US Automakers Can Take Trump Tariffs Easy: Here's Why

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After February's sales decline, President Donald Trump's initial tariff pronouncement literally rattled U.S. automakers. Trump gave markets only a week to absorb his tariff plan. The 25% and 10% tariff on foreign steel and aluminum, respectively, will be effective Mar 22. But, there's a new hope arising from the White House - the tariff exempts key trading partners Canada and Mexico.

Also, other countries have also been assured of an opportunity to appeal the tariffs, provided it does not conflict with the United States' interests, per Trump.

So, it really is too early to assume that major U.S. automakers will suffer. This especially is true since February historically is one of the slowest months for auto sales. At the same time, although automobile companies consume a lot of steel and aluminum, they may not end up as losers in the long run.

February Sales, Not All Too Bad

Major U.S. automakers reported lower new vehicles sales in February as consumer demand continued to fall. Shares of most auto giants fell due to weak sales of pickup trucks, but crossover and SUV sales came in robust.

General Motors Company GM reported a 6.9% decline in sales from February 2017 but its lower margin fleet sales rose 7%, primarily driven by a 15% increase in sales of commercial vehicles. Moreover, crossover and SUV sales were impressive.

Ford Motor Company F too reported a 6.9% year-over-year decline in sales. However, unlike other U.S. auto majors, Ford saw a 1.2% rise in its pickup trucks' sales, driven by robust demand for its F-Series models.

The decline was easier to digest for Fiat Chrysler Automobiles N.V. FCAU , which saw only a 1% dip in February sales. Pickup truck sales were one of the main culprits but a smashing 12% rise in its Jeep brand offset a lot of the sales decline.

Are Tariff Fears Overblown?

Trump's announcement of a tariff of 25% and 10% on imported steel and aluminum, respectively, may have made automakers and investors nervous. But General Motors' chief economist Mustafa Mohatarem recently said that consumers have not yet fully felt the benefits of a recent U.S. tax overhaul.

Most U.S. auto giants plummeted instinctively on the tariff announcement, not willing or waiting to evaluate long-term implications. Steel prices, compared with other countries, are already high in the United States. So a 25% tariff on imported steel may not necessarily see domestic steel prices increasing at the same rate.

That said, the other concern among investors is, what if automakers decide to pass all of the incremental cost of producing a vehicle, post the imposition of new tariffs, onto customers? And if automakers do not do so, will it affect their profitability?

In this context, an interesting observation is that over the last few years, consumers have actually preferred to purchase more expensive vehicles. In fact, both General Motors and Ford reported that their average transaction price (ATP) increased around $750 and $2,100, respectively, in February.

One of the best ways to drive both sales and ATPs is to have a bouquet of attractive products, and both General Motors and Ford are well poised in this respect. General Motors already has a strong product portfolio that boasts a wide range of fresh crossovers. The company plans to launch all-new versions of its profitable full-size truck and SUV models over the next two years.

Shares of General Motors have increased 2.27% in the last six months. General Motors sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Ford's F-series trucks and the new versions of Lincoln Navigator and Ford Expedition SUVs are already helping it gain better ATPs. Moreover, Ford in a bid to bounce back in the domestic market, also launched the EcoSport subcompact crossover in January and will continue to update a number of its high-volume products through 2018 and 2019 besides reintroducing the Ford Ranger and Ford Bronco nameplates.

In Conclusion

February might not have been a great month for major U.S. automakers. Moreover, Trump's tariffs on import of steel and aluminum have raised the fear bar to some extent. But if we look beyond the tariffs and focus on fundamentals, expansion and launches, prospects for the auto sector may be far brighter than they appear at first glance.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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