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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| September 14, 2018
If steep tariffs on goods imported into the United States are only part of a negotiating tactic from President Donald Trump, he certainly has committed to his bluff. Trump’s tariffs – the first of which went into effect in early July and prompted an immediate, equivalent response from America’s trade partners, including China – have been left in place long enough to start taking a measurable toll on American bottom lines.
Most consumers and even most investors have yet to see or feel their impact. Despite the relatively civil trade war thus far, the global economy is robust, driving overall corporate earnings upward. Workers are enjoying their recent pay raises.
Time is working against certain businesses, however. The ripple effect stemming from the initial victims’ struggle could take weeks if not months to be fully felt on other fronts. And new tariffs are being imposed. It will take weeks and/or months to feel their full impact as well, even as those outfits start to feel the early ripples.
Still, more than a few major publicly traded stocks have already taken hits related to Trump’s tariffs (and other countries’ retaliatory measures). Here are 10 companies that already have run into trade-war headwinds.
Data is as of Sept. 13, 2018.
Poultry, beef and pork specialist Tyson Foods (TSN, $63.50) already was fighting an uphill battle prior to the imposition of new tariffs on goods imported into the United States, which inspired retaliatory tariffs on U.S. goods sent to China and Mexico. Beef and pork prices have been falling, making chicken – Tyson’s primary product – relatively more expensive.
Higher net prices for chicken imported into Mexico and China only exacerbate the problem.
Tyson dished out a lowered full-year profit forecast in late July, warning shareholders that this year’s bottom line would be 12% less than initially thought thanks to the tariff war. CEO Tom Hayes explained, “The combination of changing global trade policies here and abroad, and uncertainty of any resolution, have created a challenging market environment of increased volatility, lower prices and oversupply of protein.”
A week later, Tyson posted fiscal third-quarter numbers that didn’t indicate it had hit a major headwind. Net profits rolled in above expectations and grew nicely on a year-over-year basis. TSN insists it’s a tariff victim, however, and investors largely believe that message, given the stock’s year-to-date loss of 22%.
Also of note is Tyson’s rising freight costs; they’re projected to grow by $270 million for the current fiscal year, shaving 33 cents per share off the bottom line.
The world was treated to an odd yet encouraging sight in February 2017. A small fleet of motorcycles made by Harley-Davidson (HOG, $44.55) was parked in front of the White House, being inspected by President Trump himself. It was all part of a pro-business message the country increasingly believed in over the next several months.
The proverbial honeymoon was over by June of this year. That’s when Harley announced it would be moving some of its production to Thailand, citing new retaliatory tariffs imposed by the European Union on United States-made motorcycles. The EU’s import tax would add about $2,200 to the cost of each machine, on average.
James Hardiman, Managing Director of Equity Research for Wedbush Securities, sees an upside. He says, “There is an argument to be made that Harley-Davidson moving some of its production overseas could be a positive in the long run … long-term I think it will actually help HOG’s profitability on bikes going to Europe.”
Hardiman also concedes there may be a bigger, immeasurable cost, though: The move “comes at the expense of American jobs.” He adds, “The company is in a unique position where any shift in production will be met with great animosity from not only employees but also customers.”
The Trump-supported boycott of Harley-Davidson is just part of the adverse impact of the tough decision the company had to make.
In late June, General Motors (GM) said the then-new tariffs on steel and aluminum imported into the United States could prove devastating to the country’s automobile manufacturing industry. The company’s official response to the idea: “Increased import tariffs could lead to a smaller GM, a reduced presence at home and risk less — not more — U.S. jobs.”
It remains to be seen just how much, or even if, those levies would take the suggested toll on General Motors or rival Ford (F, $9.37). Although GM’s second-quarter report was less than hoped for, the tariffs weren’t in effect then. CFO Chuck Stevens even acknowledged the $300 million increase in commodity costs wasn’t solely the result of Trump’s tariffs.
Ford, on the other hand, ultimately blamed the mere anticipation of those tariffs on the $480 million more it had to pay in commodity costs for the first quarter of 2018.
While GM may have made the most noise, Ford was the first one to be forced into drastic action. The company in late August decided to halt its plans to sell its Chinese-made Focus Active in the United States, saying the tariff would be too detrimental to the vehicle’s profitability.
Much like GM and Ford, beer outfit Molson Coors Brewing Company (TAP, $63.48) may be publicly lamenting the 10% tariff on aluminum mostly for effect, seeking ways to keep its bottom line as robust as possible by putting social political pressure on the powers that be.
Still, any added expense is a step in the wrong direction.
Canned beer – cans made out of aluminum – accounts for roughly half of the $20 billion worth of beer purchased in the U.S. every year. Adding 10% on top of its already-rising cost poses a potential threat to Molson Coors’ bottom line. CEO Gavin Hattersley explained in June that shareholders wouldn’t tolerate the extra expense, which would shave an estimated $40 million off of the company’s profits. Hattersley doesn’t believe the added cost could be passed along to consumers, either, suggesting the extra 50 cents per 12-pack needed to cover the extra cost would send customers to other brands.
A little perspective: Over the past six months alone, Molson Coors has generated a profit of just more than $700 million; there’s room in there for another $40 million. Likewise, amid a booming economy that has pushed household incomes to record levels, beer might be more price-elastic than Hattersley wants to suggest.
Nevertheless, TAP is already on the defensive.
Coca-Cola (KO, $45.83) is in the same boat as Molson Coors, as it too sells canned beverages. Unlike the brewer, however, it’s leaning toward putting most of the added load on its customers’ shoulders. Coke said in July it would be raising prices, but didn’t suggest exactly how much.
CEO James Quincey acknowledged that it wasn’t just rising aluminum prices that would lead to shopper sticker shock. He explained, “That’s the freight, that’s the metals, the steel, the aluminum going up, the labor going up. So there is cost pressure; we’re having to pass that through into the marketplace.”
Those are indications of inflation that often occur in a robust economy… an economy that’s generally able to handle modest price increases. Neil Saunders, managing director of GlobalData Retail, wrote about the matter, “Fortunately, the consumer is currently in a position to cope with some mild rises in retail prices.” But, he added that “a rise in prices across the board will likely result in a decline in retail volumes over the longer term, which will be unhelpful to the sector.”
The tariff wars have taken Whirlpool (WHR, $148.04) shareholders through a proverbial spin cycle.
When the whole idea of tariffs on imported goods was broached in January, Whirlpool CEO Marc Bitzer was a fan. The company – which competes with South Korea’s LG Electronics and Samsung within the clothes washer, dryer and refrigerator markets – would love to face a little less competition here at home. That prompted Bitzer to say, “This is, without any doubt, a positive catalyst for Whirlpool.”
Unfortunately for Bitzer, the tariffs didn’t end there. The steel and aluminum that Whirlpool needs to make its appliances also costs more. And just like Ford and Molson Coors have experienced, the mere fear of tariffs was enough to push metal prices higher ahead of their actual implementation. The additional $350 million that Whirlpool will have to shell out for materials this year will take a bite out of profits.
Bitzer’s tune now? “The global steel costs have risen substantially, and in particular, in the U.S., they have reached unexplainable levels.”
Whirlpool took the bold risk of passing along its higher costs to consumers. His belief that the company’s “job is to hold firm on these price increases and rebound some of the volume and some of the volume losses in the second half” is almost uncomfortably optimistic.
With aluminum prices on the rise, it would be surprising if iconic aluminum player Alcoa (AA, $41.77) wasn’t caught in the crossfire.
Most investors know Alcoa is a major aluminum supplier to North American buyers. What most investors might not fully appreciate, however, is that it doesn’t necessarily mine all of the metal it sells. It buys plenty from foreign suppliers, turning that raw material into something more marketable here in the United States.
How much? CEO Roy Harvey said in July, “Even if all U.S.-curtailed capacity was back online and producing metal, the U.S. would still need to import the vast majority of its required primary aluminum, with approximately 60% from Canada, which is key to the North American supply chain. Canada is an important source of metal for U.S. aluminum producers.”
The irony? A sizeable chunk of the aluminum that Alcoa imports from Canada is owned by Alcoa anyway.
All told, Alcoa estimates the tariffs will cost it up to $14 million per month. For perspective, Alcoa turned $3.6 billion worth of revenue into net income of $230 million in its most recently completed quarter.
Transportation companies haven’t been part of the mainstream discussion of tariff victims, but they’re feeling the effect, too. One of the most impacted has been rail carrier Union Pacific (UNP, $156.63), but not for the reason you might suspect.
Price hikes in commodities such as steel and aluminum (and soybeans, and meat, and chemicals, cars and building supplies) threaten demand for shipping services. But the fact is, while many American businesses have lamented higher costs, these organizations still use trains and trucks as much as they ever have.
Union Pacific’s plight is not entirely a demand-based one. It’s in the midst of laying down a great deal of new railroad track, but a shipment of rails manufactured in Japan sat on a boat for nearly six weeks in San Francisco Bay while the buyer and seller bickered about who would pay the recently created tariff on the steel beams. With the tariffs in place, the cost for a new mile of railroad track grew from $3 million to $3.75 million.
That single standoff was sorted out, but Union Pacific can’t see this argument turn into a drawn-out debacle. Union Pacific CEO Lance Fritz explained around that time, “We buy a portion of our rail … from Japan. It’s premium steel that’s built to a dimension that we have a hard time finding in the United States.”
Add solar panel maker SunPower (SPWR, $6.64) to the list of outfits that have already felt the added weight of Donald Trump’s tariff plan.
Like Union Pacific and Tyson Foods, SunPower hasn’t exactly been deemed a disaster by critics of the president’s use of taxes as a means of bringing the country’s trade partners to the negotiation table. If anything, tariffs on solar panels imported into America would prove beneficial to the U.S.-based manufacturer of solar power systems.
Problem is, SunPower doesn’t manufacture those panels domestically. They’re only designed and turned into installable systems here. The panels are made in Malaysia and the Philippines for much less than it would cost to manufacture them in the U.S. That makes them subject to a hefty 30% tariff.
But SunPower already has done what Donald Trump tacitly is trying to make all U.S. companies do. SPWR announced in April that it would acquire foreign-owned SolarWorld, which manufactures its solar panels in Oregon, thus circumventing the new tariffs. CEO Tom Werner conceded, “I am going to be very transparent, maybe too transparent. We wouldn’t have bought SolarWorld without the tariffs.”
The deal is not yet complete but should be by September’s close. The terms and the impact of the deal haven’t yet been detailed and may never be. Regardless, anytime an organization is forced to make an acquisition that undoubtedly will increase operating costs, shareholders are likely to grumble. SPWR is off 26% year-to-date, which indicates plenty of dissent.
Tariffs are the main feature of a trade war, but they’re not the only aspect. Any means of putting pressure on a trade partner that’s also a geopolitical foe is technically fair game, even if that means taking aim at a particular company.
Qualcomm (QCOM, $74.61) was that company just a few weeks ago. In the wrong place. At the wrong time. Looking to do the wrong thing.
Broadcom’s intended acquisition of Netherlands-based NXP Semiconductors (NXPI) needed the nod from several countries. The sensitive and global nature of its business – specialized semiconductors – forces regulators to not only ensure that tie-ups don’t lead to security threats, but that certain combinations of companies don’t create unfair competition.
Regulators in all nine markets that Qualcomm needed approval from gave the deal the green light, except for one – China. Annoyed by then-newly imposed tariffs on Chinese goods sold to U.S. customers (with threats for more tariffs on the table), China’s government simply sat on the request until the July deadline expired.
It’s difficult to measure the specific impact that the deal failure has had, or will have in the future. Qualcomm is a key player in the mobile market, but it doesn’t have much exposure to the automobile market. NXP would have changed that.
Two-thirds of Qualcomm’s 2017 revenue was generated in China. That too could be threatened as America’s trade partner is increasingly agitated.
James Brumley was long F as of this writing.
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