Here’s how the U.S. industry is going to benefit from the tax overhaul

The Republican-led overhaul of the U.S. tax code, a milestone in U.S. history, has direct and indirect benefits but the sectors that are likely to gain the most are highlighted below with notes from analysts.

With the Republican-led U.S. House of Representatives on the verge of approving the sweeping overhaul of the U.S. tax code, the telecom, banking and other industries are set to register maximum gains from lower corporate tax cuts.

According to equity strategists at UBS, the legislation slashes corporate income tax to 21% from 35%, and boosts the overall earnings of S&P 500 companies by 9.1%. With the bill gathering momentum, the stock market has seen a fresh rally peaking to record highs.

With the House of Representatives passing its tax overhaul bill in mid-November, the S&P 500 index has climbed nearly 5%.

Significantly, the bill, which includes a one-time tax on profits held overseas and industry-specific measures, will benefit select industries and sectors, rather than the entire gamut of U.S. industry.

According to analysts, the industries that stand to benefit the most from lower taxes include retailers, telecoms, banks and transportation.

The impact on healthcare and on the technology sector is a mixed bag.

TECH INDUSTRY

Tech industry stocks which led the market’s rally for the most part of 2017 has underperformed the S&P 500 index as the tax overhaul bill moved forward in the U.S. Congress.

As per analysts at UBS, the tech industry is expected to benefit less than the other sectors from a drop in corporate tax rates, since the measure will only boost their earnings by 5.3%. Semiconductors stocks, which have had a particularly rough ride in November, are expected to see a drop in earnings by 3.3%.

“Many chip companies have extensive international operations and relatively low blended tax rates,” said analysts at Wells Fargo in a recent note. “We see the possibility of changes in the U.S. tax rules as a potential risk for such companies.”

However, tech companies could benefit by the new tax bill if they were to buyback their shares that are held overseas which will boost their earnings per share (EPS). Among companies with such potential are Qualcomm Inc and Cisco Systems Inc.

“The tech sector would certainly be among the largest beneficiaries if cash stashed overseas can be repatriated at a low rate and presumably used for stock buybacks or dividends,” reads a recent note from Ed Yardeni, president of Yardeni Research.

HEALTH CARE INDUSTRY

Health care companies who are domestically geared are poised to benefit from lower taxes.

According to Mizuho Securities, Universal Health Services Inc, a hospital operator, Quest Diagnostics Inc, a lab-testing company, and Cardinal Health Inc, a drug wholesaler are among those service companies set to benefit the most.

“We believe tax reform should be a significant positive cash flow event, especially for healthcare services companies that tend to have limited international exposure and significant capital expenditures,” said analysts at Mizuho in a research note.

As per Chris Schott, an analyst at JPMorgan notes, while many large drugmakers already report adjusted tax rates in the low 20% range, a number of companies would benefit from the ability to bring back overseas cash.

The companies who are likely to benefit from repatriating overseas funds include Pfizer Inc which has $160 billion in offshore earnings and Merck & Co Inc whose offshore earnings are $70 billion, said Schott.

BANKING SECTOR

Banks are expected to be some of the biggest winners in the new tax regime. Ever since the bill passed the U.S. House of Representatives in mid-November, banks stocks have soared by 9%.

According to an analysts by Wells Fargo analysts of historical tax rates, of the major S&P sectors, financials pay the highest effective tax rate at 27.5%.

Big banks will see an effective increase of 13% in their EPS due to lower tax rates, said analysts at Goldman Sachs, with shares of Wells Fargo & Co and PNC Financial Services Group set to register their biggest gains.

In a recent note, Saul Martinez, an analyst with UBS noted, Regions Financial Corp, Citizens Financial Group and M&T Bank Corp are also likely to see sizable benefits in their earnings and are poised to be relative winners among the large bank stocks.

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