GM, Ford Slip as U.S. Auto Sector Hit by Trump Mexico Threat
GM, Ford Slip as U.S. Auto Sector Hit by Trump's Mexico Threat
(Bloomberg) -- U.S. automakers and parts suppliers were among the sectors hit hardest in early Friday trading after President Donald Trump’s threat to impose a tariff of up to 25% on Mexican goods. General Motors Co. and Ford Motor Co. each fell more than 3%.
The latest blow in the trade disputes adds to a month that has trimmed 12% from the 24-member S&P Supercomposite Automobiles and Components Index, shaving about $20 billion in market value in May through Thursday. It was on track to be the worst month for the sector since December’s 14% slump, although Friday’s declines could push the group beyond that.
“Given this Mexico news was a big surprise, the short-term move in stocks can be anticipated to be even more severe,” Evercore ISI analyst Chris McNally wrote in a note to clients, adding that the market had stopped worrying about the risks surrounding the North American Free Trade Agreement.
U.S. auto companies, ranging from carmakers to suppliers, have a significant exposure to Mexico, and this latest sudden maneuver -- if ultimately implemented -- may drag down the stocks an additional 5% to 10% if the “theme is present for the entire second half” of the year, Evercore’s McNally said.
Ultimately, such a tariff would raise the costs of almost all vehicles, analysts said. However, all carmakers may not be equally successful in passing down the costs to customers and may take a bigger hit to their profitability.
“Without a response from manufacturers or the supply base to shift production footprints, this would likely increase the price of vehicles for the consumer and negatively impact automaker/supplier margins,” Goldman Sachs analyst David Tamberrino wrote in a note.
GM is broadly expected to fare worse in this situation compared to peer Ford, given GM’s greater exposure to Mexico. According to RBC analyst Joseph Spak, about 28% of GM’s 2019 North American production is being done in Mexico, compared to about 10% of Ford’s. For Tesla Inc., about a quarter of the content for the Model 3 sedan comes from Mexico, Spak added.
Citi analyst Itay Michaeli said a 5% tariff could become a “several-hundred-million-dollar” hit to annual earnings for GM. GM shares fell as much as 4.5% on Friday, while Ford slipped as much as 3.4%.
Among parts makers, Delphi Technologies plunged 7.5%, Adient fell 6.6%, Goodyear Tire & Rubber lost 2.7%, and Aptiv dropped 4.1%. Michaeli also named American Axle, Lear, Magna International and Visteon among suppliers with the biggest exposure to Mexico.
Debt tied to GM and supplier American Axle & Manufacturing Holdings Inc. were among the biggest losers in the bond market on Friday morning. Risk premiums on GM’s most actively-traded debt, a 5.95% bond due in 2049, widened more than 25 basis points to 3.55 percentage points over government debt, the most since the bonds were sold last year. The cost to protect GM and Ford debt against default in the credit default swaps market jumped to the highest levels since January.
Auto dealership companies are not expected to be spared either. If the tariffs lead to cost increases that are ultimately passed on to the consumer, there would be potential for a substantial impact on demand, J.P. Morgan analyst Rajat Gupta wrote. Group 1 Automotive Inc. and Lithia Motors Inc. are the most exposed to the Mexico tariff threats among dealers, Gupta said, followed by Penske Automotive Group Inc., Asbury Automotive Group Inc. and AutoNation Inc.
--With assistance from Claire Boston.
To contact the reporters on this story: Courtney Dentch in New York at cdentch1@bloomberg.net;Esha Dey in New York at edey@bloomberg.net
To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Will Daley
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