The U.S. – China trade war has escalated again, as China said it would impose a new round of retaliatory tariffs, after the U.S. said that it would impose tariffs of 10% on Chinese imports worth $300 billion starting from September 1.President Donald Trump responded to the new round of tariffs, asking U.S. companies “.. to immediately start looking for an alternative to China.”Following the news, Apple stock lost over 4% in Friday's trading, as the company not only counts on China as a manufacturing base, but also as a sizable market for its products. An escalation of the trade war could impact the company's revenues, while inflating costs.In this analysis, we take a look at a worst case scenario for Apple's stock if the trade tiff between the two countries isn't resolved.The grey charts represent our base case and the blue charts represent our downside scenario.
Impact On Apple's Net Margins & EPS
Apple relies heavily on China for the assembly of its products. While the value add in the country may be limited, it forms a crucial part of Apple's supply chain and disruptions due to the trade war could increase Apple's costs.Separately, the U.S. has imposed tariffs of 10% on multiple Chinese goods, effective on September 1, although the tariff on cell phones and laptops is postponed to December 15. If the government doesn't rethink these tariffs, it's possible that Apple's costs in the U.S. will rise. We think it's unlikely that Apple will be able to raise pricing to compensate, meaning that margins will shrink. Under our scenario, we estimate that 2020 net margins will fall from our base case of 21.2% to 20%, with EPS coming in at $10.80 versus the base case of $12.70.