By Tomi Kilgore, MarketWatch
New tariff plan wipes out $41 billion in market cap, as analyst sees as much as $3 billion hit to earnings
Shares of Apple Inc. sank again Friday, as President Trump's plan for new tariffs on China-made goods offers a conundrum to the technology giant, which has to decide whether to eat the extra costs or pass them on to consumers.
Either way, Wall Street analysts say the outcome is likely to be bad for profits and iPhone demand, not to mention investors.
The stock(AAPL) dropped 2.1%, after shedding 2.2% on Thursday immediately after Trump tweeted his tariff plan.
It has now lost $9.02, or 4.2%, and has shed $40.8 billion in market capitalization, since the stock closed Wednesday at a nine-month high after a fiscal third-quarter earnings beat () and upbeat guidance. Meanwhile, the Dow Jones Industrial Average was fell 98 points ion Friday, after falling 281 points on Thursday. See Market Snapshot ( ).
Analyst Dan Ives at Wedbush said the tariff news is "a clear gut punch ()" to Apple, as it brings back a "dark cloud" over the outlook for iPhone demand and for investors.
"After [Chief Executive] Cook & Co. have navigated significant noise and headwinds the last thing the bulls wanted to see...was this news from the Trump administration as Apple is clearly caught in the crossfires between D.C. and Beijing," Ives wrote in a note to clients.
Don't miss: Trumps ramps up China trade war as he heads to Ohio rally ().
Ives said if Apple decides to absorb the added costs, it would reduce fiscal 2020 earnings per share by about 4%, which based on the FactSet 2020 EPS consensus of $12.67, would be about 51 cents a share. With 4.52 billion Apple shares outstanding as of July 19, that would represent about $2.29 billion.
If Apple chooses to pass the 10% tariff along to consumers by raising prices, Ives believes it will reduce iPhone demand by about 6 million to 8 million iPhones in the U.S.
Even if Apple tries to avoid the tariffs by moving iPhone production out of China, Ives estimates that the company would likely only be able to move 5% to 7% to India and/or Vietnam over the next 18 to 24 months.
"While many U.S. companies are impacted by this latest trade tension, the 'poster child' for the U.S.-China 'UFC' trade battle continues to be Apple in the eyes of the Street, with fears running rampant that these latest tariffs could significantly increase the cost of iPhones globally and have a major negative impact on Street numbers across the board," Ives wrote.
See related: New Trump tariffs threaten U.S. consumer, spelling wider trouble for stocks, analysts say ().
The analyst reiterated his outperform rating, saying outside of the near-term impact on the stock price he believes the impact on production and cost increases are containable. His $245 stock price target is about 20% above current levels.
Bank of America Merrill Lynch analyst Wamsi Mohan's "back of the envelope math" regarding the tariff impact included a more dire scenario.
Assuming expectations that Apple would have sold 50 million iPhones in the U.S. in fiscal 2020, Mohan presented two possible scenarios:
If Apple decides not to absorb the higher costs from the tariffs, and therefore increases iPhone prices by roughly 10%, he believes there could be a 20% hit to demand, which would equate to about 10 million iPhones. Since each million iPhones sold is valued at roughly 30 cents a share to earnings, that reduced demand could cut fiscal 2020 EPS by 30 cents. Add in the lower demand for Apple's other products, the hit to earnings could be 50 cents a share, or $2.26 billion.
If Apple absorbs the entire blow from tariffs, Mohan said he expects a fiscal 2020 EPS headwind of 50 cents on 50 million iPhones alone. Adding in the estimated impacts on other products and services, he estimates the total EPS impact to be 75 cents, or roughly $3.39 billion.
Also read: Opinion: Tech-spending alarms are ringing amid Trump's latest China-trade volley ().
But even at $3.4 billion, that represents just 5.9% of expected earnings next year. Mohan said that shouldn't concern investors too much given expectations that growth in Apple's services business will accelerate.
"In the broader context of the tailwinds that [Apple] has, we view this as a relatively small amount over the next several quarters and would use the pullback as an especially attractive opportunity to buy shares of Apple," Mohan wrote.
-Tomi Kilgore; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
August 05, 2019 07:47 ET (11:47 GMT)
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