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As corporate earnings season rolls on, winners and losers emerge

Mitchell Hartman and Marielle Segarra Oct 23, 2018
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“We have the highest prices in the world right now for aluminum and steel,” said Kristin Dziczek, a vice president at the Center for Automotive Research. Above, Ford Mustangs are assembled at a plant in Flat Rock, Michigan, in 2004.
Bill Pugliano/Getty Images

Corporate earnings season is starting to reveal some potential losers in this economy, especially as trade tensions escalate. We’re also seeing what kinds of companies are faring well.

Losers

Manufacturers are looking increasingly vulnerable to the effects of the trade war.

Caterpillar, the Illinois-based manufacturer of industrial engines and earth movers, had a lot of positive news in its earnings report: Profits are up 46 percent from a year ago, and sales are up in every major region around the world. Still, Caterpillar stock lost 7.56 percent after the company said it’s seeing higher materials and shipping costs as a result of tariffs on steel and aluminum.

“Tariffs are definitely driving the uncertainty,” said Elizabeth Vermillion, equity analyst at CFRA Research. She said Caterpillar is adapting to tariff-induced change well, but other companies are not so lucky.

Ford, which will release earnings Wednesday, said this week that tariffs from the Trump administration are hurting profits.

“We have the highest prices in the world right now for aluminum and steel,” said Kristin Dziczek, a vice president at the Center for Automotive Research. “This is a very narrow-margin business. It doesn’t seem like that when you go to buy a car. But on new vehicles, small sedans, you may only make a couple hundred bucks.”

Overall, manufacturers are optimistic because of the strong economy, said Lauren Wilk, a vice president at the Aluminum Association, “but the tariffs are making folks hit the pause button. They need the certainty of the supply chain in order to go ahead with investments or expansions.”

And so far, manufacturers have not hit the pause button on hiring. Last month, employment rose by nearly 20,000.

Winners

There’s something working in favor of pretty much all companies this year: The new tax law.

“One of the biggest ways is that it lowers the tax rate,” said Fabio Gaertner, associate professor at the Wisconsin School of Business. A lower tax rate means companies keep more of their money.

Companies most likely to be faring better are those that benefit from lower taxes and that have stronger defenses against tariffs because they don’t manufacture or export physical products.

“Certainly the banking industry, telecom, entertainment,” said Bernard Baumohl, chief global economist with the Economic Outlook Group. “Those industries that are not that exposed in the event of a trade war but have benefited from the cut in taxes.”

Health care is another example. And we’re seeing this trend play out now that earnings season is underway. Last week, earnings jumped for Bank of America and JPMorgan Chase. We’ve also seen strong earnings reports from UnitedHealthcare, Johnson & Johnson and Verizon.

But just because these companies haven’t been hurt by tariffs yet doesn’t mean they won’t be, said Greg McBride, senior vice president at Bankrate.com. Just look at banks, he said.

“They could ultimately feel some effects from it if those companies that are directly impacted by tariffs see a drop off in business, if they start to scale back their investment or their borrowing,” he said.

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