Analyst: Apple only slightly bruised by Trump tariffs

Gene Munster estimates $200 billion U.S. tariffs on goods made in China would lower Apple’s 2019 revenues 5% and profits less than 1%.

From a note posted Sunday night to Loup Ventures subscribers:

  • In a Friday filing with the U.S. Trade Representative, Apple outlined how proposed U.S. tariffs on $200 billion of Chinese goods would impact Apple Watch, AirPods, Beats, and other smaller product lines.
  • While Apple does not break out the contribution from these products, we estimate they will account for 4% of revenue in FY18, and grow at 35% in FY19 reaching 5% of sales.
  • If passed, we believe these tariffs could lower the profitability of Apple Watch and AirPods by 10-20%, resulting in just under a 1% negative impact on Apple’s profits in FY19.
  • We believe, beyond 2 years, these tariffs will go away.
  • Apple may fractionally increase production in the U.S. over the next 5-10 years, but we expect the share of manufacturing in the U.S. to remain small (<10%). We estimate that about 5% of Apple’s manufacturing and assembly takes place in the U.S today.

My take: Good thing Apple’s filing didn’t mention the elephant in the room. (No, not Donald Trump; the iPhone.) Can you imagine how Mr. Market would have reacted to a 10-20% cut in iPhone profitability?

13 Comments

  1. Milenko Tanasijevic said:

    Seems to me the projected drop in profitability assumes Apple will opt out of passing the additional cost of tarrifs onto the consumer. Considering reasonably high price elasticity for the AirPods etc. some of this could be absorbed by the consumers

    0
    September 10, 2018
    • John Kirk said:

      Apple isn’t really the type of company that can normally “pass on” costs. They stake out a price point and then defend it like a ninja from hell. (Not sure that metaphor made any sense, but it evoked some cool imagery!)

      3
      September 10, 2018
      • Fred Stein said:

        I love wild metaphors – keep it up.

        1
        September 10, 2018
  2. Milenko Tanasijevic said:

    …. some (or most) of the impact could be absorbed by consumers that is

    0
    September 10, 2018
  3. George Row said:

    As for the iPhone being “the elephant in the room”. Has it not been explicitly excluded from the tariffs? Whereas the other Apple products will be impacted.

    0
    September 10, 2018
  4. Gregg Thurman said:

    Any negative impact will be offset by the new US corporate tax rates.

    China has no mechanism to replace a reduction in US bound exports.

    Fear of a trade war is the result of not considering the consequences to BOTH sides. China’s exposure is far greater than that of the US.

    We are now in the brinkmanship stage of negotiations waiting for the first one to blink. Trump has made a career out making the other party blink first. People should read his book, “The Art of the Deal”.

    0
    September 10, 2018
    • Gianfranco Pedron said:

      “Any negative impact will be offset by the new US corporate tax rates.”

      Any tax advantage recently gained by the average American will be more than wiped out by the imposition of tariffs. Import taxes, sorry … tariffs, for goods coming to the USA will ultimately be paid by American consumers not the exporting entity. In the end, the imposition of an import tax is arguably little more than a con, shrouded in patriotism and nationalism, designed to grab more money from taxpayers’ wallets with their willing approval.

      “People should read his book, “The Art of the Deal”.”

      I’m pretty certain that Chinese negotiators have read the book. It’s rarely (never) a good idea to go around bragging about how smart you are by revealing your tactical and strategic “secrets” if you’re still playing the game.

      4
      September 10, 2018
      • Gregg Thurman said:

        You missed my point. First the importer pays the tariffs, not the exporter. Second, whether prices are increased to recapture the tariff is the purview of the importer, in this case Apple.

        My point was, and is, that the recent reduction in US corporate tax rates gives Apple the wiggle room to absorb those tariffs without raising prices. The tax cut increased Apple’s net income (profits) by more than the 1% decline addressed above. Gene Munster failed to compare post-tax cut net income growth over pre-tax cut net income. Even with Apple eating the tariffs (no demand “destruction”) net income grows double digits during FY 2019.

        Wamsi Mohan’s analysis is even worse, particularly because of the wording (“demand destruction”) he chose to use. He could have just as easily, and accurately, said “demand reduction” without the inflammatory image “destruction” portrayed.

        0
        September 10, 2018
        • Gianfranco Pedron said:

          No, I don’t think I missed your point Greg. We are in agreement as to who pays the import tax. As for the rest, we’ll have to agree to disagree.

          That government decided it would be beneficial to the economy to reduce repatriation tax on foreign earnings is a separate issue. That money is supposed to be reinvested in the company, in the economy and not returned to the American government in the form of a tax under a different name.

          The whole point of imposing tariffs is to threaten China’s ability to export by increasing prices on their products thus rendering them less desirable and reducing demand for them. If Apple simply pays the import tax with its tax “savings”, doesn’t increase prices and demand doesn’t drop, what’s the point of applying tariffs. For that matter, what was the point of the tax cuts to begin with other than to keep a campaign promise?

          1
          September 10, 2018
      • Gregg Thurman said:

        by revealing your tactical and strategic “secrets” if you’re still playing the game.

        Of course the Chinese read it.

        I suggested the reading for those that don’t understand Trump’s style (most everyone in the US).

        The more important issue is picking the fight in the first place. How it’s fought is secondary. Trump picked this fight because, in trade relations, the US has the upper hand. We import far more Chinese goods than China imports US goods. China is still extricating itself from 40+ years of disastrous economic decision making (communist central economic control). The US, until supplanted by China (and later India), remains the world’s largest economy. A trade war would negatively impact the US economy, but it would hurt the Chinese economy far more. As doctrine driven as the new Chinese leader is, he is also a realist. Unlike Maduro in Venezuela he isn’t going to cut his nose off to spite his face.

        0
        September 10, 2018
        • Gianfranco Pedron said:

          “… in trade relations, the US has the upper hand. We import far more Chinese goods than China imports US goods”

          That trade imbalance has helped offset the fact that wages have stagnated for the last twenty years, if not more. Offshore imports, made inexpensive because somebody, somewhere is willing to make those products for us in a more economically efficient manner than we are willing to do ourselves, have artificially kept the American worker’s purchasing power relatively stable. China could, briefly, if it wanted to, reduce America’s access to its vast pool of cheap labour just to teach us a lesson in power balance. Thankfully, it appears China’s leadership is not the impetuous.

          Stagnant wages and a cost of living subsidized by cheap imports translate into low inflation. For those of us who have managed to put some funds aside for retirement, that means money we stashed away fifteen years ago is still worth something.

          While I’m all for reducing our dependence on cheap imports and employing local labor, I’m also very well aware that it all comes at a price, a price I’m willing to pay. I’m not so sure that everyone on the sidelines cheering the fight on will be as willing to do so when the time comes.

          2
          September 10, 2018
      • Fred Stein said:

        Thanks for reminding us. Tariffs are Taxes.

        1
        September 10, 2018
  5. Fred Stein said:

    “Slightly bruised” applies. AAPL up $55 from a year ago. Down $12 from a recent peak.

    Tariffs, an import tax, doubly tax consumers. Eventually it results in higher prices*, which is inflationary. Then the Fed will raise rates, New home buyers, generally younger, will pay more interest with is no longer deductible. But all borrowers will be impacted. For example, utilities who can raise their rates based on their cost increases.

    *Tariffs add cost directly, if paid, and indirectly if manufacturers have to buy capital and hire more expensive labor in the US.

    For Apple the impact is less worrisome. Any market over-reaction results in more shares per buyback $$.

    2
    September 10, 2018

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