The US-China trade tensions have taken a turn for the worse in recent days. On Friday, China announced new tariffs on $75 billion worth of imported American goods, and a resumption of the 5% tariff on automotive parts. The new tariffs, to set between 5% and 10% and come into effect in steps on September 1 and December 15, include levies on electronics and machinery. President Trump responded in his customary fashion, by Tweet, saying in part, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.” He added that the trade situation represents an opportunity for the US.
Investors don’t seem to agree. Markets reacted to China’s and Trump’s announcements by plunging. Both the S&P 500 and Dow Jones averages fell 2.4% in Friday’s trading, and the tech-heavy NASDAQ slipped 3%. The losses were widespread, and not confined to any one sector of the market. Major companies with large exposure to the China trade were especially hard-hit. Here we take a look at three of those casualties.
Apple, Inc. (AAPL)
The world’s second largest publicly traded company lost 4.62% in the Friday market rout, falling over $9.80 per share. That Apple would prove particularly sensitive to shifts in the ‘trade war’ is no surprise; the Chinese market is Apple’s second largest, accounting for more than 18% of the company’s total revenues. The tit-for-tat tariff actions taken by the US and China have threatened the trade in electronics – and Apple’s supply chain. In response, the company is considering a drastic measure: the shift of 15% to 30% of its production from China to other areas of Southeast Asia. That Apple would consider such a drastic move underlines the risks of the trade war for the high-tech sector.
Pointing out that nearly all of Apple’s flagship product line, the iPhone, is assembled in China, 4-star analyst Daniel Ives, from Wedbush, described Friday’s trade-war ramp-up as “a gut punch to Cupertino.” Even with that, however, Ives still sees Apple as a stock worth buying, and his $245 price target on AAPL shares suggest an upside of 20%.
Despite the beating it took on Friday, AAPL retains its Moderate Buy rating from the analyst consensus. The stock has received 16 buys, 10 holds, and 1 sell in the past three months, with 6 of those buy ratings coming in just the last three weeks. Apple stock is trading for $202, and the average price target o $226 gives it an 11% upside potential.
Caterpillar, Inc. (CAT)
Caterpillar was hurting before this latest iteration of the trade conflict. The company is a major manufacturer and supplier of heavy construction and excavation equipment, with customers around the world. The general slowdown in the global economy has been eating into Cat’s sales, including in China, and the escalation in the tariff fight has made a difficult situation worse.
The deterioration of Caterpillar’s position is made clear by the company’s losses in Friday’s trading: CAT stock fell 3.25%. The Friday losses come after CAT slipped more than 12% in August, following a 10.25% EPS reported for the second quarter.
Cat hasn’t got an easy way out of its difficulties, either. According to 4-star analyst Jerry Revich, of Goldman Sachs, the construction industry is seeing rising inventories of trucks and construction machines; he predicts that there will have to be production cuts on the manufacturing end next year. In line with that, he gives CAT a Hold rating and a $130 price target.
Stephens analyst Ashish Gupta agrees, saying, “For Caterpillar, excess dealer inventory means lower reported sales in coming quarters.” He goes on to add that, “The U.S. China trade war and Chinese impact on global commodity markets are reasons to avoid the stock right now. China accounts for a huge portion of global metals and energy consumption. A slowing Chinese economy has large ripple effects for the entire resource industry—a key consumer of Caterpillar products.” Ashish rates CAT as a Sell, with a low $100 price target.
CAT is the lowest rated of the stocks in this list, with a Hold from the analyst consensus. The consensus rating is based on 7 buys, 5 holds, and 4 sells set in the past three months. The stocks’ share price of $114 and average price target of $136 still give it an upside potential of 19%.
Deere & Company (DE)
Like Caterpillar, Deere is a major manufacturer of heavy machinery; in this case, farm and agricultural equipment. And also like Caterpillar, Deere has been suffering as worldwide economic conditions have slowed down. And in a final similarity, Deere reported disappointing EPS in its most recent quarter, missing the forecast by 3.32%.
China’s largest import from the US is agricultural products, especially soybeans. As the Chinese government cracks down on trade, with retaliatory measures, US farmers are watching their prospects for a profitable year go up in smoke. And that leads them to cut back on sales and maintenance of their heavy equipment, dealing a double punch to Deere in its domestic market. At the same time, the company is facing direct headwinds from the new Chinese tariffs. Deere stock lost 5.37% in Friday's market retreat. Rising factory production costs and bad weather, which would have been news stories in a normal year, have simply dealt additional blows to an already vulnerable company.
At the same time, even with this perfect storm working against it, DE shares are getting upbeat reviews from Wall Street’s analysts. Writing from Credit Suisse, 4-star analyst Jamie Cook says of the quarterly report, “…expectations were sufficiently low heading into the print reflecting macro/trade war uncertainty, commodity prices and unfavorable weather which delayed planting,” and reiterates his belief that the company will beat the headwinds in the long run. He raises his price target on Deere to $197 (up 12%), suggesting an upside of 34%.
From BMO Capital, Joel Tiss acknowledges slowing North American sales and a flat early-order program, but points out, “…the overall sales value was higher because of better take rates of innovative technologies and bigger machines.” Like Cook, Tiss gives Deere a Buy rating. His $175 implies a 19% upside potential.
Deere is another stock with a Moderate Buy from the analyst consensus, this one based on 9 buys and 4 holds. The stock is selling for $147, has a $167 average price target, and an upside potential of 14%.
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Disclosure: This author is long on AAPL.