Corporate tax cuts are one of the hallmarks of what the markets are expecting after Donald Trump enters the White House, and analysts are busily making projections about just how much companies will benefit from those cuts. Some investors are looking to make trades based on the possibility of corporate tax cuts and any benefits a particular company might see from those cuts.

Of course we can be sure of very little at this point—other than that tax reform is almost certain to come under Trump.

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Corporate tax cuts to boost S&P 500 earnings

Barclays analyst Jonathan Glionna pegs the size of the earnings boost the S&P 500 could receive from Trump’s tax plan at $180 billion, but of course the question is much more complex than this simple figure. He notes that there is a wide variance in effective tax rates among the companies in the index, and the plan will likely carry with it other impacts on specific industries and stocks.

He estimates that the top quintile of stocks that will gain the most from the plan could see a median earnings boost of 30%. At the other extreme, he sees a 6% boost for the stocks that would benefit the least from Trump’s proposals.

Statutory tax rate isn’t everything

One thing we do know is that President-elect Trump proposed to reduce the statutory corporate tax rate to 15%, which is lower than the 20% rate the House Republicans were suggesting. If the rate were cut to 15%, the earnings boost could be roughly 16%, Glionna estimates.

He notes in his Nov. 30 U.S. Equity Strategy research note on corporate tax cuts that when looking at impact on earnings, the statutory tax rate is the dominant factor, but it isn’t the only factor. For example, Bernstein analyst Toni Sacconaghi recently did an in-depth analysis of the statutory tax rates of major tech firms to uncover which would benefit the most from a reduced tax rate, screening for those with the highest tax rates.

Glionna, however, notes that deductions also play a role in how corporate taxes impact a company’s earnings. Additionally, revaluing deferred tax liabilities will give book values a boost while also enhancing a company’s financial flexibility. On the other hand, NOL-attributed valuation would be impaired.

Further, expensing U.S. investments immediately would boost cash flow while improving returns on investments, and ending the deductibility of interest expense would make debt financing less attractive, he explains, although earnings would still be boosted materially.

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He adds that any repatriation of foreign earnings and offshore cash could bring upside in the way of distributions, mergers and acquisitions, and investments. Foreign cash repatriation has been a hot topic among analysts, especially those covering the tech sector as big names like Apple, Alphabet, Facebook and Amazon all have huge stacks of overseas cash. Of course Apple is perhaps the most notable of the lot, although companies such as Cisco Systems may fly under the radar here because with them, it’s less about the number of dollars and more about the percentages of their market caps.

Corporate tax cuts favor domestic industries

The Barclays analyst notes that domestic industries will see the greatest benefits from any corporate tax cuts, naming discretionary, financials and telecom as the key domestic sectors that will see the biggest cuts.

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On the flip side, he believes that healthcare, technology and materials will see the least benefit from Trump’s proposed tax plan. Digging deeper, however, he found winners within every sector.

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To determine the big winners and losers from the President-elect’s corporate tax proposals, Glionna screened for stocks he believes have more room to run if the tax plan passes next year. Specifically, he looked for stocks e believes “have the most upside from higher earnings from lower tax rates, valuation adjustments of deferred tax items, higher depreciation rates and an estimated impact of disallowing interest expense deductibility on new debt.” So far some stocks have repriced since the election…

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However, Glionna doesn’t believe that stock prices have fully adjusted to reflect the possible earnings gains these companies may enjoy in the event of Trump having his way on corporate tax cuts. He estimates that less than half the upside is being discounted in his Equal-Weighted basket, which has gained 10% since the election and year to date.

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