By Emily Bary
Hypothetical tariffs could mean a 10% to 20% hit to fiscal 2019 earnings in the 'worst case scenario'
Apple Inc. has mostly stayed out of the trade-war crossfire, but hypothetical tariffs on iPhones could create significant headaches for the company, according to a recent Morgan Stanley analysis.
After President Donald Trump suggested in a Wall Street Journal interview that iPhones might not be spared () in a future round of tariffs, Morgan Stanley's Katy Huberty concluded that the company could see a 10% to 20% earnings headwind for fiscal 2019 in the "worst case scenario."
There would be no easy answers for Apple (AAPL) if iPhones and laptops were targeted for tariffs, Huberty's analysis suggested. The company would have trouble sufficiently moving production out of China, and it could witness "significant demand and unit headwinds" if it were to raise prices on consumers to compensate for the tariffs. Customers would have to pay $60 to $160 more per iPhone XS if Apple passed the full tariff costs on to buyers, Huberty's analysis found.
If Apple were to absorb the costs of the tariffs, Huberty calculates that the company could see a $1 impact to earnings at a 10% tariff rate or a $2.50 hit at a 25% rate. Both absorbing the tariff costs or passing them on to consumers "are value destructive from the perspective of an Apple shareholder."
Opinion: Trump's saber-rattling ahead of China trade talks hurts Apple ()
Based on Huberty's understanding of the tariff rules, Apple would have to "do more than just one stage of final assembly outside China for the origin of the good to shift away from China," a process that would likely require billions of dollars of investment from Apple and partners over a multi-year period." Rival Samsung Electronics Co. Ltd. does more than half of its manufacturing and assembly in South Korea and Vietnam, meaning the company wouldn't feel hypothetical tariff impacts as much as Apple would.
Another potential scenario to monitor is whether Apple would ask manufacturing partners to absorb part of the tariff costs, which Huberty said some other electronics companies are doing. She has an overweight rating and $253 target price on the stock.
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Apple shares are off 0.8% in Friday morning trading, as a number of analysts weighed in on various issues related to the smartphone manufacturer. Instinet's Jeffrey Kvaal wrote of "uninspired" holiday demand for smartphones as well as "slightly lengthening replacement rates." He argued that the services business is "not a panacea" for Apple as slower unit volumes could mean that more people are buying refurbished phones, and those buyers might not be as inclined to spend up on the App Store and other offerings.
Kvaal has a neutral rating and $185 target on the shares.
Read: The iPhone XR has been Apple's best-selling phone since its launch, report says ()
Wells Fargo's Aaron Rakers, meanwhile, looked into the traffic-acquisition-cost fees that Alphabet Inc. pays Apple for various reasons, including making Google the default search platform.
"The nature of the licensing revenues also means that they are likely a material driver of Apple's operating revenue," he wrote. "While there is no indication yet that Google could cut back on its licensing fee payments to Apple, we think that there is some risk that Google could push back on the payments in the future." He rates the stock at market perform with a target price of $210.
Apple's stock has dropped 21% over the past three months, while the Dow Jones Industrial , of which Apple is a component, has fallen 2.6%. Concerns about trade-war escalation and a potential slowdown in iPhone demand have pressured the shares () in recent weeks.
-Emily Bary; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
November 30, 2018 11:24 ET (16:24 GMT)
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