The magnitude 8.9 earthquake and the subsequent tsunami that hit near Sendai, Japan will continue to have ripple effects for months to come on small to large cap companies in an assortment of sectors.
While Japan has dealt with earthquakes throughout its history, the March 11, 2011 earthquake was the largest to hit the country in 120 years, causing hundreds of billions of dollars’ worth of damage and a nuclear crisis, of which the extent is still unknown.
The wrath of the triple assaults from the earthquake, tsunami and nuclear disaster to the third largest global economy (behind the U.S. and China) can be expected to have a noticeable effect on some companies in industries within many sectors including basic materials, capital goods, consumer goods, energy, industrial goods, technology and utilities.
To put Japan’s importance to the U.S. in perspective, Japan is the United States’ fourth largest trading partner.
In 2010 Japan claimed $60.5 billion of U.S. products or 4.7% of United States’ exports of which approximately three fourths were manufactured goods. Furthermore, the U.S. imported 6.4% or roughly $124 billion of products from Japan in 2010.
The largest share of imports from Japan, approximately $46 billion or nearly 30%, was motor vehicle and motor vehicle parts. Of these Japanese imports, approximately $32 billion was from passenger vehicles and roughly $14 billion was from motor vehicle parts.
What’s more, in 2010 the U.S. imported $12 billion of computers, computer accessories, semiconductors and telecom equipment from Japan.
Furthermore, to put Japan’s dominance in the microchip market in perspective, the country supplies approximately 20% of global semiconductors and roughly 40% of flash memory chips.
The disaster can be expected to be disruptive to U.S. production in sectors dependent on Japanese parts due to Japanese transportation and power infrastructure interruptions. These setbacks are expected to result in lower supplies and higher prices.
Already there are reports that the technology giant Apple Inc. (AAPL) is facing a battery shortage for its iPods and there is speculation of shortages for its iPads and iPhones.
However, some companies like Spansion Inc. (CODE) may reap benefits from lower supply chains. The Company’s Austin, Texas facility is an active second supply source for Texas Instruments’ Aizu fab.
Still, production at Aizu fab was recently restarted and Texas Instruments Inc. (TXN) expects it to be in full production by mid April 2011.
Toyota recently confirmed that the interruption in production from the damage to certain part suppliers will result in a shortage of 233 parts for at least 30 days.
Ford Motor Co. (F) and General Motors Co. (GM) have fared slightly better. Still, part shortages caused Ford to take plants in Belgium offline and GM to briefly close a plant in the southern United States.
Similarly, the U.S. hybrid vehicle market is particularly reliant on Japan for electronic components and batteries. Likewise, the transmission system that is used in the Chevrolet Volt is made in Japan.
Consumers have already seen increased prices on Toyota’s Prius and a longer wait on certain choices at some Toyota dealerships.
Although, these setbacks can be expected to have an impact on a greater number of large cap companies then small cap companies, it can still have a heavier impact on revenues, margins and earnings of those small cap companies that may be affected.
Therefore, it is important to keep a number of things in mind when evaluating how the Japanese disaster may affect the companies within your small cap portfolio.
The longer the setback to the supply chain for Japanese products, the higher the prices could go. This in turn could negatively impact margins and earnings of those companies relying on those parts from Japan. Similarly, if prices would increase and the company using the higher priced product decided to offset the increased cost of parts, demand for their own end product may fall.
Furthermore, as inventories decrease, Japanese manufacturers may decide to only deliver to larger customers resulting in smaller companies having to stop production or find other possibly higher priced or poorer quality parts. Still, it is important to note that many electronic parts for end products work in close coordination with each other, making it impossible to simply replace one manufacturer’s part with another.
If manufactures decided to deliver to larger customers only, smaller customers may go to alternate companies for their parts resulting in an increase in customers and revenues in the short term for those substitute companies.
Additionally, Japan is the third largest market of U.S. agricultural exports. Investors can expect agricultural commodity prices to increase as fears that the nuclear crisis’ impact on Japan agriculture products grow. Any increase in prices may result in shorter term revenue and margin upturns for companies within that industry.
Likewise, the smaller Midwest agriculture company Andersons, Inc. (ANDE) may see benefits also.
Similarly, the nuclear crisis in Japan has caused nuclear power and uranium mining share prices to fall which may lead to long term buying opportunities.
Cameco Corp. (CC), the world’s second largest uranium producer, is down over 17 percent from its March 11, 2011 close and off 31 percent from its 52 week highs from February 2011.
Smaller uranium companies haven’t fared much better. Uranium Energy Corp. (UEC) is down approximately 18 percent from its March 11, 2011 close and has fallen nearly 47 percent from its 52 week high from December 2010. Similarly, Uranium Resources (URRE) is off nearly 11 percent from its March 11, 2011 close and down nearly 48 percent from its 52 week high from December 2010.
Still, Japan is a major buyer of liquefied natural gas (LNG). The price of liquefied gas can be expected to be higher in the shorter term as Japanese imports of LNG increase to support the escalation of gas fired generators substituting for lost nuclear power.
Cheniere Energy, Inc. (LNG), Clean Energy Fuels Corp. (CLNE), Golar LNG Ltd. (GLNG) and Teekay LNG Partners LP. (TGP) are basic material, services and utility companies that stand to possibly benefit from an increased demand or price in LNG.
Cheniere Energy, which is primarily engaged in the LNG related business, had over 92% of total revenues or $269.538 million from LNG terminal revenues during fiscal 2010.
The utility company, Clean Energy Fuels delivered 33.9 million of LNG in Gasoline gallon equivalents during fiscal 2010. Additionally, the services companies, Golar and Teekay are involved in the transportation of LNG.
Finally, it is estimated that rebuilding homes, factories, roads and bridges could cost over $200 billion.
Likewise, Japan imported approximately $10.4 billion of wood products last year, making it the third largest global importer. What’s more, over 70% of Japan's 2010 softwood log imports were exported by the United States and Canada.
On an intermediate term aspect, basic materials and industrial goods, especially wood products and building and construction machinery will likely see an increase in demand to help repair or replace damaged infrastructure, homes and factories.
During the last several years, Pope Resources exported between 6 percent and 16 percent of its annual production to markets in the Pacific Rim.
Rayonier Inc. sold a total of $245 million of Timber and Wood products in fiscal 2010. What’s more, approximately 10 percent Rayonier’s $1,315.0 million of consolidated revenues were sold to Japan in 2010.
Weyerhaeuser Co. exports a number of materials to Japan, including pulp, liquid packaging board, logs, lumber and wood chips. The Company sold $631 million of its $6,552.0 million of consolidated revenues to Japan in fiscal 2010.
Astec Industries, which designs, engineers, manufactures and markets equipment and components used primarily in road building, utility and related construction activities, sold $5.797 million of its $771.335 million in 2010 revenues to customers in Asia.
Similarly, Caterpillar Inc., the global manufacturer of construction equipment, had $7,482.0 million of machinery sales in the Asia/Pacific region in fiscal 2010.
The crane manufacturer and food service equipment company, Manitowoc Co. Inc., sold $307.8 million of products to customers in Asia during fiscal 2010.
Still, it should be noted that it is likely to be months prior to any rebuilding is started and purchase patterns are anticipated to be slow.