President-elect Donald Trump has pledged to impose a 25% tariff on all imports from Mexico and Canada upon taking office, a move that has already sent shockwaves across the U.S. auto industry. General Motors GM, which has the highest exposure to Mexico among U.S. automakers, felt the immediate impact as its stock tumbled 9% following the announcement. However, this sharp dip could present a golden opportunity for savvy investors.
Trump’s Tariff Threats Slam General Motors
GM leads all U.S. automakers in car exports from Mexico and its closest peer Ford F is second on the list. Shares of Ford declined 2.3% in response to the news. According to the Mexican auto trade association, the top 10 automakers with plants in Mexico produced 1.4 million vehicles in the first half of this year, with 90% of those units meant for U.S. buyers.
For decades, free trade agreements between the United States, Canada, and Mexico have shaped the North American auto industry, enabling automakers to build efficient, cost-effective supply chains across borders. However, the proposed tariffs threaten to disrupt this interconnected ecosystem. The 25% levy would significantly increase production costs, leading to higher prices for new vehicles in the country.
GM is particularly exposed, with plans to import over 750,000 vehicles from Mexico and Canada this year. These include nearly 370,000 full-size pickups, such as the Chevy Silverado and GMC Sierra, and approximately 390,000 midsize SUVs. Additionally, GM’s Mexican plants manufacture two key electric vehicles (EVs)— the battery-powered Equinox and Blazer SUVs. These models could face additional headwinds as another anticipated Trump policy aims to eliminate the $7,500 EV subsidy, further raising their costs.
The tariffs are expected to impact GM’s bottom line. The higher tariffs would not only affect fully assembled vehicles but also the cost of parts sourced from Mexico, further escalating production costs for GM’s U.S.-based plants. Elevated prices for popular models such as SUVs and pickups could reduce consumer demand, exacerbating the challenges.
Having said that, GM’s robust fundamentals and growth prospects can’t be ignored. The stock recently hit a 52-week high of $61.24 and is up more than 50% year to date. For long-term investors, yesterday’s pullback might be an opportune moment to load on GM shares.
YTD Price Performance
Image Source: Zacks Investment Research
3 Reasons Why We Remain Bullish on GM
On Track for Record 2024 Revenues and Earnings
Buoyed by strong results in the first three quarters of 2024, continued strength in its vehicle demand and disciplined cost management, General Motorslifted itsfull-year outlook during its last quarterly release. It now expects adjusted EBIT in the range of $14-$15 billion and adjusted EPS in the range of $10-$10.50. Adjusted automotive free cash flow is expected in the band of $12.5-$13.5 billion.
Through the first nine months of the year, GM generated revenues of $139.7 billion. The Zacks Consensus Estimate for full-year revenues is a record $180 billion, implying an increase of around 5%. The company is also on track to set an annual record for profitability, with the consensus mark for 2024 EPS pegged at $10.29, up 34% year over year. Notably, GM beat earnings expectations for nine consecutive quarters, underscoring its operational resilience.
General Motors Company Price, Consensus and EPS Surprise
General Motors Company price-consensus-eps-surprise-chart | General Motors Company Quote
Robust Financial Health
GM’s financial strength is another reason for optimism. The company boasts automotive liquidity of $40.2 billion, including $23.7 billion in cash and marketable securities. Its times-interest-earned ratio of 14 far exceeds the industry average of 7, reflecting a low risk of default.
Moreover, GM’s cost-cutting initiatives have proven highly effective. The company is on track to achieve $2 billion in net cost reductions by the end of 2024, having already realized $1 billion in 2023. These measures provide some cushion against potential tariff-related pressure.
Electrification Momentum
General Motors’ ambitious push into electric vehicles (EVs) is gaining traction. The company aims to make its EV lineup profitable on an EBIT basis by the end of 2024 and expects to produce 200,000 EVs this year. It aims to achieve improved sales and profitability in its EV business by reducing battery costs, introducing new models and expanding its scale.
In third-quarter 2024 alone, GM’s EV sales surged by an impressive 192% year over year, led by the Chevy Equinox EV. Its diverse EV portfolio — including models like the Cadillac Lyric, GMC Hummer EV and Chevrolet Silverado EV — positions the company as a strong contender in the rapidly growing EV market.
GM surpassed Ford in total U.S. EV sales so far this year, trailing only Tesla TSLA. As it scales EV production and reduces battery costs, GM’s electrification strategy is poised to drive long-term growth.
GM’s Compelling Valuation
At its current levels, GM stock looks highly attractive from a valuation standpoint. With a forward price-to-sales (P/S) ratio of 0.34 and a price-to-cash-flow (P/CF) ratio of 3.15, GM trades at a significant discount to industry levels.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
This bargain valuation, combined with strong earnings growth and robust cash flow, makes GM an appealing pick for value investors. GM has a Value Score of A.
Final Thoughts
While the market’s reaction to Trump’s tariff plans is understandable, it may be overly pessimistic. Although prolonged tariffs could erode profitability and disrupt supply chains, and higher vehicle prices might dampen consumer demand, GM’s strong financial position and operational efficiency position it well to navigate these challenges.
The company is set for a record-breaking financial year. With its strong vehicle lineup, EV strides and bargain valuation, General Motors looks like a prudent investment choice now for long-term investors.
GM stock has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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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.
