Some Canadian companies start new year with gains from U.S. tax cuts: analysts

Some Canadian companies start new year with gains from U.S. tax cuts: analysts
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MONTREAL — Some Canadian companies that earn a high share of their revenues in the United States are starting the new year with the prospect of saving big from a large reduction in the corporate tax rate, say industry experts.

New Flyer (TSX:NFI) and Boyd (TSX:BYD.UN), which earn more than 80 per cent of their sales south of the border, will be among those that are most impacted, an AltaCorp Capital report said Tuesday.

Analyst Chris Murray said that among engineering and construction firms, Stantec (TSX:STN) and WSP Global (TSX:WSP) will be “favourably impacted” from the tax changes and planned American infrastructure spending.

“We would expect that the introduction of new tax rules could serve as a catalyst for accelerated acquisition activity as a number of sellers see a window in which to divest their business to take advantage of the changes, benefiting the growth via acquisition strategies,” he wrote in a report.

Less likely to be helped is SNC-Lavalin (TSX:SNC) which has just 11 per cent of revenues coming from the U.S.

Tax changes approved by the Republican-led Congress and signed by President Donald Trump before Christmas cut the corporate income tax rate to 21 per cent effective Monday, from 35 per cent.

The law also allows repatriation of about US$2.6 trillion in corporate profits held offshore at a one-time tax rate of eight per cent on illiquid assets and 15.5 per cent on cash and cash equivalents.

Molson Coors, headquartered in Denver and Montreal, declined to provide details about how the tax changes will affect the brewery ahead of its quarterly results Feb. 14. However, 70 per cent of the beverage company’s revenues come from south of the border, said spokesman Colin Wheeler.

Flight training and simulator company CAE Inc. (TSX:CAE) and Bombardier (TSX:BBD.B) get 36 and 31 per cent of revenues respectively from the United States. The world’s largest economy accounts for 22 per cent of revenues at Air Canada (TSX:AC) and 16 per cent at WestJet Airlines (TSX:WJA).

In a report before the tax changes were approved, RBC Capital Markets said large tax reductions could lead to a significant shift in winners and losers.

“We think it could have a profound and positive impact on TSX performance, given its cyclical tilt,” Matthew Barasch wrote Sept. 26.

However, he warned that clouding the outlook is the fact that most Canadian and U.S. companies operating south of the border actually pay a lower effective tax rate than statutory corporate tax rate.

“While a comparison of statutory tax rates (inclusive of all state and local taxes) suggests that U.S. rates are far higher than most other countries, a comparison of effective tax rates suggests something different.”

PricewaterhouseCoopers says the implications of the tax law on Canadian-owned businesses can be significant.

It said there are many parts of the law that could affect Canadian firms in various ways, including an opportunity to realize permanent tax savings by accelerating deductions and deferring income.

“The various provisions may be beneficial or detrimental. Thus, it is important to give careful consideration to the specific implications for your operations so that value is preserved when possible,” it wrote to clients after the bill was passed.

Even while some Canadian sectors such as oil and gas producers won’t be directly impacted, they would get a lift from the resulting higher U.S. economic growth that is expected, he noted.

Barasch said some Canadian banks and insurance companies will get some earnings growth.

Most real estate companies would not be directly impacted because of their REIT structures, but non REITS such as FirstService Corp. and Colliers International Group Inc. (TSX:CIGI), with large U.S. footprints stand to benefit materially.

Canadian telecommunications companies and grocers with limited direct U.S. exposure will have little benefit.

However, Barasch said it’s difficult to quantify the impact for convenience store operator Alimentation Couche-Tard (TSX:ATD.B), which gets nearly 70 per cent of its revenues from the U.S.

And he said dairy processor Saputo Inc. (TSX:SAP), Intertape Polymer Group Inc (TSX:ITP) and Stella Jones Inc. (TSX:SJ) stand to get double-digit earnings gains.

Ross Marowits, The Canadian Press

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