Each of President Donald Trump’s comments in regard to imposing tariffs on Chinese imports has been met with a retaliatory statement from China.
The latest development in this space was China’s threat to impose tariffs on $60 billion worth of U.S. goods after the Trump administration proposed to hike the tariffs on $200 billion worth of Chinese goods from 10% to 25%. What’s frightening is that escalating tensions between two of the world's powerhouses has shaken the global balance. Analysts and investors alike are speculating on the odds of this scenario contributing to global trade imbalance and hampering growth.
As a result, companies like Boeing Inc. (BA, Financial)Â and Caterpillar Inc. (CAT, Financial)Â that are deriving a major chunk of their revenues from China are having a hard time. Although the U.S. economy seems to have strong macro fundamentals, with upbeat gross domestic product figures, strong job numbers and earnings results, industrials stocks that have a huge dependence on China have been bearing the brunt of the effects of the trade dispute between Washington and Beijing. Therefore, we’ve seen some relative weakness in several actively traded names on Wall Street as investors stay glued to their screens for continuous updates about the Trump-Jinping battle.
After Trump imposed tariffs on $34 billion worth of Chinese goods last month, the world’s second-largest economy hit back with a tit-for-tat tariff. Xi Jinping’s government said it will impose tariffs on 5,207 goods, ranging from coffee and honey to industrial chemicals, if the U.S. makes good on its promise.
"We urge the United States to come to its senses, correct its erroneous acts and create the necessary condition for a proper settlement as soon as possible," foreign ministry spokesman Geng Shuang said.
Here’s why investors are closely watching these stocks alongside new developments in the trade scenario.
Boeing
The American aerospace giant is down nearly 4.1% in the last five trading days. The company derives roughly 12% of its top line from China and the tariff exchange did not fare well with investors. Although CEO Dennis Muilenburg sees massive growth in the air travel market in the next decade, there’s growing concern with regards to the trade dispute.
“We are concerned. It’s clear that the Aerospace marketplace thrives on free and open trade around the world and we are concerned about some of the talk about tariff and trade restrictions,” Muilenburg said.
From a fundamentals perspective, however, the stock currently floats a price-earnings ratio of 21.6, compared with the industry median of 24.70. Moreover, it currently has an operating margin of 11.5%, as compared to the industry median of 5.39%, and a three-year average revenue growth rate of 7.5%, as compared to the industry median of 4.3%.
Some analysts estimate that over 20% of Boeing’s backlog is for Chinese customers. In addition, the role the company plays in providing jobs to thousands of Americans cannot be ignored. Muilenberg pointed out in a CNBC interview that the Chinese government understands the role the aerospace sector plays in economic prosperity and that it does not see its European counterpart, Airbus (XPAR:AIR, Financial), taking away its market share over this spat.
The stock currently has a market cap of $200 billion. Boeing is scored 6 out of 10 in terms of financial strength and 8 of 10 in terms of profitability and growth, per the GuruFocus website. Moreover, given the current market dynamics, it has a three-star business predictability rank.
Caterpillar
Interestingly, Caterpillar posted strong earnings for the latest quarter, with revenues and earnings both topping estimates.
"Caterpillar delivered record second-quarter profit per share," CEO Jim Umpleby said. ”Based on outstanding results in the first half of the year and continued strength in many of our end markets, Caterpillar is again raising our profit outlook for 2018."
Despite raising the earnings per share guidance by 75 cents to a range of $11 to $12, however, the stock tanked around 5% in the last five trading days, primarily owing to increased trade worries. Caterpillar derives over 5% of its revenues from China and the recent flow of events has negatively affected the stock.
From a fundamentals perspective, the stock currently floats a price-earnings ratio of 26.93 compared with the industry median of 22.82. Although it currently has an operating margin of 15.02%, as compared to the industry median of 5.5%, its three-year average revenue growth rate of -4.7% is inferior to the industry median of -1.4%.
Caterpillar mentioned that the "recently imposed tariffs are expected to impact material costs in the second half of the year by approximately $100 million to $200 million, and the company expects supply chain challenges to continue to pressure freight costs."
The stock currently has a market cap of $82.77 billion. GuruFocus scored it 5 out of 10 in terms of financial strength, but 6 of 10 in terms of profitability and growth. Moreover, it currently has a one-star business predictability rank.
All told, this cat fight is expected to continue between the Trump administration and Jinping’s administration. Investors are following the above-mentioned stocks as a proxy for trade developments and a close to this loop is not expected anytime soon.
