Apple Earnings Hit By New Tariffs

Apple Inc. (Nasdaq: AAPL) investors were hoping that the company could avoid major fallout from the trade war between the U.S. and China, but a new letter from Apple to the U.S. trade representative suggests a number of Apple products are being impacted by the latest rounds of U.S. import tariffs.

Analysts say it’s clear Apple will take a hit from the tariffs, but the magnitude and the potential duration of that hit are nothing for Apple investors to fear.

In its Friday letter, Apple said proposed U.S. tariffs on $200 billion in Chinese goods would negatively impact Apple products manufactured in China, including Apple Watch, AirPods, Beats and a handful of other products. Over the weekend President Donald Trump responded to Apple’s letter on Twitter.

“Apple prices may increase because of the massive Tariffs we may be imposing on China – but there is an easy solution where there would be ZERO tax, and indeed a tax incentive. Make your products in the United States instead of China,” Trump wrote.

Analysts say Apple will take a hit if the new tariffs are implemented, but it won’t be a big enough impact to derail AAPL stock. Bank of America analyst Wamsi Mohan says the most critical part of the new tariffs is that the iPhone will not be impacted. Mohan says only about $26 billion in fiscal 2019 revenue will come from Apple’s Other Products category.

“Assuming a third of such [revenue] is derived from the U.S., a 25 percent tariff on the products could be materially demand destructive,” Mohan says.

He estimates every $1 billion in additional demand destruction could decrease Apple’s earnings per share by about 5 cents. Mohan says moving production to the U.S. is not a simple solution.

“We [estimate] that the incremental costs to manufacture in the U.S. could vary between 15 to 25 percent for the products currently impacted by the tariffs and could lead to some demand destruction,” he says.

Loup Ventures analyst Gene Munster says the new tariffs would negatively impact Apple’s fiscal 2019 profits by slightly less than 1 percent, but long-term investors shouldn’t be worried.

“We believe, beyond two years, these tariffs will…

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