Here's What Equities Analysts Are Saying on Trump's Tariffs

(Bloomberg) -- U.S. President Donald Trump’s talk of trade war and plans to impose import tariffs of 25 percent on steel and 10 percent on aluminum products wreaked havoc on the market, putting the S&P 500 Index on track for its worst week in a month. While the implication for a potential import tariff is most pronounced within the steel and aluminum sector, it stretches beyond those two groups to sectors ranging from U.S. autos to packaging and beverage companies.

U.S. metals producers retreated Friday, a day after surging on the Trump administration’s tariff plan, with U.S. Steel Corp. and Nucor Corp. leading the sector lower. The Van Eck Vectors Steel ETF fell as much as 3.6 percent, its biggest loss in a month. 
Here is what some analysts say about the potential impact from the decision and how to trade each of these sectors.

Here's What Equities Analysts Are Saying on Trump's Tariffs

Materials and Chemicals

The timing and magnitude of Thursday’s announcement caught Longbow Research’s analyst Chris Olin’s contacts off-guard, in what he called “one of the craziest days” for the domestic steel industry. He thinks the buyers of carbon steel will continue to replenish their inventories over the next few weeks, potentially creating near-term “supply panic” and raising hot-rolled coil prices by the second quarter of 2018. The mini-mills could also see a margin tailwind due to better pricing spreads on selected products.

Some countries or product groups may also get an exemption from the levies, Bank of Montreal’s analyst David Gagliano said, citing U.S. Steel Corp. and AK Steel Holding Corp. as prime beneficiaries. He maintains a preference for Steel Dynamics Inc. and thinks that Stelco Holdings Inc. also stands to gain due to rising prices on U.S.-linked pricing indices, and the relatively limited volumes of product it sells directly into the U.S. Within aluminum sector, Century Aluminum Co.’s primary focus on the U.S. provides a greater defense than more internationally exposed peers such as Alcoa Corp.

Trump’s steel dreams may “end in tears if he doesn’t pivot”, as inflexibility could lead to a trade war with casualties on all sides, Bloomberg Intelligence analyst Andrew Cosgrove wrote. Amending and blending suggested options on steel imports may accomplish his goal of reducing shipments while appeasing many trading partners and downstream steel buyers, Cosgrove said.

But Credit Suisse’s Curt Woodworth doesn’t expect Trump to back down from 25 percent tariff on steel. A tariff at that level would drive a roughly $100- to $150-per-ton rise in spot steel prices in the short-term. He remains bullish on the sector and his top picks remain U.S. Steel, Commercial Metals Co., Nucor Corp. and Steel Dynamics. Cleveland-Cliffs Inc. could also benefit as a $50-per-ton move in hot-rolled coil prices could add about $50 million to its free cash flow.

The proposed tariff levels prompted analysts to revisit their stock recommendations. Allegheny Technologies Inc. saw upgrades from Bank of America Merrill Lynch and Keybanc as the selloff made its valuation more attractive. U.S. Steel drew a downgrade from Bank of America Merrill Lynch’s Timna Tanners on a limited benefit to 2018 earnings and a potential for steel prices to fall by 2019.

The tariffs may have unintended consequences for planned investments from chemicals producers, if factories “suddenly become costly to build,” said the American Chemistry Council, the industry’s leading advocacy group. The announcement “comes at the worst possible time” as the industry is investing $185 billion in new and expanded U.S. factories, with about half of those investments still in planning stage.

“Tariff increases may convince investors to do business elsewhere,” the Council said. Trump should “reconsider imposing costly tariffs and punishing the very businesses that are helping him grow the economy and create jobs.”

Beverages and Packaging

Packaging companies who use steel and aluminum to make rigid packaging or cans may see costs increase if producers pass the import tariffs through to their customers. Analysts at BMO and Wells Fargo cited higher costs as a risk for Greif Inc. in particular. Other can makers that could be hurt include Ball Corp., Crown Holdings, Silgan Holdings and Ardagh Group.

Beverage makers, among the can makers’ biggest customers, are also likely to face increased costs. National Beverage Corp., Monster Beverage Corp. and Molson Coors Brewing Co., are more likely to feel the effects than larger soda companies like Coca-Cola Inc. and PepsiCo, according to Credit Suisse analyst Robert Moskow. The tariff could present another cost headwind in the packaged food sector, with Campbell Soup Co. among the most affected due to its heavy use of steel in soup cans.

Construction and Mining Machinery

Concern that the tariffs could strain the supply chain for machinery companies led Robert W. Baird analyst Mircea Dobre to downgrade stocks including Terex Corp., Oshkosh Corp., Manitowoc Co. and Hyster-Yale Materials Handling Inc. The aerial work platforms and cranes seem most vulnerable since pricing can be compressed by foreign competitors with lower raw material prices, Dobre said.

William Blair’s Larry De Maria said that if a trade war ensues, the upside in Caterpillar Inc. shares could be limited. “The biggest concerns for Caterpillar that could derail a potential multi-year upcycle include geopolitical risk globally, political risk in the United States, and a trade war.” 

“A real trade war could potentially damage global trade and that would provide a real risk to the outlook,” he said, adding that the scope of potential retaliationn from other countries and trade groups is harder to quantify.

Defense and Aerospace

Tariffs are a “negative” for the aerospace group, Bernstein’s Douglas Harned said, although most defense contracts should be protected by escalators and long-term agreements. A secondary risk could be a retaliation from countries that export to the U.S., which could impact the choice of U.S. defense contractors, Harned added.

Buckingham’s Richard Safran defended the sector and said the selloff in defense stocks on Thursday was an “over-reaction.” While defense companies use a great deal of aluminum for aircraft and steel for ships and thus the logic of selling may appear reasonable, in fact, defense companies don’t have much exposure at all to commodity price fluctuations, he said. Metals used for manufacturing defense systems are generally bought under pacts that extend out for at least 10 years, resulting in stable pricing. Similar arguments can be made in aerospace for planemakers like Boeing Co. and General Dynamics Corp.’s Gulfstream. However, the primary risk to Boeing and aerospace suppliers would likely be possible retaliatory measures the Chinese take as a result of the U.S. imposing tariffs on imports.

Autos and Vehicles

General Motors Co. and Ford Co. could both see incremental pre-tax costs rise $600 million to $950 million from the tariffs, Buckingham analyst Joseph Amaturo said. Both have significant exposure to steel as a primary raw material, while Ford has additional exposure to aluminum due to its recent transition to the material for use in its F-series trucks and the Expedition and Navigator models, he said, adding that higher steel and aluminum prices could hurt financial results as soon as 2019. 

The impacts could spread through the sector, Amaturo added. “If the tariffs are enacted, the effects would also surely be felt by auto suppliers,” he said.

By extension, manufacturers of recreational vehicles and boats, including Winnebago Industries, Thor Industries, LCI Industries, Malibu Boats and MCBC Holdings, may also be at risk for higher costs given their exposure to these materials.

The market has also been fearful of potential retaliation by other countries. Harley-Davidson Inc. immediately fell to session lows after European Commission President Jean-Claude Juncker said the region may respond with tariffs on motorcycles and other American products.

Policy Implications

Trade tensions among the U.S. and its trade partners are likely to rise, particularly as it seems likely to apply to a broad group of countries that includes some allies, Goldman Sachs Chief Economist Jan Hatzius said. Indeed, the proposed tariffs drew ire from China and the European Union on Friday. An aggressive tariff could further disrupt trade developments expected over the coming months, including stalled NAFTA negotiations and potential restrictions on Chinese trade and investment.

The widespread implications could extend to U.S. agriculture, which could be targeted for retaliation, Horizon Investments’ Greg Valliere said. He thinks China will particularly retaliate among other “angry countries” including Canada, Brazil and EU members.

Compass Point’s policy analyst Isaac Boltansky said in an email to Bloomberg that it is unclear at this point whether these trade policies will spark a trade war or a skirmish, but it’s undeniable the moves significantly raised the specter of retaliation and protectionism. There is a real concern among some Republicans that these tariffs could ultimately lead to higher costs for consumers, which could have implications going into the midterm elections for candidates campaigning on platforms relating to tax overhaul saving Americans more money.

©2018 Bloomberg L.P.