During the last few hours of Sep 30, the United States and Canada reached a landmark deal, which replaces the North American Free Trade Agreement (NAFTA). The new agreement followed a weekend of hectic talks aimed at keeping alive a 25-year old agreement between the two countries and Mexico.
U.S. dairy farmers will benefit significantly from the deal. Canadian auto exports will also receive a boost. However, the auto rules of origin, which the deal lays out, means those gains will ultimately accrue to U.S. automakers. This is why it makes sense to invest in autos and related stocks at this point.
USMCA Replaces NAFTA
In a joint statement, U.S. Trade Representative Robert Lighthizer and Canada’s foreign affairs minister Chrystia Freeland stated that the new deal will “result in freer markets, fairer trade and robust economic growth in our region.” The new trilateral agreement will now be called the United States-Mexico-Canada Agreement or USMCA.
The agreement was sealed after a year of tense negotiations and uneasy ties between President Trump and Canada’s president Trudeau. It also came just before the midnight deadline imposed by the United States and saw both sides making significant concessions.
U.S. Dairy Farmers, Canadian Lumber to Benefit
Per the new agreement, Canada has agreed to provide the U.S. dairy industry with access to around 3.5% of its domestic dairy market. This percentage of a market worth around $16 billion is slightly higher than the 3.25%, which was accessible per the older Trans-Pacific Partnership.
However, the United States has also made major concessions. The USMCA preserves the resolution mechanism for trade disputes. Canada negotiated hard on this issue in order to protect its lumber companies and other industries from U.S. anti-dumping duties.
Automakers Likely to Gain
Canada has also agreed to limit its auto exports to the United States to 2.6 million vehicles. This will help it avoid a 25% U.S. tariff on auto imports in case the Trump administration goes on to impose such a duty. The stated level is well above Canada’s current production level of around 2 million units.
This clause will protect Canada’s auto plants, several of which are owned by U.S. manufacturers. Other related clauses are the new auto rules of origin, which Mexico has also agreed to in a preliminary agreement signed at the beginning of the month. This is likely to secure the interests of automakers with production facilities within the USMCA region.
In order for an automobile to avoid U.S. import duties, a minimum of 75% of its value would have to be produced in North America. This is significantly higher than the 62.5% stipulated by NAFTA. Also, 40-45% of vehicles would have to be produced by workers, who are being paid a minimum of $16 an hour. (Read: Will Trump's NAFTA Deal Benefit Automakers?)
Our Choices
The freshly concluded NAFTA replacement deal significantly benefits multiple industries on both sides of the US-Canada border. Automakers will be hugely relieved by the terms of the agreement since it protects production facilities and supply chains, which extend across Canadian, Mexican and U.S. borders.
Additionally, most U.S. companies are in a position to comply with the conditions of the new agreement. Several of the changes proposed by the deal, such as hiring more U.S. workers, are already underway.
Investing in U.S. auto stocks looks like a smart choice. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Meritor, Inc. (MTOR) is a global automotive parts manufacturer and supplier.
Meritor has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 57.5% for the current year.
Allison Transmission Holdings, Inc. (ALSN) is a designer and manufacturer of fully-automatic transmissions for commercial and defense vehicles.
Allison Transmission Holdings has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 66.7% for the current year.
Commercial Vehicle Group, Inc. (CVGI) is a designer, engineer, producer and seller of cab related products and systems.
Commercial Vehicle Group has a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.9% over the past 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cummins Inc. (CMI) is a leading global designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.
Cummins has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 25% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.3% over the past 60 days.
Oshkosh Corporation (OSK) is a designer, manufacturer and seller of a varied range of vehicle bodies, and specialty vehicles.
Oshkosh has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth rate of 41.8% for the current year.
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