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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| June 5, 2019
As if U.S.-China tensions weren’t worrying enough, there is now a new downside risk rattling the markets: Mexico tariffs.
The Trump administration recently threatened across-the-board tariffs on imports from Mexico. That followed a tweet from President Trump on May 30 stating “On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico.” This figure would steadily increase to 25% by October unless Mexico takes more forceful action to prevent migrants from illegally entering the U.S.
Goldman Sachs says investors should prepare for the worst. “At least the first 5% tariff on imports from Mexico planned for June 10 will be implemented,” Ben Snider, an equity strategist at Goldman Sachs, wrote in a recent note. “Escalation of the trade war poses a risk to both corporate profit margins and the health of the US consumer, who will likely absorb the majority of the tariffs via higher prices.”.
Deutsche Bank senior economist Matthew Luzzetti wrote in a June 4 report, “If implemented, these tariffs would be highly disruptive to the US economy given the scope ... of the trading relationship between the two economies.” He points out that American imports from Mexico were about $350 billion in 2018, or 1.7% of GDP.
Which stocks could suffer most from this new American trade-war front? Here are five stocks that TipRanks data shows are most vulnerable to the proposed Mexico tariffs. Exposure to Mexico isn’t necessarily a reason for long-term buy-and-holders to sell. But it’s important to know that volatility might be ahead … and in some cases, investors might even want to consider buying on the dip to benefit from an eventual resolution.
Data is as of June 5.
Market value: $12.0 billion
TipRanks consensus price target: $87.20 (26% upside potential)
TipRanks consensus rating: Moderate Buy
Following the White House announcement, Goldman Sachs scanned the Russell 1000 index to pinpoint stocks most exposed to Mexican tariffs. Semiconductor stock Skyworks Solutions (SWKS, $69.40) came out on top with a hefty 39% of its reported assets in Mexico. Among them is a major 360,000-square-foot manufacturing facility in Mexicali, Mexico.
Several analysts lowered their price targets in response to the tariff threat. But Skyworks has more than tariffs on Mexican imports to contend with right now.
Shares plunged 24% in May thanks mostly to tensions between the U.S. and China amid their own trade war. Skyworks supplies China’s Huawei with RF chips, which account for roughly 10% of estimated 2019 revenues. That’s a major problem because the U.S. has added Huawei to its “Entity List,” effectively banning the Chinese telecom giant from acquiring American components and technology without government approval.
Five-star Needham analyst Rajvindra Gill dropped his 2019 Skyworks estimates as a result. “Due to the recent actions by the U.S. Department of Commerce, we lower our outlook for June/Sept, as we expect SWKS, like (Qorvo), to end shipments and earn no Huawei revenue in Sept,” the analyst wrote.
That said, Gill maintains his “Buy” rating and bullish long-term outlook. “We believe SWKS sales growth will resume in 2020 due to higher mix of broad markets, which include 5G infrastructure and IoT,” he writes.
Skyworks’ troubles continued June 5. The company lowered its fiscal third-quarter revenue outlook and said it “cannot currently predict if and when shipments (to Huawei) will resume.” See what other top analysts have to say about SWKS on TipRanks.
Market value: $35.4 billion
TipRanks consensus price target: $229.00 (24% upside potential)
Constellation Brands (STZ, $184.44) is highly leveraged to the new potential trade dispute with Mexico, given its Corona and Modelo beer brands. These imports account for almost the entirety of the company’s beer volume – no wonder, then, that the shares dropped 5.8% on the day of the tariff announcement. In fact, May 31 was Constellation’s worst trading day since Jan. 9, when shares plunged 12% on a disappointing outlook for fiscal 2019.
On May 31, Jefferies analyst Kevin Grundy slashed his STZ price target from $275 to $264, citing “tariff concerns.” He summed up the potential effect of the Mexico tariff: “We make no changes to our FY20-22 estimates, but lower our PT to $264 given EPS risk from Pres. Trump’s proposed tariffs on Mexican imports,” estimating that a 5% impact would have a less than 10% impact on earnings per share. He adds, “We would not expect STZ to pass through the tariff as it would widen price gaps vs. domestic beers.”
Meanwhile JPMorgan Securities analysts estimated that approximately 73% of Constellation’s revenue comes from Mexican imports. Bernstein analysts also chimed in, adding that even the lowest tariff of 5% could result in a 7% cut to Constellation’s imported beer profits.
The message: Tariff risk is clearly unwelcome news given that sustainability of growth in STZ’s beer portfolio still a central debate for the stock. What are other financial experts saying about this beverage giant? Find out on TipRanks.
Market value: $11.8 billion
TipRanks consensus price target: $132.33 (13% upside potential)
Railroad stock Kansas City Southern (KSU, $117.12) took a nasty hit on May 31, with shares losing 4.5% and a further 1% when the markets opened again on June 3. According to Goldman Sachs, KSU 38% of its assets reported in Mexico. Indeed, its cross-border traffic represents approximately 40% of the company’s total traffic, with 60% of this cross-border traffic exported from the U.S. to Mexico, including grain exports from the Midwest states.
Kansas City itself already warned investors in its latest annual report that “failure to preserve free trade provisions, or any other action imposing import duties or border taxes, could negatively impact KCS customers and the volume of rail shipments.” And after the latest development, the company wrote in a statement that it is “aware of the President’s tweet … but is not able to estimate what impact such action might have on the flow of its cross-border freight.”
The American Association of Railroads continues to focus on ensuring that Congress will ratify the USMCA trade agreement among the U.S., Canada and Mexico, but adds, “Any action that impedes (USMCA’s) passage is concerning, such as tariffs that create barriers to commerce. We are watching what our customers say and do, particularly the auto and agricultural industries that move a lot of goods to and from Mexico.”
For further insights into Kansas City Southern stock, check out its analyst page on TipRanks.
Market value: $50.7 billion
TipRanks consensus price target: $40.67 (14% upside potential)
General Motors (GM, $35.73) is off by about 9% over the past three months, and it could suffer more weakness if tariffs on Mexican imports are pushed through. According to Deutsche Bank, GM imports 29% of the total parts for its cars and trucks from Mexico. It’s one of several auto stocks that pulled back sharply in the aftermath of the tariff announcement; shares are recovering, but the stock still has significant Mexico exposure.
Deutsche Bank estimates that, in the worst-case scenario where the tariffs were raised to 25%, GM would take an EBIT (earnings before interest and taxes) hit of $6.3 billion. That’s substantially higher than the estimated $3.3 billion for Ford (F) and $4.8 billion for Fiat Chrysler (FCAU).
The sector as a whole is vulnerable to tariffs. Deutsche Bank’s Emmanuel Rosner points out that in 2018, U.S. nominal imports from Mexico were roughly $350 billion, of which $93 billion were auto imports. “Hence, a 25% tariff would be worth $86.6bn annually, with $23 billion of that falling on US autos, which could cripple the industry and cause major uncertainty,” he writes.
Five-star Mizuho Securities analyst Vijay Rakesh has a similar message. “A tariff on goods imported from Mexico could hurt already weak US auto sales,” he writes. “US vehicle sales have declined ~3% y/y in 1Q19, and the added costs from tariffs could further weigh on sales.” See what other top analysts have to say about GM on TipRanks.
Market value: $10.9 billion
TipRanks consensus price target: $256.00 (8% downside potential)
TipRanks consensus rating: Hold
Texas-based Lennox International (LII, $278.65) provides heating and cooling systems for residential and commercial properties. Shares fell 4% on May 31 because the proposed Mexico tariffs present a material profit headwind for LII.
According to Five-star Cowen & Co. analyst Gautam Khanna, roughly a third of the company’s total revenues (and half of residential sales) are sourced from Mexico. “On an annualized basis, we est. that every 5% tariff increment on Mexican imports would represent a (roughly 90-cent-per share) headwind to annualized EPS before any offsets from likely mitigation efforts (price hikes, sourcing adjustments),” the analyst wrote on May 31.
With this in mind, Khanna reiterated his “Market Perform” rating (equivalent of “Hold) on Lennox with a price target of just $274, indicating shares could still pull back slightly from current levels. The Street as a whole has a more bearish outlook for LII, with an average analyst price target suggesting 8% downside potential.
Khanna had downgraded the stock back in April, citing “limited valuation upside” and expectations for decelerating earnings in 2020. That was one of four such downgrades over the past three months. Discover how the stock’s overall “Hold” consensus breaks down on TipRanks here.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.