Analyst: Apple’s tax reform tailwind could be huge

The Royal Bank of Canada puts Apple’s potential 2018 earnings boost at roughly 40% (see math, below).

From a note to clients by RBC analyst Amit Daryanani that landed in my inbox Monday night:

Sizing Tailwinds From Potential Tax Reform

With legislative efforts now focused around US tax reform, we think AAPL could be one of the biggest beneficiaries in our space. The four big policy levers are

(i) Reduction in Federal corporate tax rate, which should bring effective tax rate to below 20%

(ii) Deduction of capital investments

(iii) Limits to tax deduction of interest expense (minor headwind for AAPL)

(iv) Repatriation of offshore cash at a low tax rate.

While details are far from finalized, we think that potential provisions could add $4.00-$4.50 to our FY18 EPS estimate under a relatively conservative set of assumptions). Ex-repatriation, a recurring EPS boost of $1.00-1.20 itself would imply 10% + stock appreciation at current multiples, which is largely not factored in current stock price. However, if the increasingly aggressive actions of EU regulators were to result in an adverse outcome, potential tailwinds from US tax reforms could be largely offset.

Net/Net: While there are significant uncertainties around corporate tax reform, we think it could provide AAPL EPS a $4.00-4.50 tailwind and drive the stock closer to a trillion dollar market cap scenario.

Daryanani maintains his Outperform rating and $180 price target.

My take: With this Congress, “significant uncertainties” is an understatement.

Below: Daryanani’s math.

tax reform tailwind math
Click to enlarge.

3 Comments

  1. Roger Schutte said:

    Hey Daryanani, how is it you think 20% of shareholders will sell their shares for $165? Given how average trading volume has steadily dropped since the share buybacks started, don’t you think buying that many shares to take them off the market will push up share price well beyond $165? Also, right now, all of the offshore cash is discounted to basically zero. If it was suddenly valued as $200 billion, that’s roughly $40 per share. So, we have $195 right off the bat without any premium for future quarterly cash repatriations at the lower rate.

    1
    October 10, 2017
  2. Gregg Thurman said:

    The post didn’t show Daryanani’s math (Below: Daryanani’s math.).

    I would be very interested in that.

    I estimate Apple’s offshore cash at $240 Billion and growing. Apple’s contingent tax liability is 26.94% (average tax rate since last repatriation).

    At 26.94% Apple’s contingent tax liability is $64.663 Billion. At the proposed repatriation rate of 8.75% Apple’s tax liability will shrink to $21.000 Billion. This will add $43.663 Billion to Apple’s Net Income, or $8.95 EPS, depending on timing. The longer it takes to pass such a bill the higher the EPS due to Apple’s share buyback activity (approximately 4.9% YoY) and increased offshore cash holdings. With a minimalist multiple of 15 AAPL will increase in value by about $134.00 [current trailing earnings are valued at about 18 times EPS. With a reduction in the earnings multiple to 15 the net impact of the repatriated cash is about $100/share].

    It doesn’t matter when the bill passes as it will most likely become effective January 1, 2018. The windfall to the value of AAPL will occur in the quarter after Apple reports the degree of the windfall.

    I’m accruing long term Call options for January 2019 that are currently $50 out of the money (JAN 2019 $205 Calls at $4.25 each).

    My Jan 2019 price target (assumes cash repatriation) is $350 making my JAN 2019 $205 Calls worth $145 each (2295% ROI). Without cash repatriation my price target is $220. Once WS determines this is going to happen you will see a sudden (and dramatic) increase in Options volume for AAPL.

    I would be interested in other LEARNED opinions. I do not want to hear opinions based on “gut” feelings.

    0
    October 10, 2017
  3. Gregg Thurman said:

    Daryanani’s math has appeared (don’t know why it took so long).

    Daryanani is projected EPS benefit solely on SHARE REDUCTION. He is not valuing the reduction in contingent tax liability which is reflecting on Apple’s 10Q as an increase in Net Income.

    For a WS professional this is pretty shoddy work. The reality is that BOTH impacts may be felt: reduction in share count that increases EPS and increase in Net Income.

    My estimate does not reflect a massive share buyback as does Daryanani’s estimate, simply because there are too many variables AND UNKNOWNS (how many and at what price chief among them) to take into account.

    0
    October 10, 2017

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