Al Root

The U.S. manufacturing economy is no longer in a recession, but the sector now has another problem on its hands -- a brewing trade war.

Investors have to figure out what companies have the most risk, and most opportunity.

On Monday, the Institute for Supply Management's Purchasing Managers' Index, or PMI, came in at 50.9 for January, up from 49.3 for December. A number above 50 indicates growth.

The January reading, reported in February, snapped a streak of nine consecutive months of contraction. The March 2024 PMI came in at 50.3. That March growth blip is the only reason the U.S. manufacturing economy didn't contract for 26 consecutive months.

Now manufacturers have to contend with tariffs. Over the weekend, Trump made good on his promise to slap 25% import levies on Canada and Mexico, and 10% on China. On Monday, the president paused the tariff for Mexico.

New tariffs threaten to raise costs and lower profit margins for U.S. manufacturers.

"Based on aggregate data for all U.S. manufacturing, a 10% across-the-board tariff would drag margins by about [1.2 percentage points] on average," wrote BofA Securities in a Monday report. The tariff on Canada and Mexico is 25%. BofA didn't calculate that impact, but it's safe to estimate it goes up with a higher tariff.

The average operating profit margin for a manufacturing stock in the Russell 1000 is about 15%, according to Bloomberg. A 1 percentage point to 2 percentage points hit is a roughly 7% to 13% reduction in profitability.

That is a rule of thumb investors can use. Current tariffs could take, say, 10% off 2025 profit estimates -- all else being equal. Of course, the impact varies widely across industries and companies.

BofA writes that lock maker Allegion, data center infrastructure provider Vertiv, Atmus Filtration Technologies, heating and air conditioning company Carrier, GE Vernova, and Rockwell Automation are most at risk.

Those six have about 25% of North American manufacturing capacity located in Mexico, according to the broker. Those stocks are down an average of about 2.6% in midday trading. The S&P 500 and Dow Jones Industrial Average were down about 0.8% and 0.4%, respectively.

The least at risk were heating and air conditioning company Trane Technologies, electrical component maker Ametek, equipment maker Dover, automation provider Emerson Electric, fuel dispensing technology company Vontier, and component maker Parker-Hannifin.

Those six have less than 10% of North American manufacturing located in Mexico. The stocks were down about 0.9% on average in midday trading Monday.

Of the six with low risk, five have above average Buy-rating ratios on Wall Street. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average for the five, excluding Trane, is about 70%. Only 28% of analysts covering Trane stock rate shares buy.

The five stocks analysts favor could be a place for investors looking to pick something out of the bargain bin after a tariff-related selloff. They trade for an average of about 21 times the earnings expected over the coming 12 months. The average multiple for manufacturing stocks in the Russell 1000 is about 25 times.

A stock screen, as always, is only a start. Investors have to understand the businesses and tariff changes will likely come rapidly for weeks to come.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 03, 2025 14:43 ET (19:43 GMT)

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