In a move that’s sending ripples through the financial markets, President Donald Trump announced a 25% tariff on imports from Canada and Mexico, with a 10% tariff on Canadian energy products and Chinese goods. This decision, aimed at addressing concerns over illegal immigration and drug trafficking, has significant implications for Canada’s manufacturing and steel sectors. Two Canadian stocks now in the spotlight are Linamar (TSX:LNR) and Labrador Iron Ore Royalty (TSX:LIF). So, let’s look at why Canadian investors might want to watch these stocks as well.
The stocks
Linamar, headquartered in Guelph, Ont., is a major player in the automotive and industrial manufacturing sectors. In the third quarter of 2024, Linamar reported a free cash flow of $269.6 million — a substantial increase from the previous year, driven by robust earnings and prudent cash management. The Canadian stock’s industrial segment saw a 24.3% rise in sales, attributed to global market share growth in combine drapers and the acquisition of Bourgault Industries. The mobility segment also experienced a 2.1% sales uptick despite market downturns, highlighting Linamar’s resilience and strategic positioning.
Labrador Iron Ore Royalty, based in Toronto, holds interests in Iron Ore Company of Canada (IOC), which operates a major iron mine in Labrador. In the third quarter of 2024, LIORC faced challenges due to lower iron ore prices and reduced pellet premiums. Royalty revenue stood at $41.5 million, a 12% decrease from the same quarter in 2023. Net income per share was $0.53, marking a 32% decline year over year. These results were influenced by a global reduction in steel production and increased iron ore shipments from major producers, leading to price pressures.
The newly imposed tariffs could exacerbate these challenges. For Linamar, the 25% tariff on Canadian exports to the U.S. may lead to increased costs for American consumers, potentially reducing demand for Linamar’s products. This scenario could pressure the company’s profit margins and affect its growth trajectory. Similarly, Labrador Iron Ore Royalty might face heightened difficulties. The steel industry is highly sensitive to trade policies, and a 25% tariff could lead to decreased demand for Canadian iron ore in the U.S. market. This situation may further suppress iron ore prices and impact LIORC’s royalty revenues and profitability.
What to consider
Investors are now grappling with the dilemma. Should they steer clear of these Canadian stocks due to the potential risks or view the current dip as a buying opportunity? Linamar’s recent performance demonstrates its ability to navigate challenging environments, suggesting that the Canadian stock may adapt to the new tariff landscape. However, the extent of the tariffs’ impact remains uncertain, warranting cautious consideration.
For LIORC, the situation is more complex. The Canadian stock’s reliance on iron ore prices, which are subject to global market dynamics and now additional trade barriers, introduces a higher level of risk. Potential investors should closely monitor global steel production trends and the company’s strategic responses to these challenges.
It’s also essential to consider the broader economic context. The tariffs have sparked concerns about a potential trade war, with Canada and Mexico contemplating retaliatory measures. Such developments could lead to increased market volatility, affecting not only these companies but the broader investment landscape.
Bottom line
So, while Linamar and LIORC have demonstrated resilience in the past, the newly imposed tariffs introduce significant uncertainties. Investors should conduct thorough due diligence, considering the Canadian stock’s financial health, market positions, and the evolving trade environment before making investment decisions.
