US tax cuts mix pleasure and pain for Europe’s dollar earners

LONDON –  A slate of US tax reforms could provide a lift for European companies that sell into the country. For others, it may yet turn out to be a threat.

Proposals passed by lawmakers on Wednesday will see the corporate tax rate in the United States fall to 21 percent from 35 percent, a dramatic cut that is likely to boost the profits of American corporations.

The change is likely to benefit some European companies, too, and investment banks have been quick to point that out: JP Morgan has introduced a basket of 41 European stocks it believes will benefit most for its clients to buy.

More than a sixth of companies in the pan-European Stoxx 600 index derive more than a third of their revenues from North America, according to Thomson Reuters data.

Thirty-one stocks generate more than half their turnover in the United States. Nineteen of those are UK-domiciled, with construction and defence companies well-represented: Ashtead (AHT.L), Cobham (COB.L), Ferguson (FERG.L), Meggitt (MGGT.L) and Melrose (MRON.L) are all heavily exposed, according to the data.

Equipment rental firm Ashtead, whose U.S. Sunbelt arm made up 86 percent of 2016 revenues, should see a “material impact” from the tax reform, according to analysts at Liberum.

The company has told analysts it expects its effective tax rate to fall from 34-35 percent to 23-25 percent — an uplift of 15 percent to Liberum’s current profit estimates for 2020.

Building and plumbing supplier Ferguson, with 78 percent of its revenues from the United States, could also benefit according to analysts at Deutsche Bank, though the company said in its quarterly results in early December the reduction of its tax rate would be less than four percentage points.

InterContinental Hotels (IHG.L) (58 percent U.S. revenues) said on Thursday its tax rate would reduce by mid-to-high single-digit percentage points, as well as benefiting from an “exceptional” tax credit in the year the bill is signed.

Share prices of many U.S.-exposed European companies have seen strong gains as the tax bill edged towards the finish line. But Mike Bell, global market strategist at JPMorgan Asset Management, said analysts have been quite slow to factor it into their 2018 company earnings estimates.

“It would not be that surprising if we see that with P/E having expanded already, as those earnings upgrades come through that potentially takes (share prices) even a little bit higher,” he said.

But not all firms that earn in dollars will gain an advantage.

Boeing (BA)N>, whose main commercial planemaking rival is Europe’s Airbus (AIR.PA), said it would now pay tax at rates closer to those of global rivals, helping it compete better.

Morgan Stanley said French catering company Sodexo (EXHO.PA), which makes 61 percent of operating profit (EBIT) in the United States, could see 6 percent EBIT upside from the reforms, but the investment bank believes British rival Compass already has a lower U.S. tax rate than Sodexo and would see “little benefit”.  Daniel Ekstein, an analyst at UBS, said the broker has received a number of questions about whether Dutch retailer Ahold Delhaize (AD.AS) would benefit.  Despite deriving 62 percent of revenues from the United States, the retailer’s tax rate is already low at around 24 percent, meaning its U.S. peers could benefit more and leading to deflation in the retail sector.  “If the U.S food retail industry were to benefit from, say, an average 5 percent reduction in tax rate we believe that in the mid-term you’d see shelf-edge prices 5 percent lower, rather than margins 5 percent higher,” he said in a note to clients.


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