How Would The Expected U.S. Automotive Tariffs Impact General Motors?

by Trefis Team
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General Motors’ (NYSE: GM) stock price dwindled post the news of potential tariff imposition initiated by President Trump last week. General Motors caters to a substantial portion of its U.S. demand through imports and hence an imposition of significant tariffs would imply increased costs for the company, which if passed on to consumers, would result in lower sales volume. Thus, in this note, we look at the key impact on General Motors’ share price in case such a tariff is imposed under the Trump administration in the near term.

General Motors produces almost 30% of its unit sales in the U.S. from the country’s NAFTA partners, Mexico and Canada. An imposition of a 25% tariff, as threatened by Pres. Trump on such imports, would significantly impact the company’s overall cost, which if passed on to consumers would result in a decline in demand, in an already struggling U.S. automobile market. Additionally, General Motors sources a great percentage of its higher-margin trucks and SUVs from the aforementioned regions, which would thus have an aggravating impact on the company’s margins and volumes as the consumer preferences in the U.S. have recently been shifting towards these automobile variants.

We have created an interactive dashboard analysis to illustrate the marginal impact of a 1% decline in the company’s expected 2018 margin (assuming increased costs are not passed on to consumers). Our base case assumes sales and prices to be at a pre-tariff estimated level and our alternate scenario illustrates the impact of a 1% decline in the company’s EBITDA margin and the consequent impact on the company’s fair price estimate. Additionally, we have assumed a downgrade to our price multiple (P/EBITDA) from 2.9x to 2.7x to reflect the future implication of the imposed tariffs on the company’s valuation. General Motors would most likely have to shift a significant portion of their foreign production facilities to the U.S. to counter the problem, which would also imply increased costs for the company in the near term.

The above scenario results in a 13% reduced fair price estimate for the company in comparison to our base case estimate of a fair price estimate of $40. This exemplifies the fact that General Motors is highly sensitive to its EBITDA margin and would be significantly impacted in case the Trump administration follows through on its suggested tariffs on the country’s automobile imports.  In case you have alternate assumptions, you can make changes to our estimates and understand the key impact of these changes on the company’s valuation by using our interactive dashboard analysis for GM’s EBITDA margins.

 

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