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Last week, President Donald Trump announced a 25% tariff on vehicle imports. These tariffs will take effect on April 3, a day after what the president has described as “liberation day,” when he is scheduled to announce his reciprocal tariffs.
Auto stocks unsurprisingly crashed last week. The U.S. automotive industry – which happens to be very lucrative for auto majors – relies heavily on imports, and just over half of the cars sold last year were produced stateside. Foreign players like Toyota (TM), Hyundai (HYMTF), and Volkswagen (VWAGY) import many cars into the U.S. from their home markets. Even U.S.-based automakers like Ford (F) and General Motors (GM) have gradually moved production overseas to Canada and Mexico, with the latter accounting for almost a third of auto imports last year.
Tariffs Could Be ‘Devastating’ for U.S. Automotive Industry
Speaking at the Wolfe Research Investment Conference last month, Ford CEO Jim Farley said that 25% tariffs would be “devastating” while stressing that they will “blow a hole in the U.S. industry that we’ve never seen.” Farley wasn’t exaggerating, given the highly integrated nature of the U.S. auto industry where some parts can cross borders multiple times before a vehicle is finished and assembled.
U.S. automakers capitalized on the North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA), to build an integrated supply chain across the northern and southern borders.
GM Is Exposed to Tariffs on Mexico
General Motors is particularly exposed to the tariffs. Research by Barclays analyst Dan Levy finds that only 52% of the cars that GM sold in the U.S. in the first three quarters of 2024 were assembled in the U.S. 30% of GM’s cars were built in Canada and Mexico while the remaining 18% were built in other countries like South Korea. GM happens to be much more exposed to tariffs than Ford and is particularly reliant on Mexico.
GM Was Having a Joyride Before the Tariffs
GM was having quite a joyride before Trump’s tariffs complicated the picture. 2024 was a tumultuous year for global automakers, prompting players ranging from Toyota Motors, Honda (HMC), Stellantis (STLA), Volkswagen, and Aston Martin (ARGGY) to lower their annual forecasts. GM, on the other hand, raised its guidance three times and ended up posting an adjusted pre-tax profit of $14.9 billion. It gained market share in the U.S. last year and looked relatively insulated from the pricing and inventory issues that plagued the U.S. automotive industry.
GM’s market share in the U.S. electric vehicle (EV) industry doubled last year and importantly, the business generated a variable profit in the final quarter of the year.
GM Doubled Down on Buybacks and Increased Dividends
General Motors has been using its strong free cash flow to repurchase shares and announced a mega $10 billion buyback plan in 2023 - which it topped up by another $6 billion authorization in June 2024. As a result of these aggressive buybacks, the company managed to bring down its outstanding share count below 1 billion.
GM announced another $2 billion buyback last month while raising the quarterly dividend by 3 cents to $0.15. While GM’s dividend yield of 1.3% is just about a fifth of Ford’s fat 6.2% yield, the stock’s total returns have beaten the Blue Oval hands down over the last two years.
Is GM Stock a Buy or a Sell?
After the auto tariffs, JPMorgan lowered GM’s target price from $64 to $53 while maintaining its “Overweight” rating. In his note, analyst Ryan Brinkman talked about “increased potential for material earnings risk from draconian auto tariffs that now seem likelier than ever to be imposed as soon as April 3.”
It is no secret that the tariffs would be quite detrimental to GM. However, there is still some ambiguity over whether Canada and Mexico will be excluded from the tariffs, which Trump stressed are “permanent.” Notably, as part of the USMCA, Canada and Mexico got some reprieve against any U.S. global auto tariffs including a delay of 60 days in their implementation. So far, there are no signs that Trump intends to honor the commitments that his first administration agreed as part of the USMCA.
Overall, there remains significant uncertainty over Trump’s tariffs, which makes it tough to build an investment case for GM, both on the buy and the sell side.
While the stock's valuations look attractive, tariff uncertainty makes forecasting future earnings a tricky exercise. I will therefore continue to hold GM shares while awaiting more clarity on the tariffs.
