Cowen: China tariffs could lop 11% off Apple’s earnings

An unfavorable ruling in Apple v. Pepper could trim another 3% of gross cash, says analyst Krish Sankar.

From a note to clients that landed on my desktop Tuesday:

We estimate the potential LT financial impact from China import tariffs on Apple’s US hardware product sales at up to 11% of EPS and an unfavorable ruling on the App Store’s historical operating model at 3% of gross cash. The scenarios remain fluid, and we believe the impact can be moderated over time and hence is not a threat to future growth potential…

US Tariffs on China Imports: With the US-China trade situation remaining fluid, we attempt to quantify the financial impact to Apple given the very real risk of higher import costs and/or US consumer demand destruction depending on whether Apple decides to pass along some of the tariff cost. Given that the majority of Apple’s hardware products that include the iPhone, iPad, Watch, and Mac systems are assembled and imported from China, the earnings risk could be quite substantial. For the iPhone alone, we estimate the EPS impact at 6-7% assuming Apple absorbs the 25% tariff in COGS with no pass along to consumers based on a $450 import cost and annual US unit sales of 40M (22% of iPhone units). If Apple were to fully pass along the tariff cost to consumers, we forecast an EPS impact at $0.14 to $0.58 based on 10-40% demand destruction, or 1-4% of FY20E EPS.

Apple vs Pepper case: We believe the SCOTUS ruling 5-4 in favor of the plaintiffs increases the probability that Apple may have modest financial risk due to monetary awards. As a reminder, the SCOTUS ruling only gives merit to the idea that Apple App Store customers can sue the company even if the 30% App Store fee is charged to developers (who are not plaintiffs in the case) and not end consumers. The SCOTUS ruling does not take a stance on any wrongdoing or anti-competitive behavior. While there are several possible outcomes, any remediation that entails some “giveback” of prior revenues generated from the App Store fee could range from $3.1B to $9.2B (2.7% of gross cash at the midpoint) assuming consumers receive 10-30% of giveback with developers. Through the end of FY18, we estimate cumulative App Store net operating profit at $30.7B or 13.6% of gross cash.

Maintains Outperform rating and $245 price target.

My take: Givebacks to the Peppers worth $3.1 billion to $9.2 billion? That’s a range wide enough to make or break most companies.

See also: J.P. Morgan: Apple’s 11% decline ‘largely an overreaction’

4 Comments

  1. Robert Paul Leitao said:

    Analysts do what analysts do. Please keep in mind the firm maintains a $245 price target on the shares. Tariffs, if imposed, will be temporary. On a longer-term basis, production and assembly can be moved to different locations. The court ruled a case can continue. The court did not rule on the underlying merits of the claim.

    4
    May 14, 2019
  2. Gary Morton said:

    If Apple has to give back ANY money in this farfetched lawsuit, then every theater owner should have to give back money to moviegoers for the high popcorn charges. Disney should have to give back money to park goers for marked-up purchases of anything in the their parks. Starbucks should have to give back money to coffee drinkers for any third party sales in their stores. Amazon should have to giveback money for all book sales. Sports arenas should have to giveback money for their hotdog sales. Heck, Walmart should have to giveback money for any sales in their stores for which they charged a mark-up. The list goes on and on. Retail, Theme Parks, Movie Theaters, essentially any business with a model that established access to a limited access good and then sells something else associated with that good would go out of business. That is essentially every business that sells any third party product. Problem with courts is that they are populated with judges who only rarely understand business and business dynamics. Our way of life could be in trouble.

    4
    May 14, 2019
    • Aaron Belich said:

      That’s the lawyer’s job to build their case, argue, and defend it.

      1
      May 14, 2019

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