Is there Such Thing as a Tariff Winner?
One of the things investors are searching for currently given the volatility and uncertainty of the developing tariff drama is if there are any pure-play winners from tariffs. One would presume that a company that stands to win from these policies would be located within the US, the majority of their operations would also be US based, and the majority of their customers would presumably also be in the US. Maybe to add to the ‘perfect tariff winner’ scenario, the products or services that the company provides are typically done outside of the US (or at least done in a cheaper manner outside the US) that will now lead to a situation where a lot of demand will be forced to flow to the company or industry in question.
On a net basis, after considering all of the second and third order impacts from tariffs, the real answer is likely that there aren’t any true winners here. If tariffs cause a recession either in the US or with their trading partners, the slowdown that this alone will cause will more than likely dominate any of the benefits a company or industry might see. Even if these changes don’t spur a recession, the pause or pullback in trade and investment will also likely offset most benefits available. Longer-term, there could MAYBE be an argument that certain companies and industries are able to grow their volumes/revenues and do so at higher margins, but this likely has to be at the expense of someone else for this to happen, so whether it occurs within the US or elsewhere is a big question mark. But enough of the 10,000 foot view, we wanted to highlight a company that in all respects should be a tariff winner and is probably the poster child for the type of company one would want or expect to be a tariff winner and look at why (or why not) it might be a winner.
A quick disclosure here as it is a small-cap US company. I2i Capital nor myself have any financial interest in this company and we have no plans to have a financial interest in the near term in this company. We are not highlighting this name for its investment merits good or bad. We are highlighting it because it is a great example of the complex nature of these broad sweeping changes to trade.
The company in question is called Insteel Industries (IIN). It has a market-cap of roughly $670 million and is a manufacturer of prestressed concrete strand and welded wire reinforcement. This company essentially makes the steel mesh that concrete is laid over to help strengthen/reinforce the concrete. It doesn’t get more industrial and American than this! Further, essentially all sales by this company are within the United States. It is easy to see how this is probably the exact type of company the current US administration envisions in strengthening and supporting with these tariff policies. Things remain in flux and it is early days, but let’s look at the recent earnings release to understand what the benefits look like from the second quarter press release from the company:
Insteel is clear here that there are some benefits to these tariffs. It is limiting lower priced competition from entering the market. Without getting into comparative trading advantages and the details of who wins or loses here, at face value, this looks like a win for Insteel and they are still looking like they might be a ‘tariff winner’. Once you read on, however, the puts and takes start to roll in:
So, while Insteel is seeing increased demand as companies look for ways to avoid tariffs, it is not a pure win, as the capacity for the inputs that Insteel uses is low within the US and supply is tight. Typically, the company appears to have turned to Canada and Mexico to fill the shortfall in supply of inputs, but the tariffs on these countries increases prices. In fairness, the company doesn’t view this impact as overly material but they are concerned about adequate supply of their key inputs. Meanwhile, capital equipment costs are likely going higher as well, as the company notes.
Overall, Insteel is probably as close as you get to a ‘tariff winner’ and while they probably come out of this better off in some way, it is obviously not all positive news for even them. Perhaps more importantly, even if demand for their goods is higher, if they don’t have the inputs to be able to meet the demand, it won’t matter! And again, we aren’t even getting into the knock-on impacts that any economic slowdown would have, as this company and most companies that would be benefactors of tariffs in theory are also going to be more sensitive to a recession.
To reiterate, we don’t have any financial interest in this name and no near-term plans to initiate any position. We just thought that in our search for ‘tariff winners’ this company was a perfect example of the complex and intertwining impacts that these tariffs have on businesses. In some cases, there is a place for tariffs and they can help certain industries at a disadvantage. As Canadians, it is a strategy that most of us are likely more than familiar with and that is ok. But the way these changes actually manifest themselves and work its way through an economic system is far from straightforward and ripe for unintended or unforeseeable consequences.
*The author and the i2i Long/Short US Equity Fund do not have a financial or other interest in above companies discussed at the time of publishing.
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