Senate OKs GOP Tax Cuts; These Companies Are Celebrating The Most

Validea Peter Lynch Strategy Daily Upgrade Report - 12/9/2017

Senate Republicans cleared the way for $1.5 trillion in tax cuts early Wednesday with a 51-48 vote. The bill will head to President Trump’s desk, with a short detour through the House, which has to reprise its 227 to 203 vote due to procedural issues.

[ibd-display-video id=3034865 width=50 float=left autostart=true] Now the focus on Wall Street is figuring out just how big of a bonanza the new 21% corporate tax rate will be for corporate America and how much of a boost to earnings investors should expect.

On Monday, Goldman Sachs said that Wells Fargo ( WFC ) stands to gain the most among the biggest U.S. banks from the tax package, with a 17% earnings boost. Beyond the corporate rate cut, the legislation also limits the deductibility of FDIC premiums and limits the ability of companies to deduct past losses, which would hit Citigroup the hardest. After Wells Fargo, Goldman sees PNC Financial Services ( PNC ) and Bank of America ( BAC ) as the biggest winners, with expected earnings increases of 15% and 14%.

BofA Merrill Lynch analyst Kenneth Bruce upgraded credit-card issuers Capital One Financial ( COF ), Discover Financial Services ( DFS ) and Synchrony Financial (SYF) to neutral from buy on Monday and reiterated a buy rating on American Express (AXP), saying tax legislation wasn’t fully priced in to the stocks. Bruce sees a 15%-25% boost to EPS, with Discover and Synchrony near the top of the range and Capital One and AmEx both poised for a 17% EPS increase .

Delta Air Lines (DAL) CEO Ed Bastian told analysts last week that a 21% corporate tax rate would cut its tax bill by $800 million a year , the Financial Times reported. The tax legislation would boost Delta’s 2018 earnings by $1 per share above current guidance of $5.35 to $5.70 per share. That amounts to roughly an 18% EPS bump. Beyond the lower corporate rate, airlines will benefit from being able to immediately deduct the cost of aircraft purchases. Data from IBD’s parent corporation, William O’Neil & Co., show that Alaska Air Group (ALK) has the highest effective tax rate, 38%, among U.S. airlines.

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“Companies with businesses that are primarily domestic-focused tend to have higher tax rates on average. Similarly, small-cap stocks, which are generally more U.S.-centric, could see strong earnings revisions,” wrote William O’Neil chief investment strategist Randy Watts and senior equity analyst Romeo Alvarez. Among S&P 500 sectors, “Energy currently has the highest corporate tax rate and would see major relief.”

The data show Marathon Oil (MRO) with a 49.9% effective tax rate and ConocoPhillips (COP) paying a 46.9% rate.

CVS Health (CVS) has a 38.9% effective tax rate, tops among consumer staples companies, according to William O’Neil data. Aetna (AET), another high-tax company, is being acquired by CVS as it braces for the entry of into the retail prescription business. CEO Larry Merlo said recently that CVS would take some of its tax windfall and reinvest it in reconfiguring its stores to provide more health services.


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