Merrill Lynch: Apple’s pullback is a buying opportunity

Wamsi Mohan led a team of analysts who took a deep look at the cost if moving Apple’s manufacturing out of China.

The executive summary of a note that landed on my desktop Tuesday:

Sizing the impact of potential tariffs on Apple: On May 10th, the office of the U.S. trade representative announced it was raising tariffs to 25% on roughly $200bn of imports from China (excludes iPhones). In addition, there exists the possibility of a 25% tariff on another $300bn of Chinese imports into the U.S (potentially includes iPhones). If and when iPhones sold in the US (~50mn) are subject to a 25% tariff, the net impact (unchanged pricing) would be ~$0.02 per 1mn iPhones or $1 in overall EPS (9% hit to EPS on iPhones and below 15% for all products). The stock has already declined 12% off recent highs (vs. 4% for the SPX Index). We view this pullback as a particularly attractive buying opportunity and maintain our Buy rating on solid risk-reward, continued capital return, and optionality of a large cash balance.

Which is better: pay higher tariff, or move mfg to U.S.? Our global team estimates that for the iPhone, moving production (100% of final assembly) to the U.S. would require a 20% price increase to offset the incremental costs (see note). This excludes the impact of importing components that are largely produced inAsia. We estimate the incremental cost of manufacturing iPhones in the U.S.could be 15-25%, and, if passed on to consumers could lead to demand destruction, in our view.

The need for manufacturing investments in the U.S. BofAML research analysts have suggested that globalization has peaked and there will be the rise of dual supply chains, one that is Western/U.S. centric and another that is Eastern/China centric. We view several levers including tax reform, favorable capex treatment, enhanced R&D tax credits, jobs/retraining tax credits, lower land acquisition costs, higher import taxes/tariffs, etc. as ways to level the playing field. We see automation as key to moving more manufacturing into the U.S. longer term.

Slightly off topic: The “need for manufacturing investments in the U.S.” hits close to home. As of last week, I’m running for city council in Greenfield, MA, a small leafy city in Western Mass that was, for two World Wars, the country’s leading manufacturer of taps and dies (tools for making screw threads). Like much of the industrialized northeast, it was hit hard when much of its manufacturing business moved out of town, first to the south, then to the east, to Asia.

But Greenfield is still the center of a small precision metal-working industry. According to Apple’s most recent supply chain report, 200 suppliers around the world provide 98% of its components. One third of those suppliers (64) are located in the U.S.; three are in Massachusetts. Hey Tim Cook, why not Greenfield?

Fun fact: During WWII, Greenfield Tap and Die was considered so vital to the war effort that for four years anti-aircraft guns were deployed around its factories to protect from Axis attack.

merrill lynch apple greenfield

Click to enlarge.


  1. Robert Paul Leitao said:
    I agree with Merrill’s analysis. I believe the shares are oversold relative to the tariff risks. With Apple distributing quarterly dividends tomorrow, it may be a timely opportunity for shareholders to add to their positions in the company.

    May 15, 2019
  2. Turley Muller said:
    Bringing manufacturing jobs back to the US is virtually impossible when those jobs can’t be filled. The country has a labor shortage. Unemployment is at 3.6%, which likely almost all is frictional unemployment (changing jobs). There are many more job openings than people seeking jobs. Crackdowns on immigration adds to the problem as well as baby boomers leaving the workforce with less entering to replace them. US brith rates are at multi-decade low,, and for years has been soft as people wait longer to have kids etc.

    Politicians can promise job creation, but who is going to fill them? Especially in manufacturing. Doing the same thing over and over hundreds of times a day, everyday doesn’t appeal to most Americans. I would think the pay would have to be astronomical for them to be willing, and that’s not economically viable from a business standpoint which is why the monotonous, routinized jobs migrate overseas.

    When the US was heavy in manufacturing decades ago- it required experienced workers with skilled handiwork. When software-driven machines came along it eliminated the need for skilled labor. Much of what is done by humans now is assembly as machines fashion parts and spit them out to be put together.

    It would be great if the US had more automated manufacturing (labor light) but we lack engineers to program and design process.

    May 15, 2019
  3. Fred Stein said:
    Tariff or jobs in the US?

    Be honest. We don’t have the manufacturing engineers, supply chain efficiency. let alone a labor force to meet overseas manufacturing. A 100% tariff would not change this.

    May 17, 2019

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