Here's Apple's worst-case scenario in Trump's trade war, according to RBC

Apple
  • President Donald Trump in an interview with The Wall Street Journal on Monday hinted at the possibility of a 10% tariff on consumer goods such as iPhones and laptops.
  • In the worst-case scenario, new tariffs on those goods wouldn’t alter the fundamentals of Apple, RBC says.
  • But they would still impact the company’s bottom line.
  • Watch Apple trade live.

All eyes are on the direction of the US-and-China trade and potential tariffs on Apple, a crucial tech player in trade between the world’s two largest economies. But RBC says the new tariffs won’t alter the fundamentals of the tech titan – even in the worst-case scenario.

In a Monday interview with The Wall Street Journal, President Donald Trump hinted at the possibility of a 10% tariff on consumer goods such as iPhones and laptops should China and the US not reach a trade agreement at the G20 summit later this week. So far, Trump has imposed tariffs on $US250 billion of Chinese imports, but has exempted iPhones and laptops.

But conflicting signals came from White House economic adviser Larry Kudlow. Speaking on Wednesday, Kudlow said a trade deal was still a “good possibility” and that the White House was having “a lot of communication with the Chinese government at all levels” ahead of Sunday’s highly anticipated meeting between Trump and Chinese President Xi Jinping.

“With Trump’s remarks clashing head-on with Kudlow’s positive comments, the US administration is clearly adopting a classical good cop, bad cop strategy leading up to trade talks,” said Lukman Otunuga, a research analyst at the trading broker FXTM.

According to RBC, Trump imposing tariffs on the iPhone won’t be too harmful to Apple.

By the firm’s calculation, in the worst-case scenario, Trump will apply a 10% tariff on all Apple products sold in the US and Apple will completely absorb the costs. That would cause a $US1 headwind for next year’s earnings per share. In a more severe scenario of a 25% tariff being completely absorbed by Apple, the bottom line would reduce $US2.5 a share.

But things probably won’t be that bad, RBC says. The firm says the two sides could find a middle ground on trade and secure a breakthrough deal, leading to no new tariffs. There’s also the possibility that Trump only imposes a 10% tariff on the bill of materials built in China, exempting processors and other components built outside of China but assembled in China. Moreover, Apple doesn’t have to absorb the entire tariffs and has the ability to pass some of the effects on to their suppliers.

APPLERBC
“While this adds another layer of uncertainty to the AAPL story, we don’t think it alters fundamentals (yet) in any manner,” RBC analyst Amit Daryanani said in a note sent out to clients on Tuesday.

“We maintain our Outperform rating, as we think that in an increasingly ‘risk-off’ environment, AAPL with its strong balance- sheet, aggressive buyback, and ability to drive GM’s higher remains a core large-cap tech holding.”

Daryanani has a price target of $US235 – 35% above where Apple shares were settled on Tuesday.

Apple was up 1% this year.

Now read:

AAPLMI

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.