Post-election panic in auto stocks overblown

Auto stocks were among the hardest hit by the U.S. election, with Donald Trump's anti-NAFTA rhetoric spooking investors in this highly-globalized business. There's a strong case to be made that the worry is overblown.

Shares of General Motors (GM) and Ford Motor (F) each lost more than 2% the day after the election, while suppliers including Delphi Automotive (DLPH) and BorgWarner (BWA) lost more than 3.5% apiece. Trump on the campaign trail mentioned Ford and GM specifically when criticizing corporations for moving production to Mexico, and the candidate had suggested slapping a tariff of between 10% and 35% on vehicles and parts made in Mexico and imported into the U.S. and curbing imports from China.

Such a move would likely send shockwaves through the auto business, which over the years has patched together a global supply chain to the extent that even vehicles, subsystems and parts made in America rely on components built elsewhere. New restrictions on importing could leave automakers scrambling to fill gaps in their supply chain, and could cause them to have to substantially raise prices.

Mexico exports an estimated $100 billion in automotive goods to the United States annually, split roughly evenly between finished vehicles and parts.

Of course it is dangerous to extrapolate what is said on the campaign trail to what becomes law, even in the case of a political outsider such as Trump. CFRA Research analyst Efraim Levy after the election reiterated his "strong buy" rating on General Motors arguing that "despite the legislative advantages of having a Republican-controlled Congress, we expect a moderation of tone once in office."

The exact mechanisms of fulfilling the campaign promise appear difficult. Any significantly punitive tariff slapped on a particular country would likely go against World Trade Organization rules and a renegotiating of NAFTA, if possible, would take years to accomplish and require Congressional approval. With groups like the Peterson Institute for International Economics estimating trade wars with Mexico and China could lead to at least a 4% drop in overall U.S. employment, legislators are unlikely to dive head first into drastic actions.

Morgan Stanley's Adam Jonas notes that the Mexican peso has dropped considerably on the Trump victory, and figures to remain weak if the president-elect follows through on his trade promises. The peso drop would add to the already considerable cost advantage of manufacturing in Mexico, and could be more than enough to offset any potential tariff boost.

And as UBS Investment Bank analyst Colin Langan notes, even if a worst case scenario a supplier would only be negatively impacted by tariffs if their footprint was worse than its peers. Langan said Delphi and Visteon (VC) have almost all of their North American production in Mexico, and Adient (ADNT) - the former auto business of Johnson Controls (JCI) - and Lear (LEA) are also exposed. But "we believe the footprints of these suppliers are likely similar to their competitors, and therefore we don't see a competitive disadvantage."

Among the automakers Langan said Ford has the lowest exposure to Mexico with only 13% of North American production, compared to an average of 22%, but Ford like others has announced plans to increase production there over time. Ford, GM and Fiat Chrysler (FCAU) all do less of their total North American production in Mexico than rivals Volkswagen and Renault/Nissan do, meaning that in the event of a trade war the U.S. automakers would actually have an advantage against some competitors.

Finally it is important to note that other parts of Trump's platform would be much more favorable to automakers, including his pledge to review federal fuel-economy and emission standards. Automakers could cut into the billions they will have to spend in the years to come to hit new standards should they be relaxed, another potential offset to any higher import costs.

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