Trump and Congressional Republicans have set their sights on tax reform. They hope to simplify the tax code to benefit corporate America and the middle class, but the details have yet to be decided.
What looks to be clear though, is that Apple would benefit greatly if the proposed plans end up becoming a law. RBC analyst Amit Daryanani said that in his mind, Apple is “one of the biggest beneficiaries” of the proposed plan.
“While details are far from finalised, we think that potential provisions could add $US4.00-$US4.50 to our FY18 EPS estimate under a relatively conservative set of assumptions,’ Daryanani said in a recent note to clients. That would boost fiscal year 2018 earnings to $US14.69 per share.
A few main areas of the proposed tax plan could greatly benefit Apple, according to Daryanani. They are as follows:
- “Deduction of capital investments”
- “Reduction in Federal corporate tax rate, which should bring effective tax rate to below 20%”
- “Repatriation of offshore cash at a low tax rate”
Deducting capital expenses is a bit complicated, but would essentially allow Apple to take the money it invests in itself (its massive multi-billion dollar campus excluded because it is a “structure”) and expense it. Details of exactly how much Apple could deduct are unclear, but Daryanani estimates it to be about $US8 billion for 2018.
A reduction in the corporate tax rate is pretty self-explanatory. Paying fewer taxes is good for anyone’s bottom line.
Finally, Daryanani expects Apple to earn $US70.37 billion before taxes in 2018. After deducting $US8 billion of capital expenses, and paying a reduced tax rate of 20%, Apple could save as much as $US5.34 billion and add as much as $US1.08 per share to its earnings, compared to its current tax code.
Apple holds about $US219 billion of cash overseas that it could move back to the US according to Daryanani. The GOP’s tax plan does not specify a specific tax rate for repatriated earnings, but Daryanani expects it to be close to 10%. If Apple uses that repatriated money to purchase stocks, it could add an additional $US3.25 per share to current earnings expectations.
Combining the savings from deductions and a lower tax rate ($US1.08 per share) with the earnings boost from repatriated cash ($US3.25 per share) could add about $US4.33 to Apple’s 2018 fiscal year, according to Daryanani.
He believes if tax reform passes in Apple’s favour, it could send the company across the fabled $US1 trillion market cap number, a first for a US company. Apple’s market cap currently sits at about a $US801 billion.
The tax-based boost could be nullified by adverse decisions by the European Commission, however. The commission recently ruled that Ireland would have to accept about $US15 billion in back taxes from Apple after an arrangement between the two entities was ruled illegal.
Apple shares are up 34.08% this year.
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