It’s risky business. In an interview with the Wall Street Journal, President Trump suggests he may introduce a 10% tariff for Apple (AAPL) iPhones and laptops if China and the U.S. do not reach a trade agreement. RBC Capital Markets top analyst Amit Daryanani says he sees three scenarios playing out from this point: 1.) It could not even happen and be a posture, 2.) AAPL could absorb the cost and put a 10% tariff on the entire bill of material resulting in an EPS impact of about $1.00 or 3.) a 10% tariff to bill of materials built in China, meaning other components built outside of China (but assembled in China) are exempt from the tax, resulting in an about $0.45-55 annual EPS impact.
Daryanani says that though this declaration adds another layer of uncertainty to the Apple story, it doesn’t alter the stock’s foundation just yet. The analyst maintains his Outperform rating for the stock in what he calls an increasingly “risk-off” environment. He notes AAPL has a strong balance sheet, aggressive buyback and ability to drive GM’s higher, which remains a core large-cap tech holding. The analyst reiterates a price target of $235, which shows an upside of 35% from where the stock is currently trading. (To watch Daryanani’s track record, click here)
Daryanani’s estimates show a 10% tariff applied on all Apple products (ex-Services) sold in the U.S., completely absorbed by AAPL would shrink gross margins by ~200bps and EPS could decline by $1.00 (assuming tariff is only for BOM originating in China, EPS impact is ~0.45-55c, GM impact is ~90bps).” A more severe scenario of 25% tariff completely absorbed by AAPL would impact gross margins by ~500bps and EPS by ~$2.50. If/when AAPL would pass these tariffs to customers, the potential impact on demand for its products remains uncertain, particularly in the current muted demand environment for smartphones and high prices for iPhones. Also, AAPL has the ability to have their supply-chain share the cost over time,” Daryanani said.
The analyst hits on Apple Services and other categories: “We continue to see investments from AAPL in this business, with recent announcement of multi-year partnership with Oscar-winning indie studio A24, which should bolster its content offering,” the analyst added.
His estimates for the December quarter stand at $91.7 billion in revenue and $4.66 in EPS. For fiscal year 2019 the analyst models revenue of $277.9 billion versus street consensus of $279.5 billion with EPS of $13.20 versus street consensus of $13.42.
Daryanani is among 21 bulls on Wall Street when it comes to Apple stock. TipRanks took a survey and found 13 are sidelined and one is bearish. The consensus price target is just a bit lower than Daryanani’s, $233.54 showing a 32.54% upside from the current share price. (See AAPL’s price targets and analyst ratings on TipRanks)