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US tax cuts – sell the fact

Michael McCarthy
December 18, 2017

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By Michael McCarthy

Despite a lack of legislative success, many US investors are pinning their hopes on the White House. A promise to slash corporate tax rates alongside other tax reforms has investors piling into US shares, creating new all-time highs. Naturally, this strength is spreading around the globe. Local shares that could benefit have received particular support.

However, the promise of tax cuts has been around for a long term. Corporate earnings momentum is positive, supporting higher share prices, but the US S&P 500 index is up more than 30% since the election. There is a similar effect with stocks exposed to US growth, such as Boral, Computershare, Cochlear and James Hardie. There is a real possibility that tax cuts are already factored, and that the delivery of the tax cuts could spark a “sell the fact” move. 

If the markets do adjust downward as the legislation is delivered, in my view, James Hardie (JHX) is particularly vulnerable. 

JHX benefitted from both the potential for tax cuts and the promise of a large and stimulatory infrastructure spend. The difficulty in gaining the approval of both houses of the US parliament for ANY legislation is apparent. Yet JHX’s share price is once again approaching all-time highs around $23.00.

It’s not just a “sell the fact” move that is potentially troublesome for JHX shareholders. Should the tax reform or infrastructure bills become unpassable the market judgement could be severe. On the other hand the best case scenario – both bills passed by both houses - may not add much to the current share price given the roughly 30% rally this year.

In valuation terms JHX looks more expensive at around 30 times earnings. The dividend yield is a relatively low 2%. Given a limited upside potential and a number of possible damaging scenarios, JHX shareholders may want to lock in gains before the fate of the tax legislation is known.

Published: Tuesday, December 19, 2017


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