President Trump May Exempt Apple From December Tariffs, But What if He Doesn't?

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Let's play the devil's advocate here. 

President Trump hinted this week that Apple (AAPL) - Get Report may be exempt from December tariffs, should they go into effect. Trump and Apple CEO Tim Cook met in Texas at one of Apple's manufacturing facilities. When Trump was asked if he would exempt Apple, he said "We're looking at that." 

Apple shares rose 0.20% to $263.72 Thursday, but before we explore the stock's upside, we'll explore its downside. 

The tariffs in December would likely be 10% on several goods, including consumer electronics (including iPhones and other Apple products). Most of those products are finished in China and imported to the U.S. for sale. If Apple absorbs the added cost of importing, it would see a roughly 4% hit to 2020 earnings per share. Some analysts say it would be a bit more than 4%, some say less.

Currently, analysts polled by FactSet are looking for 2020 EPS of $12.95. With the stock trading at $263 a share, the implied forward earnings multiple is roughly 20 times. Keeping the multiple, which is beginning to reflect the higher growth services business, constant, a the a 4% hit to EPS could result in a roughly 5% hit to the stock. With negative sentiment in this scenario, the stock could of course fall harder than that. 

Some analysts have said that the removal of tariffs from the risks Apple faces would also remove a major "overhang" on the stock, which could send the stock even higher. Importantly, the stock has risen 67% year-to-date. That rise reflects a recent appreciation for services, bullishness on iPhone 11 and 2020 5G enabled device sales, as well as optimism that a trade deal will soon get done. 

Still, "The most important commentary to come out of the event was Trump saying the administration is looking into Apple being "exempt" from the next wave of tariffs that could hit on December 15th if an agreement does not come and thus remain an ominous date and line in the sand for US tech vendors," said Wedbush Securities analyst Dan Ives. "This will be a relief for investors as we continue to head into the Fort Sumter-like December 15th." 

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