Apple's Hedging Advantage Might Be Evaporating

• While the strong dollar has been a major headwind for many retailers, Apple Inc. AAPL has been able to offset much of the impact using FX hedges.
• Apple enjoyed $4.144 billion in pre-tax FX hedging gains in fiscal 2015.
• Stifel estimates that Apple will not enjoy nearly as much of a hedging gain in 2016.

Although the strong dollar has had a negative impact on Apple’s operations over the past several quarters, the company’s large FX hedging positions have provided major benefits as well. Stifel analyst Aaron Rakers recently took a look at Apple’s FX hedging situation headed into 2016.

2015 benefits
Apple reportedly booked $4.144 billion of pre-tax FX gains in fiscal 2015. Stifel estimates that these gains resulted in an EPS boost of about $0.70/share, or around 8.0 percent. These hedging gains dwarf those of rivals Microsoft Corporation MSFT ($700 million), Alphabet Inc GOOGL ($900 million) and International Business Machines Corp IBM ($1.03 billion) during the same period.


2016 estimates
Looking ahead, Stifel estimates that Apple’s FX hedging benefits peaked in fiscal Q3 of 2015, and they will continue downward over the next two quarters.

“Exiting F4Q15, Apple’s FX hedging contract asset values totaled $1.442 billion, or representing a consistent decline from the $3.561 billion preak exiting the Dec ’14 quarter – a trend leaving us to consider a continued decline from the $1.409B and $806M gains recognized during F3Q15 and F4Q15, respectively,” Rakers explained.


Stifel predicts hedging gains of about $850 million for Apple over the first two quarters for fiscal 2016.
 

Related Link: iPhone 6c: What Is Apple Thinking?

Valuation
Even with the reduced benefits of FX hedging gains, Stifel still sees upside to Apple’s stock and maintains its Buy rating. The firm’s $150 price target represents a 15.1x P/E and about an 8.4x EV/EBITDA on 2016 estimates.

Disclosure: the author holds no position in the stocks mentioned.