- "Ultimately, we continue to believe the threat of incremental trade friction (in addition to ongoing risk of a fading US cycle) could have material (and potentially far-reaching) ramifications for the auto industry (primarily auto companies)," Bank of America analyst John Murphy said.
- Sectors that have analysts concerned include retail, autos, auto parts, and semiconductors.
- "The new tariff threat could cause softlines [retail] stocks to drop 40%," wrote UBS analyst Jay Sole.
Wall Street analysts covering individual companies are increasingly concerned about the ramifications of a possible China-U.S. trade war on a wide range of sectors in their coverage universes.
While many believe retail stocks could suffer the worst fate in the absence of a trade agreement, they aren't the only ones. Other sectors to watch include autos, auto parts, and semiconductors.
The worries began after a series of tweets on Sunday, when President Donald Trump said that $200 billion in Chinese goods could be subject to a 25% percent tariff. The Dow Jones Industrial Average is now down more than 550 points in two days with the sell-off accelerating on Tuesday after U.S. Trade Representative Robert Lighthizer confirmed that tariffs would go forward on Friday. Some on Wall Street were hoping Trump was bluffing.
Both hardline and softline retail stocks have analysts on edge as nearly every name they cover imports goods they sell from China. Softline refers to stores that sell things like apparel and linens. Hardline is goods such as appliances and electronics.
"The new tariff threat could cause softlines stocks to drop 40%," wrote UBS analyst Jay Sole, who covers TJX Companies, Ross Stores and Burlington Stores. "If 25% tariffs are enacted, it could catalyze further US retail disruption," he said.
"Within our consumer coverage, the most signiﬁcant category on the $200 billion list was furniture - retailers exposed to this category, such as Big Lots (BIG), could see a negative impact," Goldman Sachs said.
If a deal isn't reached, semiconductors would also be at considerable risk as compared to other spaces in tech, analysts at Needham say.
"Semiconductor suppliers have relatively high 'ship-to' revenue exposure to China," they said.
But analysts at Cowen took a slightly different approach to all the tariff talk.
"While most companies have detailed the direct impact of the trade war on their revenue and earnings, we see a far larger effect stemming from the indirect headwinds the trade war has generated. As a result, we believe that a resolution of the trade war could release considerable earnings upside," they wrote.
Here's which sectors are worrying Wall Street analysts:
"Within our consumer coverage, the most signiﬁcant category on the $200bn list was furniture - retailers exposed to this category, such as Big Lots (BIG), could see a negative impact. Also, ﬁxed price point retailers that import goods from China, such as Dollar Tree (DLTR) and Five Below (FIVE), could also be negatively impacted. We note that DLTR already included the impact of a move to 25% in FY19 EPS guidance, but based on our conversations, investors were anticipating upside if tariffs stayed at 10%. For FIVE, FY19 guidance assumes a 10% tariff (the impact of which was fully mitigated), but management did note that price changes could be implemented as one potential way to offset further tariff increases."
"The new tariff threat could cause Softlines stocks to drop 40%...If 25% tariffs are enacted, it could catalyze further US retail disruption. Many retailers are already struggling. New tariffs, plus the probable accompanying drop in demand, could accelerate the pace of store closures, which is already at a peak. The beneficiary of weaker retailers closing many doors is the remaining ones get stronger. The market would probably think of Off-Price retailers first in this scenario. These include stocks like TJX, ROST, and BURL. The market may also consider leading department stores like Kohl's as long-term winners."
"We believe the Street is vastly underestimating the upside potential of a trade resolution on chemical company earnings, especially for DOW, LYB, WLK and OLN. While most companies have detailed the direct impact of the trade war on their revenue and earnings, we see a far larger effect stemming from the indirect headwinds the trade war has generated. As a result, we believe that a resolution of the trade war could release considerable earnings upside."
"For Auto Parts, a neutral to potentially positive in the short/med term; We believe at least one quarter of COGS is exposed with potentially more based on next rounds. Given less elasticity we would expect the top line to benefit along with GM in short term. For example, ORLY has seen over 200bps of inflation in comps over the last two quarters and expected a similar FY impact. But not as much has been tariff related to date. The 25% could be incremental. We see a higher than average ability to take pricing (although we do question how much can be taken in such a short period of time). GM has also benefited given slow turns and lower cost of older inventory. More tariffs suggest that could continue in 2H vs prior flat to potentially negative scenario. ORLY noted the benefit in Q1 and expected similar in Q2 before moderating in 2H (which estimates reflect)."
"Ultimately, we continue to believe the threat of incremental trade friction (in addition to ongoing risk of a fading US cycle) could have material (and potentially far-reaching) ramifications for the auto industry (primarily auto companies). These could include: margin compression (should tariffs be absorbed by the value chain); price inflation (should tariffs be passed on to the consumer); along with volatility and implications for economic activity."
"As a group, semiconductor suppliers have relatively high "ship-to" revenue exposure to China. This high exposure to China puts the semiconductor sector at greater risk to the escalation in the U.S.-China trade war than many other segments of technology. Below, we highlight the percentage of total "ship to" revenue from China for each company in our semiconductor coverage universe: MaxLinear (MXL, Hold)-63% of sales in 2018; Ambarella (AMBA, Hold)-58% of FY19 (January) sales to Taiwan and 29% of FY19 sales to Asia Pacific; Monolithic Power Systems (MPWR, Hold)-57% of sales in 2018; Semtech (SMTC, Hold): 55% of sales in FY19 (January); Marvell Technology (MRVL, Buy)-42% of sales in FY19 (January); Inphi (IPHI, Buy)-39% of sales in 2018; Acacia Communications (ACIA, Hold)-29% of sales in 2018; MACOM Technology (MTSI, Buy)-28% of sales in FY18 (Sept.); Intel (INTC, Hold)-27% of sales in 2018; Xilinx (XLNX, Hold)-26% of sales in FY18 (March); and Aquantia (AQ, Buy)-26% of sales in 2018."
"Agriculture and Specialty Chemical names under our coverage would be most impacted by a re-escalation in trade talks; we think a trade deal is necessary for the second half earnings inflection anticipated for ADM and BG, and CBT and POL have significant exposure to China. In the "No Deal" scenario we want to own GRA and the water utilities. While solar names could get caught in negative headlines, the existing solar tariff structure is separate from current developments."