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More Tariffs Mean More Reasons It’s a Good Idea to Avoid GM Stock

At the beginning of May, I wrote a piece on why shares of automotive giant General Motors (NYSE:GM) won’t make a sustainable move higher anytime soon. The thesis was simple. GM stock hasn’t gone anywhere in five years because revenues and profits haven’t gone anywhere, either. Revenues and profits won’t head higher anytime soon, because the headwinds facing this company are only getting more severe. As such, with revenues and profits stuck in neutral, GM won’t make a move higher anytime soon.

gm stock

Source: Shutterstock

Since that piece published, GM stock has drifted 14% lower.

Why? Tariffs. In early May, U.S. President Donald Trump threatened to raise tariffs on a wider set of imports from China. Then, in late May, Trump threatened to institute to new tariffs on all imports from Mexico. General Motors has wide exposure to these tariffs since a lot of their product is imported from China and Mexico.

The implication? Revenues and profits won’t just stagnate going forward. They could actually move lower in the foreseeable future. If they do, the stock will naturally drift lower, too.

This tariff risk is very real for GM stock. As are the other headwinds plaguing this company and stock. As such, regardless of the stock’s cheap valuation, GM stock should be avoided here and now.

Tariffs and General Motors

In the big picture, tariffs at scale present a meaningful challenge for General Motors, specifically the newly announced tariffs on imports from Mexico.

Trump announced that he would institute a 5% tariff on all Mexican imports starting on June 10, in response to the immigration problem which he claims Mexico is not doing much to solve. So long as this immigration problem remains, that 5% tariff will move higher every month. In July, it will jump to 10%. In August, it will jump to 15%. It will hit 20% in September, and 25% in October, and will stay at 25% permanently and indefinitely until Mexico fully responds to America’s claims regarding immigration.

The problem here is that all of the U.S. automotive giants import a lot of product from Mexico, but, none as much as GM. According to Deutsche Bank, just under 30% of GM’s total parts for its cars and trucks are imported from Mexico, versus 17% exposure for Ford (NYSE:F) and 24% exposure for Fiat Chrysler (NYSE:FCAU).

Thus, roughly 30% of GM’s total parts will be subject to indefinitely higher prices for the foreseeable future. This could have a big impact at scale. If this set of tariffs does move up to 25%, Deutsche Bank estimates that the EBIT hit on GM will be $6.3 billion. GM did $11.8 billion in EBIT last year. In other words, we are talking about a potential 50% hit to EBIT in a worst-case scenario.

To be sure, General Motors is doing its part to offset this tariff exposure. The company is pouring $24 million into its Fort Wayne Assembly facility in Indiana to expand production of the Chevrolet Silverado 1500 and GMC Sierra 1500 pick-up trucks.

This is a step in the right direction. But, it’s not nearly enough to offset the full impact of tariffs, as Deutsche estimates that over 40% of Silverado trucks sold in the U.S. are made in Mexico.

Overall, then, the tariff headwind is very real and potentially very dangerous for General Motors going forward.

Tariffs Aren’t the Only Headwind

The bigger problem is that tariffs aren’t the only headwind GM has to deal with for the foreseeable future.

On top of tariffs, General Motors is looking at a U.S. auto market that could shrink over the next several years as the sharing economy gains momentum and traction. Broadly, a rise in the popularity of ride-sharing services like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have, for the first time in several decades, sparked a drop in car ownership rates across the United States.

This trend should persist, because ride-sharing is only becoming more popular, traffic problems are only becoming more severe, and car ownership is only becoming more expensive.

As such, General Motors is potentially looking at a smaller addressable market in the future.

Further, in that smaller addressable market, General Motors will likely take home a smaller piece of the pie. The electric vehicle revolution is well under way, and while GM is pivoting to keep up with the consumption trend, they are behind EV-focused players like Tesla (NASDAQ:TSLA). Inevitably, because of the introduction of new EV-focused players, GM’s market share will shrink over the next several years.

Overall, the fundamentals here aren’t great. They do not support consistent revenue and profit growth for the foreseeable future, and because of such, they will lead to a weaker for longer GM stock.

Bottom Line on GM Stock

GM stock was stuck in no man’s land without any meaningful upward catalyst before the Mexico and China tariffs. Now, with those tariffs set to be enacted soon, there’s even more reason to avoid GM stock for the foreseeable future.

As of this writing, Luke Lango was long TSLA, UBER, and LYFT.

Article printed from InvestorPlace Media, https://investorplace.com/2019/06/more-tariffs-avoid-gm-stock/.

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