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What are we looking for?

Large Canadian firms with strong international ties that are relatively less exposed to the outcome of NAFTA (North American Free Trade Agreement) renegotiations.

The Screen

NAFTA negotiations between Canada and the United States resume on Wednesday, and what the final result will look like is far from certain. Seventy per cent of Canada’s goods and services go to U.S. buyers, and the Trump administration’s disruptive trade policies could have a major impact on Canadian gross domestic product (GDP) growth. Diversity of trade relationships, rather than relying on one large partner, is always a good thing, and, perhaps now, is more important than ever for Canada. According to Reuters polls, the five largest economies, besides the United States, in 2020 will be: China, Japan, Germany, India and France. In fact, China and Japan alone are projected to be the same size as the United States by then. We will screen for big Canadian companies that have significant commercial relationships in these countries and relatively little exposure to the U.S. market.

To quantify these commercial relationships, we use the revenue component of the Thomson Reuters Starmine Countries of Risk Model. The revenue component provides the relative revenue distribution to each individual country in which a company does business. We require at least 15 per cent in any of the five big economies mentioned above, and no more than 25 per cent to the United States.

Larger firms enjoy advantages in international business from economies of scale, deep expertise – which is valuable to foreign buyers, and more capital to spend (or borrow against) to make the necessary investment. Market capitalization is a proxy, albeit an imperfect one, to measure the scale of this international advantage. We require a market capitalization of least $1.5-billion.

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What did we find?

The screen yields nine companies, and for two – both based in British Columbia and in the Basic Materials sector – U.S. foreign policy could actually serve as a tailwind.

Vancouver’s Methanex is the world’s largest producer of methanol. Methanol prices should fall when two Iranian plants begin production and enter the market as expected. If, however, the Trump administration is now able to get China to join sanctions against Iran and effectively remove Iran exports from world markets, this will most likely lead to a significant rise in methanol prices.

Prince George’s Canfor Pulp Products is the largest North American producer of NBSK (northern bleached softwood kraft) pulp. As part of China’s possible countermeasures to U.S. tariffs, China has hinted at a 25-per-cent duty on imported U.S. pulp – a move that could increase Chinese demand for B.C. pulp.

Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

Select large Canadian stocks with international exposure

Company Ticker Market Cap ($Bil) Revenue Exposure Div (NTM) Recent Close ($) 1-Yr Return
China Japan Germany India France USA
Teck Resources Ltd. TECK-B-T 17.3 18% 16% 5% 6% 1% 11% 0.91%                           29.41  -5%
First Quantum Minerals FM-T 11.5 28% - 6% 7% - - 0.08%                           16.37  8%
Stars Group Inc. TSGI-T 10.0 2% - 19% - 5% 4% 0.00%                           37.06  81%
Methanex Corp. MX-T 7.6 26% 3% 4% 2% 3% 19% 1.83%                           95.22  51%
Vermilion Energy Inc. VET-T 6.3 - - 6% - 23% 1% 6.67%                           41.44  6%
Lundin Mining Corp. LUN-T 4.7 18% 7% 8% 4% 6% 8% 2.00%                              6.22  -35%
Gibson Energy Inc. GEI-T 2.8 16% 7% 5% 3% 3% 21% 6.81%                           19.38  18%
Celestica Inc. CLS-T 2.2 21% 2% 2% 1% 1% 10% 0.00%                           16.05  11%
Canfor Pulp Products CFX-T 1.8 25% 10% 1% 5% - 24% 0.91%                           27.37  108%

Source: Thomson Reuters Eikon