Will Trump bully Canadian manufacturing stocks?

U.S. President Donald Trump has bullied car manufacturers to shift production from Mexico to the U.S. Some worry that he will start to bully Canadian manufacturers too. Even so, Key Canadian manufacturing stocks Magna International and Gildan Activewear remain buys.

U.S. President Donald Trump is bullying car manufacturers. He sees no reason why companies can produce in low-wage countries and then export to the U.S. Mr. Trump would rather force companies to build factories and produce in the U.S.

Ford Motor had begun building a car factory in Mexico. Mr. Trump threatened to slap a “big border tax” on these cars. Ford backed down and agreed to create jobs in the U.S. The fact is, few companies can afford to lose sales in the U.S. Mr. Trump has warned General Motors and Toyota Motor to produce in the U.S. or face retribution. Fiat Chrysler Automobiles will at least delay investment in a new Mexican factory. What does this mean for Canada?

On January 9, Ford Motor, General Motors and Fiat Chrysler Automobiles confirmed that they’ll invest $1.6 billion in Canada over four years. This investment was agreed upon during collective bargaining talks in the autumn. We expect the vehicle manufacturers to honour their commitments.

Magna should stand its ground

Mr. Trump might try to bully Canadian auto-parts makers into investing more in the U.S. Key stock Magna International (TSX—MG; NYSE—MGA), a global automotive parts manufacturing stock, comes to mind. The thing is, Magna is part of established supply chains integrated across North America. Its customers and suppliers would likely complain about the disruptions that Mr. Trump’s protectionism would cause.

In addition, shifting production from Mexico to the U.S. will significantly raise the cost of vehicles. As a result, the North American automobile manufacturers could lose market share to less-costly Japanese manufacturers. After all, the Japanese have moved some production to low-wage countries in Asia. Factor in the high U.S. dollar and American vehicle exports could shrivel. This is likely one unintended consequence of Trump’s insistence that production shift from lower-wage Mexico to the higher-wage U.S.

Magna remains a buy for long-term share price gains, as well as decent and growing dividends.

Gildan already produces in the U.S.

A friend wonders about Montreal-based Key manufacturing stock Gildan Activewear (TSX—GIL; NYSE—GIL). It makes and sells family apparel. This includes T-shirts, fleece, sport shirts, underwear, socks, hosiery and shapewear. The cyclical consumer goods stock employs 48,000 at large manufacturing facilities in Central America, the Caribbean, North America and Bangladesh. It’s “committed to industry-leading labour and environmental practices”.

Gildan says it: “distributes its products in printwear markets in the U.S., Canada, Europe, Asia-Pacific, and Latin America. In retail markets, the Company sells its products to a broad spectrum of retailers primarily in the U.S. and Canada and also to manufacturers.” The U.S. is critical for Gildan.

On the positive side, Gildan produces in the U.S. The yarn used to manufacture its products comes from five factories in North Carolina and Georgia. The company owns and operates a garment dyeing facility in Massachusetts. It owns and operates a sock and sheet manufacturing facility in North Carolina. While Gildan produces a lot outside the U.S., these jobs pay wages far below American levels.

On January 10, Gildan paid US$88 million to acquire the American Apparel brand. This was its third recent acquisition in the U.S.

Gildan remains a buy for long-term share price gains, as well as modest, but growing, dividends.

 

This is an edited version of an article that was originally published for subscribers in the January 20, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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