In a press release on Monday, Apple noted that March guidance would change. The primary reasons for this change? In short, coronavirus. Manufacturing issues are expected to constrain iPhone supply and retail store closures will dampen demand.

While the ultimate economic impact of the coronavirus remains largely uncertain, these issues faced by Apple are expected to affect a broad swathe of S&P 500 companies.
With this news, we can make a first ‘stab’ at virus’s impact on S&P 500 1Q2020 EPS.

• Sell-side analysts cut AAPL EPS forecasts by ~$0.15 this Monday morning (their best guess), which translates to a ~$650 million impact on $12.5 billion of quarterly net income, or roughly 5%.

Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

• Assuming a 5%, 10% or 15% impact on 1Q2020 EPS for those exposed (50% of the S&P 500 per our estimate), this implies $1.00 to $3.00 of total negative impact on S&P 500 EPS per our analysis (see below).

While I see an impact to earnings for Q1, I also expect that there will be a snap back of activity post-Corona. Hence, I expect the $1.00 to $3.00 of negative EPS impact to be fully recovered in 2H2020 EPS. The fact that the earnings impact could be -$8 billion to -$25 billion also points to increasing likelihood of fiscal stimulus from US, China, Japan and Europe, a major reason why investors should not get too negative.

Within domestic markets, the impacts are expected to be felt most sharply by multinationals and exporters and concentrated in 1Q and tapering off in Q2.

Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

The hit to European and Asian companies should be far larger as percentage of net income. Thus, the global “safety trade” means even more inflows into US equities. And, as we have previously stated, there is just not enough S&P 500 to go around ($300tn of global household liquid assets vs $25tn of S&P 500 market cap). We suggest sticking with our “Granny shots” stocks and the leaders of this market: Technology and Healthcare. Technology and Healthcare are accounting for about 70%-75% points gained YTD (see chart below).

Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

What could go wrong? Corona virus is largely a China-centric health story. This could spread to Europe and possibly the US which would result in a larger hit to earnings than our $1.00-$3.00 estimate.

Bottom line: AAPL is giving us the first hints of what we can expect for 1Q2020 and it should be sloppy. This is not a thesis killer for our 2020 equity outlook as we do not see the competitive position of AAPL or US-tech companies weakening. These are issues facing all global companies. But in the myopia of market consensus thinking, this downward cycle of 1Q2020 EPS estimates will be a short-term headwind. In other words, expect a lot of negative chatter in the next few weeks.

Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight

Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS

Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

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