October 18, 2017 / 9:06 PM / 2 years ago

GRAPHIC-Stocks to watch as NAFTA's future remains in doubt

    By Rodrigo Campos and Lewis Krauskopf
    NEW YORK, Oct 18 (Reuters) - The future of the North
American Free Trade Agreement (NAFTA), a nearly 24-year-old
trade pact between Canada, the United States and Mexico, hangs
in doubt after the latest round of talks in Washington ended in
acrimony on Tuesday, casting uncertainty over a range of stocks.
    NAFTA, long opposed by U.S. President Donald Trump,
eliminates most tariffs on trade between the three countries.
Although trade more than quadrupled between those countries
since 1994, Trump blames NAFTA for lost U.S. manufacturing jobs
and a trade deficit with Mexico.                          
    U.S. stocks with the most revenue exposure to their NAFTA
partners include Kansas City Southern        , Molson Coors
Brewing and Colgate-Palmolive Co       . 
    Investors are positioning for the final outcome on NAFTA,
which could be negative for several sectors if the deal is
scrapped. Since Trump's election victory, Mexican shares with
the most NAFTA revenue exposure have far underperformed Canadian
and U.S. shares screened by the same measure. 
    Here are some of the most sensitive sectors and stocks: 
    The Trump administration is proposing stricter automotive
content rules that require the use of North American-made steel,
aluminum, copper and plastic resins. 
    U.S. automakers and the U.S. steel industry are concerned
that changes to NAFTA could interfere with existing supply
    "Decades have been spent optimizing supply chains and they
are very intertwined," RBC analysts said in a note on the sector
and NAFTA this month. "Even if a specific plant isn’t directly
impacted it could be indirectly impacted because of supply
    American Axle        , which manufactures chassis modules
and other auto and truck components, Canadian auto systems maker
Magna International         , Linamar Corp         , and
Martinrea International          could be among the hardest hit.
    "Our general view is that any disruption to NAFTA is
negative for autos," the RBC note said. 
    Perhaps no company has been in the NAFTA cross-hairs as much
as railroad Kansas City Southern. Cross-border revenue makes up
more than a quarter of its total revenue, according to its
second-quarter earnings presentation. 
    “We believe the market would punish KSU shares immediately
upon NAFTA collapse due to the uncertainty of the impact on U.S.
trade with Mexico," said Morningstar analyst Keith Schoonmaker.
    Shares in Kansas City Southern have underperformed those of
rivals CSX Corp         and Norfolk Southern         since the
    Union Pacific Corp        , the No. 1 U.S. railroad, derives
10 percent of its revenue from trade to and from Mexico,
Schoonmaker says. Canadian National Railway Co          and
Canadian Pacific Railway         are other railroads to watch.
    Share in trucking companies such as Celadon Group Inc
        and Werner Enterprises          could also move on the
NAFTA outcome. One possible impact is the cross-border shipment
process could become less efficient, said Morningstar analyst
Matthew Young.    
    The U.S. Agriculture Secretary told Fox Business last week
that NAFTA benefits Canada more than it does the United States,
singling out the dairy, wine and poultry industries.
    Asked last week about a worst-case NAFTA scenario, U.S.
poultry producer Sanderson Farms          Chief Executive Joe
Sanderson said tariffs on agricultural products going into
Mexico would be "bad for the industry, and be bad for Sanderson
    Canadian dairy producer Saputo Inc         , which also has
U.S. operations, could be hurt if the flow of U.S. dairy
products to Mexico and Canada is affected as prices inside the
United States could come under pressure, said a brokerage
research analyst who requested anonymity.
     On the sweeteners side, financial services company Kepler
Cheuvreux earlier this year questioned the tenability of Tate &
Lyle's          North American bulk ingredients performance
partly due to risk of the NAFTA renegotiation.             
    Shares of Constellation Brands Inc        , which holds
rights to sell Mexican beer brands Corona and Modelo in the
United States, dropped 7.6 percent the day after Trump's
election, their biggest single-day loss in about 3-1/2 years.
    Molson Coors        , which imports Molson brands to the
United States from Molson Coors Canada, slid 8.6 percent over
four days after the election.
    Suncor Energy Inc         and Canadian Natural Resources
Limited          are among the top Canadian exporters of crude
to the United States and their stocks could suffer if the United
States were to impose tariffs. 
    But the Canadian energy industry doubts that the United
States would tax Canadian crude imports, a major source for U.S.
    Agriculture exports for the United States are expected to
total roughly $139 billion in 2018, of which roughly 30 percent
is to Canada and Mexico, according to Jefferies analyst Stephen
    Should NAFTA falter, it could have implications for
agriculture equipment makers such as Deere & Co        and ACGO
Corp          as export demand for U.S. crops falls.  
    "Market expectations are for a significant rally in crop
prices and equipment sales, but fraying NAFTA ties pose a risk
to this recovery thesis," Volkmann said in a research note.
    An estimated $11.5 billion out of $26.3 billion of U.S.
textile exports go to Canada and Mexico, according to the
National Council of Textile Organizations.
    "Cutting off that flow of goods or taxing that flow at a
higher rate is believed to be harmful,” said Stefanie Miller,
senior tax and trade analyst at Height Securities. 
    Canadian company Gildan Activewear          has 87 percent
of its revenue exposed to the United States, according to
Thomson Reuters data.
    However, in a filing last month, yarn manufacturer Unifi Inc
        said it anticipates that any modifications or updates to
the trade agreement "will not significantly impact textile and
apparel trade in the NAFTA region."   

 (Additional reporting by Christine Murray in Mexico City and
Solarina Ho and Fergal Smith in Toronto; Editing by Megan Davies
and Meredith Mazzilli)
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