A Tariff Winner?!: iberdrola (Spain: IBE)
Image: Courtesy of Julius Silver via Pexels
in Our Latest PodCast: reciprocal trade agreements May drive unlikely value
Tariffs Become Another Online Hatestorm
A few weeks ago, the President made tariff and trade policy central to his speech to the joint session of Congress. And overnight, what economists and trade lawyers quietly fussed over became clickbait on Tik Tok, YouTube, and even online games. Then apparent mayhem ensued.
Not just markets fear tariffs. Now online gamers sweat potential trade wars.
What’s the Upside?
For better or worse, tariffs and trade have evolved into a yet another factional theme, like immigration and gender politics. Americans now flatly reject ideas about tariffs that are beyond the grip of their convictions.
And in the vast wasteland between what is believed about tariffs – and what is actually happening – may lie significant value.
Not Tariffs, but Reciprocal Trade Levies
The President has made his views about tariffs clear. About a month ago, The White House released an easy-to-read white paper called Reciprocal Trade and Tariffs.
The paper avoids any mention of across-the-board tariffs. Instead, it explains that the White House will seek to engineer recognizable reciprocal levies like value-added taxes, non-tariff barriers, and other international two-way import policies.
And – this is the key – the White House plans to restructure these reciprocal trade levies on a by-country basis.
Nothing New Under the Reciprocal Trading Sun
What makes reciprocal trade agreements somewhat palatable is that they have a long – even ancient – history. One of our favorite bits of research, on what works and what does not when it comes to reciprocal trade, is a 2012 paper from the National Bureau of Economic Research.
This engaging study, by Diego Puga and Daniel Trefler, explores the reciprocal trade policies of medieval Venice, from about 850 to about 1250 A.D.
Medieval Venice offers powerful advice to modern traders struggling with tariffs.
Puga and Trefler cleverly modeled the interactions between craftspeople, merchants, and regulators. In particular, the researchers studied how the Venetian state managed the costs and risks of overseas trade.
Their model clearly explains how any modern investor can emulate effective reciprocal trade policies practiced by the Venetians.
Unlikely Reciprocal Trade Winner: Iberdrola.
Puga’s and Trefler’s approach opens up fascinating pockets of value. One of the most interesting is a Spanish power utility called Iberdrola, which trades in various markets in Spain, under the ticker “IBE.”
The Venetian approach leads to an interesting Spanish utility: Iberdrola.
Iberdrola is basically a jazzed-up power company with 40,000 employees, 154 billion euros in total assets, 53 billion euros in revenue, and 8 billion euros in operating income. Cash flow from operations grew about 20% from 2022 to 2023. The stock has traded at around $13 for what seems like forever.
Iberdrola is ConEd or Duke Energy, but with a cool Spanish flair.
But here’s the thing with Iberdrola: The company has major investors like the Qatar Investment Authority, BlackRock, and Norges Bank. And it just completed the acquisition of an American power company called Avangrid (NYSE: AGR). That allowed it to enter into a power agreement with Blue Creek wind farm, the largest wind-turbine facility in Ohio. It also captured a share of the 950-acre Powell Creek Solar plant in Ohio.
Strictly speaking, these infrastructure deals morph Iberdrola into a kind of electrical infrastructure company. And that puts it in the same glitzy sector as other electrical infrastructure companies like Quanta Services (PWR). Quanta is currently trading at $235 per share, on a ginned up price-to-earnings ratio of $55!
If you apply Puga and Trefler’s reciprocal trade approach, the United States is unlikely to enter into destructive levy policies with Spain. That makes Iberdrola better hedged against evolving global tariff uncertainty than Quanta Services.
Rational Lessons Learned
All that’s required to harness the value of a company like Iberdrola is to reject today’s no-win thinking about tariffs. One simply has to realize that when market participants refuse to think, opportunity lies waiting for those who do.
And couldn’t we all use a bit of opportunity these days?