Toronto, Ontario -- January 15th, 2018 -- In this week's Tuesday Ticker, Boyd could benefit from Trump tax, AkzoNobel considers buyers, PPG surprises, and much, much more!
Stock prices continue to rise. The Dow Jones Industrial Average hit 25,803 last week. The Standard & Poor's 500 index, 2786. These are record highs. In just the first two weeks of the new year the S&P 500 is up over four percent already. That’s just unsustainable. And no one is seriously suggesting that kind of growth could go on for the rest of the year. But markets have been exuberant in the wake of recent tax cuts.
The new tax legislation will see massive amounts of money flow to the bottom line of U.S. corporations. There are calls for the companies to spend that money on long-term growth through investments in R&D, new ventures and capital upgrades. Others bet the money will spent in a manner similar to the 2006 tax cut, that is, on short-term boosts to shareholders through stock buybacks and big dividend payments. Whatever the case, there’s a lot of cash coming, some $2.6 trillion that will wash through corporations in 2018. An RBC Capital Markets analyst report suggests the benefit of tax reform could be an increase of 17 percent in earnings per share on average for the companies in the S&P 500 index. The flood of cash will swell with an extra $1 trillion over five years that will come from repatriated taxes as companies move money from foreign locations under new rules.
Of the Canadian companies to benefit from the tax cut, one name that stands out is Boyd Income Group. Organizations that do a majority of their business in the United States will be the ones that benefit. Boyd earns more than 80 percent of its revenue from sales south of the border. That makes it one of the Canadian companies most likely to benefit from the legislative changes according to a report from AltaCorp Capital.
AkzoNobel is in talks three to four possible buyers of its specialty chemicals division. The company agreed to split into two during its fight against the unsolicited bid from PPG. The company announced last Wednesday it could spin off the division into a stand alone organization with its own stock listing. The other option is to just sell the division. Several suitors have announced interest in making a deal. Firms in the running (according to Bloomberg) include, Carlyle, a private equity firm often described as one with deep political connections in the states (including the Bush family and other senior government officials); a Dutch private equity firm, Hal Investments (AkzoNobel is based in the Netherlands); Lanxess, a chemical company (which would favour a buy from a strategic point of view); Bain Capital, the private equity firm that did so much to move American manufacturing offshore and provided Mitt Romney his fortune.
Few expected PPG to end up where it has. The stock was up an impressive 23 percent in 2017. That return outpaces the S&P 500. Few thought the company would do that welle. After all, PPG lost out on its bid for AkzoNobel. Material costs increased over the year. Nevertheless, according to analysts, the company has been strong in cutting costs. The cost of titanium dioxide, the main ingredient for white paint, will remain high. But the company has reduced expenses in many other areas, including general administration.
Sherwin-Williams shares are also doing well. The price rose beyond what the average of all target prices set by analysts that follow the company. The bar was $420.71. Shares have been trading over $430 of late. That’s a new 52-week high. Over just the last three months shares in Sherwin-Williams have gained over twelve percent. It seems many think the company will benefit from the coming tax cuts.
William Blair & Company, a Chicago brokerage, this week upped its outlook for U.S. recycled parts supplier, LKQ. The upgrade follows on the unexpected harsh winter this year. The William Blair analyst based his analysis on the Midwestern Regional Climate Center's Accumulated Winter Season Severity Index, which shows the 2017-2018 winter snow severity is, so far, more extreme than last year. According to the report, “For LKQ, the accumulation of snow is correlated with collision claims growth. This could provide a much-needed tailwind to LKQ's North American parts and service [growth rate] following two consecutive mild winters.” The analyst went on to write that, “The severe and extreme snow accumulation in the Midwest and Northeast is particularly encouraging given that LKQ has a strong presence in these states… Overall, we see upside to our North American organic growth assumption of 4.6 percent in 2018.” The analyst believes shares could rise to $56 over the next twelve months. Growth in the companies North American division could be above five percent. More cars in the North American fleet are sest to enter the three- to ten-year-old ‘sweet spot’ (when repairs become more common). As this happens recycled parts sold by the company will be in higher demand. The company expects that there will be an 18 percent increase in cars of that age between 2016 and 2021. Other reasons cited as a boost to earnings include a general increase in the number of parts needed per repair and a rise in the number of miles driven per car.