The rhetoric between the U.S. and China over trade continues to dominate the markets. The market has been volatile for several months over proposed tariffs and the fear of retaliation, and just this week the U.S. announced it was looking to restrict companies with 25% Chinese ownership from buying U.S. tech firms in an attempt prevent theft of intellectual property.
Adding to the market’s concerns was news from motorcycle maker Harley Davidson (HOG) that it would move the production of its bikes that ship to the European Union to international facilities out of fear that a pending trade war would slow U.S. economic growth.
There is always the chance that negotiations between the world’s two largest economies will lead to a resolution that avoids an all-out trade war, but negotiations are going to be tough, and there is no certainty that a deal can be reached.
Assuming a trade war does erupt, here are five companies that are vulnerable.
Over the last year, aerospace and defense contractor Boeing (BA) pulled around 13% of its overall revenue from China. Just this past November the company reached a $37 billion deal to send 300 aircraft to a state-run Chinese company. A trade war could impact the order and could also put pressure on other countries that do business with Boeing, further impacting orders. Boeing has such a wide international reach, that the ripple effect across Europe and other continents from a U.S./China trade war could have a very material impact on orders and sales moving forward. The market has already turned neutral on the stock just on the thought a possible trade war, but if one truly does erupt the stock could lose a lot of ground considering how strong it performed in recent years.
Heavy machinery maker Deere (DE) is particularly vulnerable to the current trade tensions. President Trump put a 25% tariff on steel which will hurt the company in terms of cost to build new machines. The higher input cost will hurt the company’s bottom line unless it raises prices to keep margins in-line. Higher prices could hurt sales, and if the company keeps prices the same the bottom line will shrink. Neither is an attractive outcome. The company will also get hit because China is targeting farmers. Agricultural states are very important to the republican party, and China is smart to realize that targeting farmers puts a lot of pressure on Trump ahead of the 2020 election. If sales of agricultural commodities start to weaken, farmers will be less likely to invest in new machinery. DE shares have already trended lower over the last several months as a result of trade war fears.
Expeditors International of Washington
Expeditors (EXPD) is a logistics company. The company offers cargo transport services, logistics and insurance for goods shipped around the globe. The big problem is that around 30% of its total sales are tied to business in China. This poses a major problem as tensions rise between the two nations. President Trump says a trade war is “easy to win”, but the harsh reality of the situation is that no one really wins, and particularly companies that have such a huge exposure to China as Expeditors does. So far the market has been willing to overlook the company’s exposure, with the stock trading up to a record high in early June, but the stock’s recent strength will come under pressure and create and a lot of downside risk if tensions escalate further and additional tariffs are put in place that have the potential to impact shipments to and from China.
While the Starbucks (SBUX) does not have a huge exposure in China, it is the company’s fastest growing market. Just this past December, the company forecast in less than a decade China would become its largest market. Starbucks is a very famous U.S. brand, and could become a target by the Chinese to apply additional political pressure on President Trump. Starbucks faces a saturated market in the U.S., and the stock recently got hammered after the company warned of slowing same store sales growth, so international growth is critical moving forward, and any moves to slow down the company’s growth in China will put a lot of pressure on the stock moving forward.
Tech titan Apple (AAPL) has a lot on the line. The company builds a lot of its devices in China, and tariffs could raise the cost of the company’s devices and put it in the unfavorable position of either being forced to pass the extra costs to customers, or deal with shrinking margins. Apple’s devices are already priced high, and it is unclear how much additional cost consumers will be willing to pay for its products. Another problem is that Apple sells a lot of devices in China, which accounts for around 20% of its sales, and if sales in both countries start to suffer the impact will be material for the company that is already struggling with a mature smartphone market in the U.S.