U.S. companies said they are tempering the effects of escalating tariffs with China through price increases or changes to their supply chains, but they warn investors that the picture could worsen next year.
Tariffs have slowed U.S. timber and grain exports, raised the cost of imported clothes hangers and heavy-equipment materials, and compressed profit margins for computer chip and tool makers, among other effects, according to an analysis of results and comments from the roughly 75% of S&P 500 companies that have reported third-quarter earnings.
“The negative impact is pretty widespread across the S&P 500,” said Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank. Still, he said, the overall effect so far is mostly modest.
Timber giant Weyerhaeuser Co. said log exports to China fell after the country imposed retaliatory 5% tariffs on Sept. 24, despite solid construction activity there. Railroad operator Union Pacific Corp. said in October that the season’s typical grain-shipment increase hadn’t materialized, due in part to Chinese tariffs.
At heavy-equipment maker Caterpillar Inc., sales haven’t suffered, and the fact it has assembly operations in both countries reduces its need for imports. Still, the company faces higher raw-material costs, though they are running toward the lower end of its earlier forecast of between $100 million and $200 million for the year’s second half, company officials said in a September projection.
Some companies said they are turning the tariffs to their advantage. Warehouse-store chain Costco Wholesale Corp. is pitching its customers products such as nuts and pork; prices for these items have fallen as exports have slowed in the face of China’s tariffs.
“Something like one third of the U.S. pork…is exported to China,” Costco Chief Financial Officer Richard Galanti told investors on an early October conference call. “That’s changed, and therefore pork prices are way down. There’s great savings. That’s creating some opportunities.”
The tariff concerns come as the recent run of robust profit and sales growth shows signs of slowing. Analysts and economists warn of still-slower earnings growth next year.
Overall, third-quarter per-share earnings for S&P 500 companies are on track to rise 27.1% over the same period in 2017, the third straight quarter with earnings gains near or above 25%, according to financial-data firm Refinitiv. Analysts said as much as a third of that quarterly gain stems from last year’s U.S. corporate tax cut and is unlikely to continue next year.
S&P 500 revenues are expected to rise 8%, still above normal for recent years but slower than in the last three quarters, Refinitiv says. The figures reflect reported results, as adjusted by analysts, and analyst estimates for the rest.
Looking ahead, analysts and economists note that global growth has slowed, particularly in Europe and China. “Probably some of it is due to the tariffs and the trade war,” Mr. Chadha said. “But some of it would pretty clearly happen anyway.”
Executives or analysts have mentioned tariffs or the terms “China trade” or “trade war” about 600 times during earnings calls at about 130 S&P 500 companies since mid-September, The Wall Street Journal found in an analysis of conference-call transcripts retrieved from Factiva. The terms arose at least a half-dozen times at about a quarter of the businesses.
If tariffs jump to 25% on the $200 billion of Chinese imports that currently face a 10% levy, as the Trump administration has threatened, earnings growth for the S&P 500 could be reduced 2 to 3 percentage points, said David Lefkowitz, senior equity strategist for the Americas at UBS Global Wealth Management’s chief investment office. He projects that would cut earnings growth to about 4%—a deceleration likely too small to derail the economic expansion on its own.
Already, the U.S. tariffs and China’s retaliatory levies are hitting a diverse range of U.S. businesses.
Workplace uniform supplier Cintas Corp. said it is paying more for clothes hangers, while other direct effects are limited. “It is something that’s starting to creep in,” Chief Financial Officer J. Michael Hansen told investors in September.
Micron Technology Inc., which sells computer memory chips and storage, said tariffs could trim its first-quarter gross margin by 0.5 to 1 percentage point, contributing to projections for a year-over-year decline of at least 1.4 percentage points. Mitigation will take time, financial chief David Zinsner told investors in September.
Stanley Black & Decker Inc. said tariffs, combined with commodity-price and currency shifts, squeezed its operating margins. Two-thirds of the toolmaker’s imports from China are subject to tariffs, primarily finished goods such as power-tool accessories, vacuums and some hand tools.
The additional costs are running $50 million this year, the company said in October, and could rise to $250 million next year, before mitigation efforts—and up to $150 million more if the U.S. follows through on other proposed tariff moves. The company said it plans to raise prices in January to adjust for tariffs imposed this fall and has sought exemptions for some imports.
“I want to make it very clear that it’s not a doom-and-gloom story right now, and we don’t expect it to be in the fourth quarter, because the bulk of the tariff increases really don’t hit until January 1,” Chief Executive James Loree told investors in October.
Some companies said raising prices, as many have done, takes time and isn’t always possible.
BorgWarner Inc., which sells parts primarily to car and truck makers, said it expects $20 million in tariff and inflation costs this year, but has absorbed all of it so far.
“We’ve not passed anything through,” CEO Frédéric Lissalde said. “Discussions take time and are happening.”
Mohawk Industries Inc., which makes flooring and countertops, said it has announced price increases on its imports from China that cover both the tariffs and other rising costs. The company also has revamped supply chains.
Still, Mohawk CEO Jeffrey Lorberbaum urged patience and said in the short term that higher prices could drive customers to buy other products unaffected by the tariffs. “It won’t happen like a light switch,” Mr. Lorberbaum said.
Zoetis Inc., a veterinary pharmaceutical company, said it could recoup lost sales to U.S. livestock producers, which have seen demand from China slip due to tariffs, through rising demand elsewhere.
Fortune Brands Home & Security Inc., which sells cabinetry, doors and home-security products, said tariffs are expected to cost it $2 million to $3 million in the fourth quarter, and more in January if tariff rates increase.
Long term, it said, the levies may help the company as it relies more on production and assembly in locations unaffected by tariffs. It is moving more door-component production to a facility in Mexico, for example, executives said on a conference call with analysts in October.
“Tariffs are not trivial, but they are manageable,” CEO Christopher Klein said. “Once we manage through the initial impact, we actually see potential upside for us from the tariffs given our competitive positions.”
Corrections & Amplifications
If tariffs jump to 25% on the $200 billion of Chinese imports that currently face a 10% levy, as the Trump administration has threatened, earnings growth for the S&P 500 could be reduced 2 to 3 percentage points, said David Lefkowitz, senior equity strategist for the Americas at UBS Global Wealth Management’s chief investment office. An earlier version of this article incorrectly cited a $200 million figure. (10/4)
Write to Theo Francis at email@example.com
Appeared in the November 5, 2018, print edition as ‘U.S. Firms Try to Blunt Bite of Tariffs From China.’