AAPL reported Q2’19 earnings last week and they were pretty good. However, given the most recent tariff news, Apple’s stock has declined over 10% in two days. What is the market pricing in?
A simple way of expressing the markets new view is to say, “what is the change in stock price implying about EPS estimates?”
The price change in stock is therefore equal to the change in earnings estimates.
So the market is essentially pricing in a China impact of at least 11.7% to earnings. That could be from a 10% tariff or a retaliation against a US producer like Apple.
After skimming AAPL’s filings, I found that China represents ~20% of sales. Assuming this business is of similar margin to the whole company, that means that ~$10.8BN of net income comes from China, or $2.4 / share. Since the market is implying the earnings estimates need to come down by ~$1.5 / share, one could simply say that the market is implying 62% of AAPL’s China earnings are gone ($1.50 out of $2.40).
Obviously, it isn’t that simple (for example, the market could price in some slowdown in AAPL’s other regions due to a slowing global economy).
I will say though that this seems bold considering what Apple had said on its latest earnings call:
I sometimes like to do this math to gauge how realistic or unrealistic the market is being. Sometimes, like in the case of Bayer and the glyphosate liability, I think the market is pricing in sums that make no sense. Other times, it underestimates them.
Fortunately for Apple, they’ll be able to grow EPS in a lot of different environments due to their cash hoard. Here is a snapshot of their capitalization.
I think people often forget that Apple has a lot of long-term investments in marketable securities on its balance sheet. I would consider that cash for all intents and purposes because the company can (and does) sell some securities for attractive investments or to buy back stock.
Therefore, ~24% of Apple’s market cap is in cash right now. Let’s assume they use all that to buy back stock, but it comes at a premium. Let’s use ~30% premium which is around $250 / share.
At $250 / share, they can repurchase 842 million shares, which is a little less than 20% of the outstanding amount. If I assume net income is unchanged for 2020 (roughly $58BN), then EPS should go from $12.78 to $15.71. A 15x multiple on $15.71 is a $236 stock price, or 22% upside. A 17x multiple foots to 38% upside to $267. At 17x, this is ~1x above the S&Ps P/E multiple, but well deserved in my view given I think AAPL is an above-average company.
At this point, it seems like Apple is well positioned to either return capital to shareholders or invest cash for new projects. While others are concerned about the company and what lies ahead for its future, I think having so much cash at this point provides for a significant margin of safety.