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May 31, 2019 11:30 AM, EDT

GM, Ford Slip as Auto Sector Hit by Trump’s Mexico Threat

GM Jeff Kowalsky/Bloomberg News

U.S. automakers and parts suppliers were among the sectors hit hardest in early trading May 31 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 May 30. It was on track to be the worst month for the sector since December’s 14% slump, although the May 31 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 May 31, while Ford slipped as much as 3.4%.

The cost to protect GM and Ford debt against default in the credit default swaps market jumped to the highest levels since January.