Stocks to Watch as NAFTA’s Future Remains in Doubt

October 18, 2017 9:06 pm
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U.S. automakers and the U.S. steel industry are concerned that changes to NAFTA could interfere with existing supply networks.

“Decades have been spent optimising supply chains and they are very intertwined,” RBC analysts said in a note on the sector and NAFTA this month. “Even if a specific plant isn’t directly impacted it could be indirectly impacted because of supply constraints.”

American Axle, which manufactures chassis modules and other auto and truck components, Canadian auto systems maker Magna International, Linamar Corp, and Martinrea International could be among the hardest hit.

“Our general view is that any disruption to NAFTA is negative for autos,” the RBC note said.

GROUND TRANSPORTATION

Perhaps no company has been in the NAFTA cross-hairs as much as railroad Kansas City Southern. Cross-border revenue makes up more than a quarter of its total revenue, according to its second-quarter earnings presentation.

“We believe the market would punish KSU shares immediately upon NAFTA collapse due to the uncertainty of the impact on U.S. trade with Mexico,” said Morningstar analyst Keith Schoonmaker.

Shares in Kansas City Southern have underperformed those of rivals CSX Corp and Norfolk Southern since the election.

Union Pacific Corp, the No. 1 U.S. railroad, derives 10 percent of its revenue from trade to and from Mexico, Schoonmaker says. Canadian National Railway Co and Canadian Pacific Railway are other railroads to watch. Share in trucking companies such as Celadon Group Inc and Werner Enterprises could also move on the NAFTA outcome. One possible impact is the cross-border shipment process could become less efficient, said Morningstar analyst Matthew Young.

FOOD

The U.S. Agriculture Secretary told Fox Business last week that NAFTA benefits Canada more than it does the United States, singling out the dairy, wine and poultry industries.

Asked last week about a worst-case NAFTA scenario, U.S. poultry producer Sanderson Farms Chief Executive Joe Sanderson said tariffs on agricultural products going into Mexico would be “bad for the industry, and be bad for Sanderson Farms.”

Canadian dairy producer Saputo Inc, which also has U.S. operations, could be hurt if the flow of U.S. dairy products to Mexico and Canada is affected as prices inside the United States could come under pressure, said a brokerage research analyst who requested anonymity.

On the sweeteners side, financial services company Kepler Cheuvreux earlier this year questioned the tenability of Tate & Lyle’s North American bulk ingredients performance partly due to risk of the NAFTA renegotiation.

Shares of Constellation Brands Inc, which holds rights to sell Mexican beer brands Corona and Modelo in the United States, dropped 7.6 percent the day after Trump’s election, their biggest single-day loss in about 3-1/2 years.

Molson Coors, which imports Molson brands to the United States from Molson Coors Canada, slid 8.6 percent over four days after the election.

ENERGY

Suncor Energy Inc and Canadian Natural Resources Limited are among the top Canadian exporters of crude to the United States and their stocks could suffer if the United States were to impose tariffs.

But the Canadian energy industry doubts that the United States would tax Canadian crude imports, a major source for U.S. refineries.

AGRICULTURE

Agriculture exports for the United States are expected to total roughly $139 billion in 2018, of which roughly 30 percent is to Canada and Mexico, according to Jefferies analyst Stephen Volkmann. Should NAFTA falter, it could have implications for agriculture equipment makers such as Deere & Co and ACGO Corp as export demand for U.S. crops falls.

“Market expectations are for a significant rally in crop prices and equipment sales, but fraying NAFTA ties pose a risk to this recovery thesis,” Volkmann said in a research note.

TEXTILES

An estimated $11.5 billion out of $26.3 billion of U.S. textile exports go to Canada and Mexico, according to the National Council of Textile Organizations.

“Cutting off that flow of goods or taxing that flow at a higher rate is believed to be harmful,” said Stefanie Miller, senior tax and trade analyst at Height Securities.

Canadian company Gildan Activewear has 87 percent of its revenue exposed to the United States, according to Thomson Reuters data.

However, in a filing last month, yarn manufacturer Unifi Inc said it anticipates that any modifications or updates to the trade agreement “will not significantly impact textile and apparel trade in the NAFTA region.”

(Additional reporting by Christine Murray in Mexico City and Solarina Ho and Fergal Smith in Toronto; Editing by Megan Davies and Meredith Mazzilli)

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