The sixth round of NAFTA negotiations are scheduled to begin in Montreal on January 23. Up until now, the market has mostly voted ‘with its feet’ and seems largely unconcerned. The following companies are solid investments but also have an intense amount of cross-border business.
First up is Guelph-based Linamar Corporation (TSX: LNR). Consistent with the automotive sector, this automotive parts company has a somewhat cyclical earnings pattern. But have NAFTA rumblings scared off investors? I’d vote no, aside from a fairly steep 1.82% drop on Tuesday, which seemed to be fairly market wide.
Linamar’s earnings per share (EPS) are expected to go from $8.09 from 2017 to $9.72 in 2018 — an 18% increase. If the estimates hold, this would be the largest EPS jump in recent year-by-year comparisons. Ergo, 2018 should be another great year for shareholders.
On Monday, the federal government announced it would invest $49 million in Linamar’s business supposedly to advance efforts on artificial intelligence and advanced manufacturing. This cash endorsement is above the $33 million that Linamar appears to have spent on technology and development in 2016.
Reading the NAFTA tea leaves on this, it would suggest the Trudeau’s government is either confident Linamar will be relatively unaffected or preemptively supporting Linamar in advance of a storm. Let’s assume the former. Where could this government money go? It could go into more patent-oriented R&D work, such as a 2017 patented technology on axle assembly that can be used for electric and hybrid vehicles.
Second on this list is Aurora, Ontario-headquartered Magna International Inc. (TSX: MG)(NYSE: MGA), one of the largest global players in the automotive sector. A lot of great things have been said about Magna. Tuesday’s forecasting press release by Magna was interesting, expressing messages that free cash flows will increase, and sales may flatten out in 2018. I’m somewhat reading between the lines on the sales;Â nonetheless, it might be time to put a stop loss order for Magna since it has had a great run.
Third on this list is CanWel Building Materials Group Ltd. (TSX:CWX), which develops downstream wood products. Softwood lumber is historically one of the most bitterly disputed NAFTA items for the simple reason that what Canada has, the U.S. needs. NAFTA buzz has, however, not hurt CanWel to date, since the share price is up 21% in the last six months (when NAFTA meetings started). It must be said that West Fraser Timber Co. Ltd. (TSX:WFT), another lumber company from the West Coast, is up even more, 42%, over the same six-month period.
But did I mention that CanWel pays a 9% dividend yield? Normally, an ultra high yield makes me nervous. CanWel recently stated it intends to maintain its current dividend policy, but do you think CanWel would confess a planned dividend cut? By the numbers, the payout ratio is high — above 100%. The company didn’t make it any easier when it issued an additional six million shares in 2017. The annual lump sum from 77 million shares amounts to $44 million in dividend payouts for 2018. The company is counting on forthcoming proceeds from a fall 2017 acquisition of complementary Hawaii-based company Honsador Building Products.
Take home
Linamar edges out these others in this NAFTA-focused session.
