After months of threatening to levy tariffs on imports from countries he blames for facilitating the flood of fentanyl into the U.S., on Saturday, President Donald Trump did just that. He announced the imposition of new 25% tariffs on imports to the U.S. from its top two trading partners, Mexico and Canada. The country's third biggest trading partner, China, got hit with a 10% increase in its tariffs as well.
U.S. stock markets are reacting as you might expect they would, with the Dow Jones Industrial Average down more than 600 points (1.4%) as of 10:20 a.m. ET, and the broader S&P 500 off 1.9%. Transportation stocks in particular were taking it on the chin this morning: United Parcel Service(NYSE: UPS) stock is down 3.5% as I write this, Forward Air Corporation(NASDAQ: FWRD) is off 6.3%, and FedEx shares (NYSE: FDX) are doing worst of all -- down 6.6%. Trump later put a hold on the Mexico tariffs.
Tariffs news
The new tariffs are expected to go into immediate and full effect just after midnight tonight, although energy imports from Canada will get a slight reprieve, being taxed at only 10%. CNBC notes that combined, U.S. trade with the three countries named is worth $1.6 trillion annually, so you might think this means, the tariffs would generate about $400 billion in additional annual revenue for the U.S.
In fact, the amount will be far lower than that because (1) the $1.6 trillion covers trade in both directions -- but only trade coming into the U.S. would be subject to tariffs, (2) some of the tariffs are at 10%, not 25% and (3), the U.S. importers who are required to pay the import tariffs will probably raise prices to cover their increased cost. Higher prices tend to depress demand, with the result that the volume of trade will decrease, resulting in lower tariff revenue as well.
Investors are worrying that the higher prices will have a second effect: inflation.
Indeed, higher prices are pretty much the definition of inflation, and inflation was already starting to inch higher again in December, when the inflation rate rose to 2.6%. These new tariffs could make it worse.
Why tariffs are particularly bad news for UPS, Forward Air, and FedEx
According to data from S&P Global Market Intelligence, FedEx does 72% of its business in the U.S. and UPS gets 79% of its revenues from the U.S. (Forward Air doesn't break down its geographical revenue distribution in this way). So while the two larger companies, at least, have some revenue streams that won't be directly exposed to the tariffs fight, the bulk of their business will be exposed.
In a pair of ratings moves this morning, Chicago's Loop Capital lowered its price target on UPS stock to $115, and maintained a hold rating on the stock. Loop also downgraded its rating on FedEx stock from buy to hold.
Loop argues that importing companies are adept at updating prices quickly and that when they do raise prices, sales of imported goods will fall. Lower sales will mean fewer goods to sell, and fewer goods that need transportation to their place of sale. Hence, Loop is downgrading the entire U.S. transportation sector today, and UPS and FedEx in particular.
Is it safe to buy UPS, Forward Air, and FedEx stocks?
In its notes, which were carried on TheFly.com today, Loop points out that the U.S. transportation sector was already in a two-year-long "freight recession" before these tariffs went into effect. FedEx earnings were down 11% year over year in its most recent earnings report, while UPS just finished warning that its sales (which grew less than 6% last quarter) will miss analyst forecasts by about 6% this year, shrinking to $89 billion, rather than growing as expected.
A four-way trade war among the U.S., Mexico, Canada, and China -- which many are fearing -- would almost certainly add to investor worries on that score.
That being said, trade wars eventually end. UPS stock, trading at 17 times earnings today, and paying a dividend yield of nearly 5%, looks attractive to me. Likewise for Forward Air at a valuation of 15 times earnings, despite having a dividend yield of less than 3%. FedEx on the other hand, at 17 times earnings but with only a 2% dividend yield looks relatively less attractive than the others.
Investors looking to buy into transportation stocks in anticipation of an end to the trade war might consider looking at UPS first, Forward Air next, and FedEx stock last of all. In fact, you might want to start looking into that today, because this situation is changing fast. Just before noon, Trump announced he was putting the Mexico tariffs on hold for a month.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
