Retailers, telecom operators and banks will be the main beneficiaries of the tax reform approved by Donald Trump. In 2017, the US economy showed steady growth, reinforcing investor confidence that the crisis was over. Positive dynamics can be traced not only in statistics from the labor market (unemployment at historical lows, salaries are rising), but also in the actions of the Federal Reserve.
Last year, the Fed, which was steadily raising interest rates amid accelerating inflation, launched a program to reduce its balance sheet in the amount of $ 4.5 trillion by $ 10 billion per month. After February 2018, the monthly amount of asset reduction will be increased to $ 50 billion.
Maintaining such a monetary policy, coupled with the implementation of Donald Trump's tax reform, will increase corporate profitability by 5-20% depending on the industry they represent. Retailers, financial companies and telecoms generate the main revenue in the USA, therefore we consider these sectors to be the most promising for investments next year.
Retail giants such as Macy’s (M), Target (TGT) and Nordstrom (JWN) make money exclusively in the United States. Due to changes in the tax system (the rate will be reduced from 37% to 20-23%), their profit will grow by an average of 45%.
Shares of these companies should be included in the portfolio now, since ideas related to tax reform are likely to be won back in the first two quarters of this year. In part, this factor has already been taken into account in quotes. This is evidenced by the growth of Target (TGT) and Nordstrom (JWN) quotes by an average of 17% over the past two months, as well as Macy’s securities appreciation by 46% over the same time.
Traditional retailers are still inferior to Amazon (AMZN) in terms of business growth, so it’s difficult to talk about their long-term prospects.
Walmart (WMT) seems to be the most promising in this sector – thanks to the development of the Internet direction, it is quite capable of competing with Amazon. Walmart receives about 75% of its revenue in the United States, so three quarters of its pre-tax profit will increase by 45%. In this regard, we forecast the sales of the retail network in 2018 in the amount of $ 512 billion, and pre-tax profit – at the level of $ 21.22 billion.
In this situation, the retailer will save $ 2.5 billion in taxes, which will allow him to increase capital costs for the development of online trading to $ 7-7.5 billion. It is the promotion of the online platform that will allow the company to stimulate the revenue growth that we observed last year.
While online sales form an insignificant part of the turnover of the entire corporation, but the transformation of Walmart's business potentially allows us to expect that this direction may become leading over time. The target price for Walmart shares by the end of 2018 is $ 121 per share.
The main players in the American market AT&T (T) and Verizon (VZ) have a similar sales structure: corporations generate 94% and 100% of their revenue in the USA, respectively. A more promising idea is the purchase of AT&T shares – the company is 28% ahead of its main competitor in terms of turnover. This means that its net profit can grow stronger. However, this is not the only plus of the company. She will get another advantage through a strategic merger with Time Warner (TWX).
This will allow AT&T to follow the path of Netflix – a company that compares favorably with other creators of entertainment content, as it has direct access to viewers through its own streaming service. This allows Netflix to collect and analyze huge amounts of information in order to offer viewers only the product they are interested in.
The synergy between AT&T and Time Warner lies precisely in the analysis of big data, which will enable AT&T to compete not only with Netflix, but also with Disney for a share in the entertainment media market. So far, regulators have a negative attitude towards this transaction, but if it is successfully concluded, the return will be tremendous, even despite the risks. AT&T target price is $ 50 per share by the end of 2018.
The financial sector has great chances to become a growth leader in 2018 and overtake the technology sector by this indicator. The dash of the financial industry will help to make a favorable market environment. After the adoption of the tax reform, American banks will have more free money, which will positively affect their creditworthiness.
Having received more profit, companies will want to reinvest part of the funds and attract more credit resources to develop and expand their business. The volume of issuance of corporate loans will increase, so will the rates on them. We expect the Fed to raise the rate three times in 2018 to 2.25%. This will allow financial corporations to increase turnover by $ 110 billion.
In addition, with the advent of Jerome Powell as head of the Fed, deregulation of the financial sector is expected, due to which the capital of banks will increase. The law on minimum capital does not require approval by the US Congress, so the process of its adoption can begin immediately after the change of head of the regulator. As a result, EPS banks will be able to increase by 5-10%.
Also in January 2018, changes will take effect in calculating the bank debt burden (advance approach). The new calculation method will take into account such safe assets as US Treasury bonds and Fed deposits. However, the real effect can only be seen after the first quarter. Most likely, it will be expressed in increasing banks' earnings per share to 10%. Thus, the entire financial sector will be a successful investment. The target for the Industry Select Financial Sector SPDR Fund (XLF) is $ 35, which means a potential return of almost 30% from current levels.