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number cruncher

What are we looking for?

Canadian lumber and metal stocks that could be resilient to a reintroduction of Trump-era import tariffs.

The screen

Republican presidential hopeful Nikki Haley ended her campaign last week, leaving Donald Trump as the front-runner to become the Republican Party’s nominee. Mr. Trump’s potential re-election leaves many analysts wondering what a second term would entail for the United States and its trade partners.

During his last presidential term, Mr. Trump introduced multiple tariffs on different Canadian materials. In 2017 and 2018, he approved tariffs of 10 per cent, 20 per cent and 25 per cent on Canadian aluminum, softwood lumber and steel. If Mr. Trump were to return to office and reinstate similar protectionist policies, Canada could be deeply affected. Under this scenario, companies with the lowest revenue exposure to the U.S. should outperform, as local Canadian sales will be relatively immune to new tariffs.

We used FactSet’s universal screening tool to identify Canadian companies that will be minimally impacted by tariffs by applying the following guidelines:

  • Traded on a Canadian stock exchange
  • Market capitalization greater than $100-million
  • Classified in the construction wood products or primary metals products industries, according to FactSet
  • Revenue exposure of less than 50 per cent to the U.S. according to FactSet’s proprietary geographic revenue exposure algorithm

We ranked the six remaining companies by using a multifactor ranking of revenue exposure to the U.S., cost of goods sold (COGS) as a percentage of revenue and asset turnover ratio. A low COGS as a percentage of sales is preferred because tariffs will directly increase input costs for a company. The asset turnover ratio is an important measure of how quickly a company can sell its inventory. With higher selling prices owing to tariffs, a high asset turnover is ideal to cushion a decrease in demand.

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What we found

Canadian companies that can survive a Trump re-election

1Goodfellow Inc.GDL-TConstruction Wood Products14.75125.
2Neo Performance Materials, Inc.NEO-TPrimary Metals Products7.01297.45.7-8.1-23.116.975.21.0
3Stelco Holdings, Inc.STLC-TPrimary Metals Products40.592,237.74.9-18.1-19.831.782.00.9
4Russel Metals Inc.RUS-TPrimary Metals Products43.342,617.73.7-2.927.439.486.31.8
5Western Forest Products Inc.WEF-TConstruction Wood Products0.58183.70.0-18.3-52.034.597.51.1
65N Plus Inc.VNP-TPrimary Metals Products4.57405.40.020.926.644.271.40.7

Source: Factset

*all figures as of last annual report date

Just six stocks passed our final screen, but 14 other Canadian metal and lumber companies were excluded owing to their high U.S. revenue exposure. This is not a surprise given Canada’s strong trade partnership with the U.S., and these other companies will be most affected by any future tariffs.

Goodfellow Inc. GDL-T, a manufacturer of value-added lumber products, ranked No. 1 on our screen with just 7.2 per cent revenue exposure to the U.S. Aside from lower revenue risk from tariffs, Goodfellow also boasts a relatively low COGS as a percentage of revenue at 77.8 per cent. Tariffs generally raise the price of commodities, and Goodfellow should be better insulated to rising input costs relative to peers. Income investors may also be interested in its 6.7 per cent dividend yield, outshining all other companies that passed our screen.

Neo Performance Materials Inc. NEO-T, a metal-based materials manufacturer, ranked second on our screen with 16.9 per cent revenue exposure to the U.S. The company’s primary source of revenue is its “Magnequench” segment, which produces powders for magnets that have applications in the automotive, media storage, appliance and residential industries. Neo Performance Materials is a niche contributor to the electric-vehicle growth trend, and hence could offer outsized returns in the long term. Investors should be on the lookout for further updates on the company’s March 15 earnings call.

Arjun Deiva, CFA, is regional director of FactSet Canada’s consulting division.

Disclaimer: The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.

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