.

Steve's email is posted below:


At my request, the board of directors has granted me a medical leave of absence so I can focus on my health. I will continue as CEO and be involved in major strategic decisions for the company.

I have asked Tim Cook to be responsible for all of Apple's day to day operations. I have great confidence that Tim and the rest of the executive management team will do a terrific job executing the exciting plans we have in place for 2011.

I love Apple so much and hope to be back as soon as I can. In the meantime, my family and I would deeply appreciate respect for our privacy. Steve"

Apple's Stock During Past Jobs Absences: A Buying Opportunity?

With this news, the number one question on investors' minds is: buy or sell? The natural expectation is for shares of AAPL to sell-off on this news. After all, that's exactly what happened the last two times Jobs took a medical leave of absence, in 2004 for pancreatic cancer surgery and in 2009 for a liver transplant. And already today, shares of Apple trading in Germany are down 7%.

Jobs' 2004 Absence: AAPL was down around 2% the day of the announcement of his surgery. Shares ended the week down almost 8%. One month later, shares had recovered the losses. One year later? Shares doubled.

Jobs' 2009 Absence: AAPL initially traded down 6% the day news broke that Jobs was leaving but ended the day down 2%. What happened to Apple's stock during the six months Jobs was gone? Up over 66%.

Taking a quick look at the StockTwits stream for AAPL shows that investors are readily expecting a dip in shares on the news again this time around. Yet what you should also take note of is the resounding 'buy the dip' mentality. This is probably most attributable to the fact that so many people witnessed shares eventually rise the last time Apple's CEO had to take some time away.

If you drill down specifics, Jobs' departure does not really have an immediate impact. Tim Cook, the company's COO, will take over operations just as he did last time Jobs stepped away. Cook, known for his operational prowess, will continue to execute the company's roadmap. Consider this: Apple's product pipeline for the entire year is largely already in place. Per Engadget:

- The Verizon (VZ) iPhone was just announced & will be released soon

- iPad 2 is currently in development and is rumored to be released in the early Spring

- The next generation iPhone 5 is also rumored to be in development with a potential summer release

- After that, it makes sense that they develop an iPhone capable of running LTE/4G data speeds

And on top of that, you have the usual refreshes and revamps to iPods, Apple TV, as well as the iMac and Macbook computer lines. The point here is simple: Jobs' absence changes little in terms of product roadmap and 2011 plans.

Yes, obviously the CEO is hugely valuable to the company, but Cook has already proven once that he can handle things while Jobs is gone. Investors have become more familiar with Cook as well as other key figures at the company, including Jonathan Ive of the design team. While Jobs is Apple's figurehead, he is not the only person there.

The largest potential negative of Jobs' temporary departure revolves around his attention to detail and his ability to envision the 'next big thing.' In that sense, he will certainly be missed. The more pressing concern here would be if Jobs extends his temporary absence into a permanent one.

Jobs' Second Medical Leave In Two Years

For investors, there is arguably no one more important to a stock than Steve Jobs. The man IS Apple. He is a visionary and responsible for the company's impressive turnaround over the years. At the same time, he is obviously human.

Back in 2008, the CEO started to noticeably lose weight and rumors started surging that his health was in decline. Apple investors will recall that Jobs previously battled pancreatic cancer. In January 2009, Jobs took a leave of absence and posted a letter about it. He returned about six months later after a liver transplant and the company flourished.

In his two letters (in 2009 and now in 2011) there is one common thread: he is still technically in charge. In 2009 he wrote, "I will continue as Apple's CEO during my recovery." And now in 2011 he writes, "I will continue as CEO and be involved in major strategic decisions for the company." And as we've outlined above, the company's pipeline is largely in place for the rest of the year.

However, a second leave of absence in a few years has to spook investors somewhat. We're not here to speculate as to what might be wrong with Steve. But investors in one of the largest companies in the world will chime in that they deserve the right to know what's going on with the CEO of a public company.

The crux of the situation is that Jobs' departure in the immediate term doesn't hurt Apple. The company rebounded just fine during his last departure. Jobs' absence is most concerning from an investment standpoint if he were to make it permanent. And with each additional medical leave, speculation mounts.

Everybody Loves AAPL Shares

Jobs' health will once again become THE talking point for the stock. Before this news came out, zero sell-side analysts had a 'sell' rating on the company. Zero.

Of all the stocks and hedge funds we cover on MarketFolly.com, Apple is by far and away the most widely owned by hedgies. David Einhorn of Greenlight Capital established his AAPL position way back at $248 per share and he was arguably a late-comer to the AAPL party. So many prominent managers own AAPL as a top holding that we had to create a separate post for the top hedge funds that own Apple.

And already, Goldman Sachs is out defending shares of the company as they anticipate a wave of sellers this morning and in the near-term. They re-iterated keeping AAPL on their Conviction Buy List and buying on any weakness with a 12-month price target of $430. Goldman's Bill Shope outlines their rationale:

"1) The management team remains strong, and we believe investors would embrace Tim Cook in any potential succession plan;

2) Apple's $51 billion in cash and investments could be partially distributed to shareholders to stabilize the shares;

3) The multiple of 15.1X already represents a significant historical discount, and we see no direct risk to earnings from this move."

It should also be noted that Goldman identifies "uncertain management succession plans" as a potential key risk for the future. But in the near-term, it's very clear that they still like shares on any expected weakness. You can read the full Goldman Sachs note on Apple here and can visit our previous post on Goldman identifying AAPL as the most important stock to hedge funds.

What It Means For Investors

Shares of AAPL will undoubtedly have a cloud of uncertainty hanging over them for some time. The same thing happened when Jobs took medical leave in 2009. Investors will also carefully consider that the company is set to report earnings this week as well. Apple often 'sandbags' guidance and then blows out the numbers in its report.

Will the company's earnings be able to overshadow Jobs' departure? It's doubtful, especially when you consider that analysts on the conference call will largely focus on Jobs. And if Apple's past stance on commenting on Jobs' health is any indication, they'll be beyond tight-lipped.

The main takeaway here is that Apple has already survived a Jobs medical leave before and with the company's current product roadmap in place, it can do so again. At the same time, investors rightfully have to be concerned about Jobs' long-term future at the company. His health is the most important thing here and as he stated in his 2009 letter, "I will be the first one to step up and tell our Board of Directors if I can no longer continue to fulfill my duties as Apple's CEO."

In the near term, the company will be fine. It's the long-term that investors have to be concerned about. It will be most intriguing to see what various hedge funds do with their AAPL positions pending this development. A mass exodus by hedge funds could send shares spiraling. After all, it is one of the most widely owned stocks in the market and we've identified the hedge funds that own lots of AAPL in a separate post.

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