Companies Feel the Tariff Pinch
Months into the U.S.-China trade spat, large firms are flagging the costs, warning of future hit
U.S. companies say they are blunting the effects from escalating tariffs with China through price increases or changes to their supply chains, but they warn investors that the picture could worsen next year.
Tariffs have slowed timber and grain shipments, raised the cost of clothes hangers and heavy-equipment materials, and compressed margins for chip- and toolmakers, among other effects, according to an analysis of results and comments from the roughly 75% of S&P 500 companies that have reported earnings.
“The negative impact is pretty widespread across the S&P 500,” said Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank. Still, he added, the overall impact is rather modest so far.
The tariff concerns come as the recent run of robust profit and sales growth shows signs of slowing. Gains are moderating and performance is uneven, with companies within some industries reporting markedly different results. Analysts and economists are warning of still-slower earnings growth next year.
Overall, third-quarter per-share earnings for S&P 500 companies were on track to rise 27.1% over the same period in 2017, the third straight quarter with earnings gains near or above 25%, according to financial-data firm Refinitiv. Analysts say as much as a third of that quarterly gain stems from last year’s corporate tax cut, and is unlikely to continue next year.
S&P 500 revenues are expected to rise 8%, still above normal for recent years but slower than the last three quarters, Refinitiv data show. The figures reflect reported results, as adjusted by analysts, and analyst estimates for the rest.
Companies are grappling with tariffs on trade with China, as well as on imports of steel, aluminum, softwood lumber and more.
Executives or analysts have mentioned tariffs or the terms “China trade” or “trade war” about 600 times in earnings calls at about 130 S&P 500 companies since mid-September, The Wall Street Journal found in an analysis of conference-call transcripts retrieved from Factiva. The terms arose at least a half-dozen times at about a quarter of the companies.
If tariffs jump to 25% on the $200 million of Chinese imports that currently face a 10% levy, as the Trump administration has threatened, it could reduce earnings growth for the S&P 500 by 2 to 3 percentage points, Mr. Lefkowitz said. He projects that would cut earnings growth to around 4%, a deceleration likely too small to derail the economic expansion on its own.
Some companies have said the tariffs are slowing demand for products shipped to China from the U.S. According to timber company Weyerhaeuser Co. , log exports to China declined with the country’s 5% tariffs, imposed Sept. 24, despite solid construction activity there.
Railroad giant Union Pacific Corp. said in October that the season’s typical grain-shipment increase hadn’t materialized, due in part to Chinese tariffs.
Caterpillar Inc. said sales haven’t suffered, and its manufacturing operations in both countries reduce its need for imports. Still, additional material costs are running toward the lower end of the company’s earlier forecast of between $100 million and $200 million in the second half of this year, company officials said in September.
Workplace uniform supplier Cintas Corp. said it is paying more for clothes hangers because of the tariffs, while other direct impacts are limited. “It is something that’s starting to creep in,” Chief Financial Officer J. Michael Hansen told investors in September.
Micron Technology Inc., which sells computer memory and storage, said tariffs could reduce its first-quarter gross margin by 0.5 to 1 percentage point, contributing to projections for a year-over-year decline of at least 1.4 percentage points.
Mitigation will take time, Financial Chief David Zinsner told investors in September. “It will be a quarter or two probably before we start to see some benefit,” he said.
Stanley Black & Decker Inc. said tariffs, with commodity-price and currency shifts, squeezed operating margins. Two-thirds of the toolmaker’s imports from China are subject to tariffs, primarily finished goods such as power-tool accessories, vacuums and some hand tools.
The additional costs are running $50 million this year, the company said in October, and could rise to $250 million next year, before mitigation efforts—and up to $150 million more if the U.S. follows through on other proposed tariff moves. The company said it plans to increase prices in January to adjust for tariffs imposed this fall, and has sought exemptions for some imports.
“I want to make it very clear that it’s not a doom-and-gloom story right now, and we don’t expect it to be in the fourth quarter, because the bulk of the tariff increases really don’t hit until January 1,” Chief Executive James Loree told investors in October.
Some companies say raising prices, as many firms have done, takes time and isn’t always possible.
BorgWarner Inc., which sells parts primarily to car and truck manufacturers, said it expects $20 million of tariff and inflation costs this year, and has absorbed all of it so far.
“We’ve not passed anything through,” CEO Frédéric Lissalde said. “Discussions take time and are happening.”
Mohawk Industries Inc., which makes flooring and countertops, said it has announced price increases on its imports from China that cover both the tariffs and other rising costs. The company also has revamped supply chains.
Still, Mohawk CEO Jeffrey Lorberbaum urged patience and said in the short term that higher prices could drive customers to buy other products unaffected by the tariffs. “It won’t happen like a light switch,” Mr. Lorberbaum said.
Fortune Brands Home & Security Inc., which sells cabinetry, doors and home security products, said the tariffs are expected to cost it $2 million to $3 million in the fourth quarter, and more in January if tariff rates increase.
Long-term, it said, the levies could help the company as it relies more heavily on production and assembly outside China. It is moving more door-component production to a facility in Mexico, for example, executives said on a conference call with analysts in October.
“Tariffs are not trivial, but they are manageable,” CEO Christopher Klein said. “Once we manage through the initial impact, we actually see potential upside for us from the tariffs given our competitive positions.”