Mother Nature certainly is a beast at times. Watching her ongoing treachery on the television is heartbreaking to say the least. Looking out the window, I see sporadic rain – which will continue for a few days – but nothing of the magnitude being experienced just a couple hundred miles away.
As my mind wanders a little due to the same images being replayed over and over, I can’t help but thinking of the economic impact of Harvey. Being resident in Texas, my portfolio has a little bias towards my home state. In a similar vein, which companies stand to lose – or gain – from this tragedy? I figured I’d lay out my thoughts – which probably are incomplete – as a basis for determining whether my portfolio can weather (pun intended) a storm of this severity.
Probably the most impressive images being broadcast are of electrical transformers shorting out. As Texas deregulated the industry a few years ago, distribution (poles, transformers, etc.) reside with a few companies in specific geographic territories. The two areas hardest hit are Corpus Christi (AEP) and Houston (Center Point <NRG>). Neither of which are in my portfolio and these two will likely take a hit on earnings.
What of the transformers? Well the base components are primarily Copper, Iron, Silicon and Hi-B Electrical Steel. So copper and iron ore may continue their rise. Hi-B Electrical Steel (which I’d never heard of) is manufactured by six companies worldwide, one in the US (AK Steel (AKS)). Transformers themselves range in price from $1-7 million. Primary beneficiaries (publicly held) could be SPX Corp. (SPXC), ABB Ltd (ABB – adr), Mitsubishi (MHVYF), Hyundai (HYHZF), General Electric (GE). Of these I own GE and may look closer at ABB. Note: some manufacturing is performed in Canada and Mexico so NAFTA is beneficial to Texas’ recovery.
This section will probably garner the most headlines and will be a massive hit. Initial estimates range from $20-39B (and rising). For homeowners, the unfortunate situation will get worse when the realization sets in that significant recovery is unlikely as most damage will be attributable to water which is not covered without flood insurance. State Farm (private) has the largest exposure with Allstate (ALL), which I own, coming in second. The Travelers (TRV) has a sizable commercial exposure as well (and is owned).
I expect the impact here to be muted as the season was winding down. Some impact could be expected with the loss of Labor Day, particularly to the Padre Island area. Three cruise lines sail from Galveston; Carnival (CCL), Disney (DIS), and Royal Caribbean (RCL) two of which have been impacted. Air traffic to Houston is also disrupted.
With the Port of Galveston, Port Corpus Christi and Houston Ship Channel closed, I suspect the impact will be more in delays unless the infrastructure has sustained significant damage from wind or flood. More problematic is the ability of employees to report to work in the coming days.
Railroads are facing line closures with Kansas City Southern (KSU) having two sections between Houston and Laredo closed. Union Pacific (UNP), also with tracks in the area, also has issues. With the number of road closures, trucking also faces short term problems but should recover quicker.
Texas banks in potentially affected areas have been permitted to close by the OCC and Texas Banking Commissioner. Some branches will probably suffer damage and Cullen/Frost (CFR) has reportedly taken additional measures regarding customer data. (My guess is an additional offsite backup location away from potential floods.) Another I’m watching is Prosperity Bank (PB) which is headquartered in Houston. Both are held in my account. 29 Aug Update: PB 39 of 243 branches were closed, today the Corpus Christi branches reopened.
The net result will likely be a shift in product mix with greater emphasis on items such as bottled water and non-perishables. I see a benefit for Coca-Cola (KO), Pepsi (PEP) and Nestle (NSRGY) in particular.
Refining & Transport
There are three areas watch, strengthening crack spreads, refinery shut downs, and pipeline throughput. The biggest factor would be any impact to the Colonial Pipeline from Houston which delivers about 25% of the US northeast’s gas supply. A major disruption (power, pressure, etc.) could result in a spike in gas prices making this more a national issue rather than regional. In this mix, I hold Valero (VLO).
As always, just my 2¢ worth but I would also encourage you to consider a donation to a worthy charity such as the Red Cross.
Updated 27 Aug to add TRV
Updated 29 Aug to add Railroads
Note: 31 Aug – Colonial Pipeline suspends diesel and aviation transport yesterday and gasoline transport today until further notice. Dallas prices are $2.499 up from $2.039 prior to Harvey. Lines of vehicles are forming at local stations. VLO has booked at least one tanker to export refined fuel from Europe.