It's a special mailbag episode on Industry Focus: Energy. In this week's show, host Sarah Priestley and Motley Fool contributor Taylor Muckerman answer listener questions about investing in a few of the many subsectors of the energy and industrials sector.
What will the newly imposed solar cell tariff mean for solar and the U.S. economy over the next five years? Who are the strongest players in the railroad industry today? Why don't we talk about the agriculture industry more, and what are some companies that investors should check out if they're interested in the space? What are the biggest risks that investors need to be aware of in the agriculture sector? Get answers to all these questions and more by tuning in.
A full transcript follows the video.
This video was recorded on Feb. 1, 2018.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 1st of February. We're going to be doing a listener mailbag episode. This is where we answer a couple of questions that you have kindly sent in. I'm your host, Sarah Priestley, and joining me in the studio is Motley Fool Canada Premium analyst, Taylor Muckerman. Taylor, how are you doing?
Taylor Muckerman: I'm great! This episode is right up my alley.
Priestley: [laughs] Thank goodness! What, you mean random questions?
Muckerman: Yeah, random questions and the topics that they're covering.
Priestley: So, before we start in earnest with today's show, I just want to mention one thing. The Motley Fool has a competition for college students. It's open to all people over 18 attending college. The first-place winner gets $10,000, and 20 runners-up can receive $1,000. All you have to do to enter is write a 500- to 1,000-word article on one of the prompts listed on the competition page, which is at www.fool.com/competition. It doesn't close until April 30, so there's plenty of time. If you're a college student, then please apply, it's a great way to get some extra cash and put your podcast listening to some good use. Similarly, if you know any college students, please spread the good word. Terms and conditions apply. Please visit www.fool.com/competition for more details. How does $10,000 sound, Taylor?
Muckerman: It would sound even better if I was a college student.
Priestley: [laughs] Good point. You are over 18, though.
Muckerman: I am.
Priestley: Just. So, the first question we received was actually on Twitter. You can always tweet us any time @MFIndustryFocus. For anyone not familiar with this, on Jan. 23, President Trump made these remarks. He said, "Based on the recommendations of the independent bipartisan U.S. International Trade Commission, I'm taking action to impose safeguards on imported residential washing machines and all solar products." We covered the basics of this on an episode on the 27th of September last year, when the ITC, the International Trade Commission, ruled 4-0 in favor of authorizing trade barriers. But this all came after a petition by Georgia-based Suniva, Oregon-based SolarWorld, that invoked the 201 Safeguard law. President Trump believes this will create jobs, revive the U.S. manufacturing sector. Were you surprised, Taylor?
Muckerman: They brought this up a few months ago. The two companies that brought it up, SolarWorld and Suniva, aren't even U.S. companies. They're based here in the U.S., but SolarWorld is owned by a German company, and Suniva is owned by a Hong Kong-based company. So, interesting to see tariffs imposed due to complaints by foreign companies. But, yeah, 30% tariff. A little bit surprised simply because of the impact that the solar industry has had on the U.S. job force over the last five to 10 years. The rapid decrease in cost, you're looking at a 70% lower install cost since 2010. Just, a dramatic lowering of costs there. Now it's competitive with a lot of other energy sources, even without subsidies, even though that was one of the big hangups for a lot of people, that this industry has been wildly subsidized in the past. You're still looking at about $20 billion in subsidies to fossil fuels in the United States, so it's not just solar that's being helped out by the U.S. government. It's all across the board.
Over a quarter of a million jobs in this industry. The Solar Energy Industries Association says we're going to lose about 34% of those over the next five years, 23,000 of that 260,000 this year alone. So, upfront cost already right there just in terms of jobs. And these jobs are generally much higher paying than minimum wage and other blue-collar jobs. The claim that it's going to create jobs -- there's nobody that says it's going to remain right where it is. It's either, we're going to lose 34% of jobs, or we're going to create jobs, according to Donald Trump. I'm going to trust the industry experts that have been talking about this since it was even announced as a possibility, and suggest that maybe this isn't going to be so great for the solar industry, setting us back when we've really been championing renewable energy for the last few years and trying to keep up with the rest of the world, with so many other countries just plowing money into renewables in terms of wind and solar and hydro. I'd hate to see us get left behind.
Priestley: As you quite rightly pointed out, there's been a huge boost in jobs. I think the jobs are up 178% since 2010 in the solar industry.
Muckerman: Yeah, doubled since 2012.
Priestley: It's crazy. I think, for people not familiar, this particularly pertains to the solar cell manufacturing, whereas a bigger portion of the industry now is essentially the installation of the panels, is that right?
Muckerman: Yeah, that's right, and that's where most of this job loss they suggest is going to be impacted. The U.S. solar panel manufacturers aren't too nervous about this, but certainly companies like SolarCity, and there's so many regional competitors to solar installations, small businesses that are going to be impacted by this, most likely. They just don't have the scale that a lot of the larger manufacturers have, like First Solar and SunPower and things that are global companies. So, you're looking at a potential impact to small and medium-sized businesses here. But, it's not a 30% over the whole five years. It's going to drop 5% each year, landing at 10% the final year and then disappearing in year six. Still, pretty broad impact if you listen to those in the industry.
Priestley: I think the first 2.5 gigawatts of imported solar cells are exempted, too, which obviously will soften the blow somewhat but not completely. It's important to note that, of the percentage of the finished product, I think the solar cells are somewhere about 30%. But, you really have slim margins here, and to really make the sale on this you're talking about pennies per kilowatt, so everything is up for grabs. One thing that we might see, and it's been rumored that this has already happened, it's been rumored that an unidentified foreign company was discussing opening a solar module assembly plant in Jacksonville, Florida. So, we might start to see some more spending from foreign companies in terms of actually doing the assembly in the U.S. Still, that doesn't overcome a lot of the predicted job losses.
Muckerman: Yeah. More regionally based, too, like, more widespread around the country.
Priestley: Absolutely. We also got an email asking about the railroad industry, our opinion on stocks in the space. Personally, I'm fascinated by logistics, generally, in the U.S. right now. Freight is definitely not a small portion of that. I think it's a $60 billion industry with more miles in the system, supposedly, than any other rail system. That seems huge. But, that's according to the Federal Transport Administration, so it must be true. Of rail freight, the majority is bulk commodities like agricultural, energy products, mineral, paper, and this is because rail is great for moving heavy commodities over long distances, whereas trucks -- and we talked about trucking last week -- are best for transporting time-sensitive, high-value goods short to medium distances.
Muckerman: Also an industry in high demand, trucking.
Muckerman: We have a shortage of that.
Priestley: If you're bullish on the population expanding and people consuming more, then logistics is where you want to be.
Muckerman: For sure, yeah.
Priestley: So, what do you make of this space, Taylor?
Muckerman: You talk about it being a large industry, one of the largest globally for the United States and North America in particular. When you look at an industry this big, there's a few big players. You have, in order of size, Union Pacific (NYSE:UNP) is the No. 1 market cap looking at about $100 billion. Then, about half the size of that is Canadian National Rail (NYSE:CNI), which is the largest Canadian rail line, but it does have access straight down the gut of the United States, passing through Chicago and the Midwest down into the Gulf. Then, CSX (NASDAQ:CSX), mostly East Coast Appalachian region from New England down to its headquarters in Jacksonville, Florida. Then, Norfolk Southern, Canadian Pacific (NYSE:CP) and Kansas Southern. Those are the big six here in the United States. There's a couple of smaller ones. Then, of course, you have BNSF, which is owned by Berkshire, so you can't invest directly in that, but if you want access to it, just buy some $350 shares of Berkshire or however much it is these days.
But you want to look at three specific things when you look at these companies. That's what they're towing, where they're towing it, and how efficiently they're towing it. For the last five to 1- years, the most efficient one has been Canadian National Railway. Hunter Harrison, who recently passed away, as the CEO of CSX, really revolutionized the rail industry first at, I think it was Illinois Railway, I don't know if it was public at the time, but this was many decades ago. Then he took the helm at Canadian National Railway, and he basically created a whole new way of running a railroad with precision scheduling, driving the operating ratio down, which is operating expenses divided by revenue. That's kind of how you gauge the efficiency of railroads, and you can kind of compare the peer group. Right now, you're looking at Canadian National Rail with an operating ratio, I think they ended 2017 right about 60%, 60.4%. For some perspective, Union Pacific at 62.6%. CSX, another big railroad, at 67.9%. So, a little bit higher.
If you can follow him around the rail industry, he was at CN Rail for a while, then he got poached by Canadian Pacific, and then he got poached from there and moved to CSX where he unfortunately passed away several months ago as the CEO. So, that company is still in a state of flux, trying to transition to his method of precision railroading, because CSX's network is just ... they likened it to a bowl of spaghetti. It's just so convoluted, everything is going every which way, because it's in a tight area, hard logistically. When you look at Canadian National Railway, they go east to west to Canada and north to south straight down the gut. Canadian Pacific, east to west. So, they didn't really have this tangled mess that CSX has. So, they're busy closing major hubs, they're busy eliminating railway mileage. That company, I think you can look at it as a turnaround story. But the best of the breed, definitely, CN Rail, CP, and the biggest, Union Pacific.
Priestley: Actually raised a lot of questions about contingency planning when he passed away, I think. There was a big feature in the Wall Street Journal about that. Which, it's an unfortunate thing to happen, but investors need to know that, if it does happen, there's a plan in place.
Muckerman: Sure. They wanted to do an independent health screen and he said "No, you just have to take the word of my own personal doctor," and the board did. Whether or not that would have raised any red flags, no one will ever know. But, they did that, and they gave him a huge payout. So, definitely, he used his reputation to steer that discussion in his direction. So, yeah, certainly, another thing that investors would want to be cognizant of. You have to be aware of the handouts and --
Priestley: Compensation packages.
Muckerman: -- yeah, that the CEOs are getting. No matter how great they've been in the past, you can still reach too far.
Priestley: Mm-hmm. And you mentioned operating ratio, hugely important in this industry. Union Pacific, correct me if I'm wrong, has been driving for 60% for a while.
Muckerman: Yeah, that's their goal. Next year, they hope, 2019, they hope to have it in the 60% range.
Priestley: I think their stock dipped a little bit when they announced final year earnings, just because they didn't make that. They missed that mark because of some headwinds, I think fuel prices were up and it was a very early, bad winter. So, I think for a lot of the railroads, they reported similar issues. But, things to note, obviously, it's a really cyclical industry, and it's dependent on other industries, agriculture, energy, which we know go through these huge cycles. Also, coal accounts for nearly 40% of the tonnage. Coal is enjoying a bit of a boon now because of the presidency that we have.
Muckerman: I think he called it beautiful, clean coal last night on the State of the Union. I don't know if it's beautiful nor clean, but it is coal, so he got one of the three words right.
Priestley: [laughs] When I was in high school, we lived in a farmhouse and we had a coal fire, and I can tell you, it's not clean.
Muckerman: No. The billions that have been spent trying to make it clean and just haven't come through yet prove that it's much harder than just saying beautiful, clean coal a thousand times.
Priestley: Another thing to be mindful of is the increased use of pipelines in energy transportation. We've talked about that before, we've talked about all these new pipelines being built, especially around natural gas in the Northeast and things like that. I personally am still bullish, as we talked about, on the whole logistics infrastructure. But these are things that I think people need to be considerate of.
Muckerman: Yeah. You're looking at companies that pay dividends. They might not be the highest dividends in the world. You're looking at 1%-3%, maybe.
Priestley: 2.2% for Union Pacific, which is pretty good.
Muckerman: Yeah, Canadian National is around 1.8% or 1.9%. But when things do go flat for these companies, they're churning out a bunch of cash, buying back shares, they have the opportunity to raise the dividend if there's a lesser need to invest back into the business. So, even during downtimes, this is a very necessary industry. And some companies relying more on intermodal, where you have the cabs of the semi-truck rigs dropped onto a flatbed on a train, taking it from the shipping terminal to a trucking hub and then right on to the semi across the country. So, you can rely on that. And like you said, CSX has lost about $2 billion in coal revenue over the last several years. Before Hunter Harrison passed away, he said -- he admitted the game is up, coal is going to disappear, and CSX and others will have to find a way. But he said that he wanted the last railcar of coal to be transported on a CSX railway.
Priestley: He's kind of gone in there.
Muckerman: [laughs] Yeah, when I heard that, I was like, wow, you hear from the CEO of a company that's very dependent on coal, much less than it used to be but, to say that it's on its way out right when he took the job, that's where I was like, yeah, I think you're right.
Priestley: It's interesting to me, given how dependent the U.S. once was on passenger rail, that it just doesn't feature now, really. I mean, obviously, there are some, but it's not to the same extent. Air fare has just really wiped it out. We received a similar question about agriculture, basically, what do we think about it. Why do we not talk about it more, was the gist of the question. Which was, essentially, yes, you're right, we should talk about it more, it's a pretty huge part of the American industry.
Muckerman: It's massive.
Priestley: There are a lot of factors at play in this industry. It's dependent on whether oversupply issues weaken selling price, which is something that we're beginning to see. It's a tough industry, but we always need food and chemicals.
Muckerman: Yeah, commodity industry. That's basically an oil and gas industry or a gold or silver industry, wrapped up into something you can eat. [laughs]
Priestley: [laughs] Yeah, wrapped up in a cereal box. There's lots of ways to play the market, in terms of the equipment manufacturers, the seed suppliers, the fertilizer companies. What would be your strategy to hedge your bets in the industry?
Muckerman: Just diversify, I guess. Like you mentioned, there are several different subsectors of the ag sector as a whole. Fertilizer is one of the biggest. Commodity industry, these companies are mining things like potash, nitrogen, phosphate, ammonia. And some of them mine a lot of them, some of them are more niche and only mine one or two. The potash industry, one of the more important fertilizers out there. Back in 2013, the "OPEC of potash" broke up, it was a Russian company, Uralkali, and a Belarusian company, Belaruskali. They basically owned a third of the market of potash. Uralkali, the Russian company, backed out unannounced and sent the potash market into a free fall. It's been recovering ever since. They had discussions this past summer in July. Nothing came of it, so they're still separate entities. But, you're looking at those two companies, and then the Canadian giants. You have Nutrien, which is Agrium and PotashCorp combined. They just finalized that deal and released the new ticker late last year, November or December of last year. That's a $34 billion company. Then, CF Industries is a U.S.-based company. Mosaic is one of the more diversified companies in terms of the fertilizers they produce. Then, another big one internationally, Sociedad Quimica y Minera de Chile, SQM.
Priestley: Well done.
Muckerman: I guess, maybe, somebody can correct me over Twitter. They are a big diversified company. Not only fertilizer but lithium, they're a big play in the lithium market, iodine, industrial chemicals and potassium. So, a little bit of a, maybe you're not hedging all your bets on the success of fertilizer, even though you imagine, left and less arable land, more and more people, you're going to need to increase your yield, so fertilizer is an important part of that. So, that's one area.
These companies are cyclical, as you mentioned, not only because crop yields are weather-dependent, but also, people eat more sometimes than they do in other years. Population can boom, you could have a big demographic start to die off or a big demographic start to hit their years where they eat more. So, it's definitely something you have to pay attention to, in terms of global population and things like that. These crops are being moved all over the world by boat and train.
Priestley: One interesting thing to note about that is, I read a statistic today that said meat consumption has declined 7.3% in the U.S. China is now the largest consumer, and it is projected to increase 15%. So, I thought that was interesting. I'm not sure exactly if that's this whole shift toward more plant-based foods as a health movement, or what that actually means for the U.S. But, certainly, these huge global demographic swings, as you mentioned, play a huge role. Another company that's worth mentioning, you may have already mentioned it, FMC Corp.
Muckerman: Oh, yeah, right, yes.
Priestley: Purely just because they're back in vogue now after falling out of favor on Wall Street. Their lithium segment, which I think only contributes about 10%, their plan is to grow that and grow that and grow that and then spin it off.
Muckerman: Their other big business is crop protection -- pesticides, herbicides and insecticides, things like that.
Priestley: Their P/E is pretty high, I think, basically, because lithium is so hot right now. Everyone is seeing what Tesla is doing --
Muckerman: Thanks, Elon Musk, you jerk, with your Gigafactory.
Priestley: -- and thinking, "We're going to double the global production of batteries, I should probably get in on this." But, yeah, it's an interesting play. And then, the one other thing to watch I would say, in the industry, is the Monsanto-Bayer deal, potentially.
Muckerman: For sure. They're in the same market at FMC Corp. with the seed protection and genomics, the biggest of the breed in terms of that and public companies.
Priestley: GMO, yeah.
Muckerman: And DowDuPont competing in that space as well, with about $6 billion in ag revenue each year with their seed business.
Priestley: These are absolutely huge businesses we're talking about.
Muckerman: Yeah, they're massive. Monsanto, $54 billion. DowDuPont, $176 billion market cap. Obviously, it's not all from ag with them, but still a pretty decent portion when you're talking about $6 billion in annual revenue. Then, tying it back to the decline in protein consumption, there's a company we're watching closely in Canada, AGT Food and Ingredients. It's a small-cap stock, $500 million market cap Canadian dollars. So take 20% off of that, and you're looking at a $400 million company in U.S. dollars. They're the largest producer and exporter of pulse crops, which is the edible seeds from peas, beans, lentils, and chickpeas. And as you start to see more vegetarian and vegan diets, you have to get your protein from somewhere, and those are big sources of protein and fiber, and they're the world's largest provider of that. So it's a unique company. And their logistics network -- talking about logistics again -- is one of their key selling points of this company, because they sell it around the world to over 120 countries.
Priestley: That's interesting. Currently, it's a $400 million market cap?
Muckerman: Yeah. More of a niche player. 2.7% yield. AGT on the TSX. Not sure if it's over the counter, but fairly easy to buy a Canadian company if you're in the U.S. And then, you can talk about equipment companies like Deere & Co. and AGCO Corp., which is a more pure play on agricultural equipment. Another Canadian company, Ag Growth, which is more grain handling like conveyor belts and silos and things like that, so, more niche, as well.
Priestley: And there's a lot of trends in the industry right now. The average age of a farmer in the U.S. is 50. Thirty percent are above 65. So you're starting to see more young people come into the industry. And you're starting to see, the lessons that they're being taught by the people they're taking over from is, mechanize to the fullest extent because the labor is just not there.
Muckerman: Oh, yeah. John Deere and Deere & Co. is at the forefront of that, in terms of automating the heck out of the industry.
Priestley: Yeah. I can't remember what it's called, is it set-and=run harvesting? Where it's almost --
Muckerman: That's basically what they're doing, so if it's not, maybe they should change the name to that.
Priestley: [laughs] I just coined a new phrase. Yeah. One more thing to mention, exactly the same as railroads, there's some great income opportunities in the industry. If you're OK to go along with those peaks and troughs for the long term, you can really find some gems.
Muckerman: And speaking of peaks and troughs, Deere & Co. up 57% in the last 12 months.
Priestley: That's nuts.
Muckerman: That's one heck of a year for a company of that size.
Priestley: Well, thank you very much, Taylor! I'm sure we'll try and do an agriculture type show where we focus more exclusively on that.
Muckerman: Sure, dive into those companies more specifically.
Priestley: It's just such a huge space.
Muckerman: That was a pretty broad overview. [laughs]
Priestley: Yeah. That's it from us today. If you would like to get in touch, please feel free to email us at email@example.com, or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thank you to Austin Morgan for producing the show today. For Taylor, I'm Sarah Priestley. Thanks for listening and Fool on!
Sarah Priestley has no position in any of the stocks mentioned. Taylor Muckerman owns shares of Tesla. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Canadian National Railway, and Tesla. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.