Donovan’s View: lots of pennies earned

Posted by Dennis Sellers Dec 29, 2008 at 5:04pm

By Gaurang Donovan

“A penny saved is a penny earned.”— Benjamin Franklin

One can only imagine what the reaction would have been if Apple had to announce a 20 percent or larger drop in the value of their US$24 billion cash stockpile back at the end of September.

The headline would have screamed “Apple cash losses—$4.8 billion” and no doubt the share price would have taken a larger dip at that time of bank bailout mania.

Instead, the loss was measured by Apple at $117 million for the $24 billion portfolio and that level of loss can be viewed as a very good result in such awful market conditions and an achievement by Chief Financial Officer Peter Oppenheimer and the treasury team at Apple. Unfortunately, it has largely gone without notice or comment in reports.

There are not a lot of organizations at present with cash holdings the size of Apple’s, and I wish to point to recent results of other organizations for comparisons in a very important but often overlooked function: treasury operations.

But before we look at others, let’s review Apple’s generation of cash in its business. Over the last few years it has not gone unnoticed in the media and analysts reports. Every analyst who had not noticed it before it reached the $10 billion level just over two years earlier on Oct. 18. 2006, had definitely written about it by the time it got to $20 billion as it grew so quickly. By the end of the March 2008, the last day of an investment bank called Bear Stearns who had not managed its investments very well, the level of cash Apple held was just under $20 billion.

A hoard of cash the size that Apple has accumulated will attract many proposals and offers of possible investment opportunities from those knocking on Apple’s door; from their own bankers’ products (including esoteric derivatives on offer) to venture capitalists’ investment opportunities to complete strangers’ ideas of the next best thing. Yet Oppenheimer and his treasury team had to evaluate market conditions, the variety of proposals and and still make decisions on how to invest the cash within a corporate investment strategy and set of objectives.

After a previous time with a diminished and dangerously low cash position under previous boards and CEOs, Apple’s investment strategy has been a conservative one for the last few years once it started accumulating cash again as a result of its renewed business operations and successful products.

Apple’s management latest comments on the cash accumulation and its management were spoken in the recent earnings conference call.

Apple’s Chief Financial Officer Peter Oppenheimer reported in his opening remarks on Oct. 21, 2008, during the Apple Fourth Quarter 2008 Earnings call.

“We are very pleased to have generated $3.7 billion in cash during the quarter, ending with $24.5 billion. Cash flow from operations was $4.3 billion. Our investment priority has been preservation of capital, which has served us well in these difficult credit markets. At the end of the September quarter, our unrealized mark-to-market loss was $117 million on the total portfolio of $24.5 billion, which was only an $80 million sequential increase from the end of the June quarter. We plan to hold these investments and do not expect to realize any material losses on them.”

In his most recent public Apple-related appearance at that same conference call, CEO Steven P. Jobs spoke of five points of the broader market conditions Apple was facing. His quote on the fifth point is below:

“And five, we have almost $25 billion safely in the bank and zero debt. This provides us tremendous stability and the ability to invest our way through this downturn. This is what we did during the last downturn—we increased R&D investments and created some of our best new products and businesses, like the Apple retail stores, for one. This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does.”

During the conference call, Peter Oppenheimer was asked a single question on Apple’s credit issues and provide the following response.

“You know, this is definitely a concerning environment from a credit perspective. Our treasury team has done just an amazing job with our cash. I was so proud to tell you in my opening comments that our mark-to-market, unrealized mark-to-market on the portfolio only increased $80 million sequentially on over $24 billion of cash, so they’ve done a great job. On the receivables side, we’ve historically been very good in that area. We’ve got good people. We stay on top of collections and we monitor accounts, I think as any company does. But it’s a tough environment out there and we are being as careful as we can and hopefully we won’t have issues in the future.”

Thus up to the end of September, the mark-to-market value (net unrealized losses as nothing was sold off yet and is still held) of over $24 billion in the portfolio was a mere $117 million over the course of the year.

So what about other organization’s performances?

Harvard University said on Dec. 2 that it had losses of at least 22 percent, or $8 billion, since June 30, when its endowment was valued at $36.9 billion.

One reporter suggested Harvard University’s loss is closer to $18 billion if the losses on the fund’s illiquid investment are realistically appraised.

On Dec. 17 Yale University, the second-wealthiest US institution of higher learning at the end of June, estimated that its endowment has since fallen 25 percent, to $17 billion from a high $22.9 billion in June.

The largest public pension fund in the US is California Public Employees’ Retirement System and it reported on 8 December that it lost 31.1 percent of its value since peaking last fall, a staggering $81.4 billion drop. The CalPERS portfolio hit a high point of $260.6 billion on Oct. 31, 2007. As of market close on Dec. 4, it had fallen to $179.2 billion—almost back to its value in mid-2000.

The US’s second-largest public pension fund is the California State Teachers’ Retirement System with 794,812 members. Its portfolio fell 20.3 percent, or $32.9 billion from June 30 to Oct. 31, going from $162.2 billion to $129.3 billion.

Now while the dates for exact comparisons of portfolio performances don’t coincide with the latest Apple reporting nor do the investment strategies match exactly, from a bird’s eye view, it does seem like Oppenheimer and his treasury team have done well in at least not losing (in value of today’s prices) their invested cash up to the end of September and that does need to be appreciated as a job well done. Let’s hope that level of performance has continued through the three months since that earnings conference call report.

The direct quotes for Peter Oppenheimer and Steve Jobs at Apple’s earnings conference call are to be attributed to the transcript provided by Seeking Alpha.

(Columnist Gaurang Donovan is an Australian “mystery man” who wishes to keep his identify secret for personal and business reasons—Dennis)

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