C.J. Lawrence’s Terry Gardner Quoted in TheStreet was asked to provide his insights on the industrial sector – June 25, 2018

Harley Davidson’s Woes May Not Affect All Industrials Amid Strong U.S. Economy by John Pickering

Rough day for Harley.

Harley Davidson (HOG) shares fell as much as 7% after the American motorcycle manufacturer said it would move some if its production overseas to avoid tariffs imposed by the European Union in response to President Trump’s trade moves.

The company, based in Republican House Speaker Paul Ryan’s home state of Wisconsin, is one of the first to acknowledge that President Trump’s trade battles are going to cause harm to U.S. businesses that the President has vowed to protect. Trump took to Twitter in the evening to slam Harley.

Harley is an iconic brand and to see them react this way and reposition their manufacturing is counterproductive to what the administration is trying to achieve, said Terry Gardner, portfolio strategist at C.J. Lawrence brokerage in New York.

Trump’s decision to pull the U.S. out of the Trans-Pacific Partnership had already prompted Harley to close a plant in Missouri and build one in Thailand. The current decision will attempt to save Harley’s European customers about $2,200 extra per bike.

“Harley-Davidson believes the tremendous cost increase, if passed onto its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region, reducing customer access to Harley-Davidson products and negatively impacting the sustainability of its dealers’ businesses,” the company said in a statement.

The Dow Jones Industrial Average fell as much as 2% today before closing down 1.3% to 24,252.80, paced by Boeing (BA) and Caterpillar (CAT) , as the rising trade tensions threaten to offset expectations that U.S. companies will report strong second-quarter earnings. President Trump may be betting that the U.S. economy, which is growing faster than Europe’s and is less dependent on exports than either Europe or China, is better equipped to withstand a trade war.

“He’s probably right” that the U.S. is better positioned than some of its rivals,” Gardner said, referring to the President. Still, “it’s important to remember that trade wars have casualties. While one country can claim victory there are often victims globally.”

Europe imposed tariffs on $3.3 billion of American products Friday in response to U.S. barriers on imports of aluminum and steel. That triggered threats of further tariffs on European cars from Trump.

Daimler AG (DMLRY) , makers of Mercedes-Benz cars, said last week that tariffs will lower its profits, pushing down Germany’s DAX Index and was among the worst performers of the region’s stock gauges as data showed business sentiment slipped. Automakers were the big losers after more tariff threats from Trump at the end of last week.

Even amid the tariff fears, Lawrence’s Gardner sees optimism for investors in industrial stocks, especially defense stocks. The S&P Industrials sector, which at minus 4.3% is the second worst sector performance this year so far behind consumer staples, is poised to rebound as the effects of rising oil prices are reflected in high capital spending by oil producers.

Oil and natural gas prices have rebounded to the point of spurring capital investment, and general capital expenditure growth is accelerating,

Gardner also pointed to United Rentals Inc. (URI) as a company poised to benefit from higher capital spending by oil companies, because it can expect to gain more business as customers need to move more stuff around.

“Trade related risks to the broader market look to be increasing, and industrial stocks are not immune to trade war related disruption,” Gardner wrote. “But industrial stock prices may already reflect much of that risk and may not be discounting the possibility that we are in the midst of a capital spending cycle.”

United Rentals, which is up about 50% in the last year, fell 4.4% today to $148.15.

Article Link: https://www.thestreet.com/investing/harley-woes-may-not-affect-all-industrials-amid-strong-u-s-economy-14633231