U.S. stocks moved higher on the morning of May 15 amid the simmering trade conflict between the United States and China. The immediate catalyst for these early gains was news that the Trump administration is likely to delay tariffs on imported automobiles. The interconnected nature of the industry had U.S. automakers breathing a collective sigh of relief.
In fact, equity markets finished the day in the green after President Trump made encouraging comments about U.S.-China trade relations. Trump sounded optimistic about upcoming negotiations, renewing optimism about a near-term trade deal.
Analysts also believe that a decision to defer auto tariffs is an attempt to avoid a new battle raging from a larger trade conflict. This is why it makes sense to invest in car and auto parts’ stocks, which are likely to gain from such a decision.
Tariffs on Auto Imports May be Deferred
The Trump administration is likely to put off tariffs on imported cars and parts for a minimum of six months, according to CNBC and Reuters. Key officials believe that this is necessary to avoid opening another front in a worldwide trade war, which is already taking a heavy toll on the global economy.
The White House faces a May 18 deadline by when it will have to decide whether or not it should impose duties on car and auto parts’ imports. Following the deadline, the Trump administration will have another 180 days to decide on the issue, if it continues to negotiate with the concerned exporting countries.
Trump has been mulling over imposing tariffs as high as 25% on imported autos. The Commerce Department has recommended that such duties be imposed in order to protect the domestic auto sector, citing national security concerns. The same rationale has been used to justify duties on steel and aluminum imports.
U.S. Automakers Oppose Tariffs
While tariffs would hurt car and auto parts’ imports, domestic companies would have to suffer ultimately. U.S. industry bodies have stressed time and time again that nothing like a completely domestic car really exists. Auto production depends on components sourced from across the world.
This is why tariffs on foreign auto imports would increase costs for both U.S. companies and their foreign competitors. And finally, these costs would have to be borne by domestic consumers. According to the Center of Automotive Research, relatively lighter tariffs would raise car tariffs by only a couple of hundred dollars.
However, weightier tariffs would make autos expensive by more than a thousand dollars. While prices of imported cars would rise by as much as $3700, U.S. auto prices could rise by $1900. Automakers are already bearing the brunt of steel and aluminum tariffs as well as those imposed on a variety of Chinese goods.
Duties on auto imports would only make things much worse. This is exactly why the Alliance of Automobile Manufacturers warned of the negative consequences of such duties, when the Department of Commerce submitted its recommendations in February.
Reports that the Trump administration is likely to defer tariffs on auto imports are welcome tidings for U.S. automakers. Such duties would raise production costs substantially, ultimately raising prices for consumers and leading to a decline in demand for U.S. autos.
But with such tariffs looking unlikely, this is a good time to invest in car and auto parts’ stocks. However, picking winning stocks may prove to be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
Meritor, Inc. MTOR is a global automotive parts manufacturer and supplier.
Meritor has a VGM Score of A. The company has expected earnings growth of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.2% over the past 30 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has expected earnings growth of 26.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the past 30 days.
Ford Motor Company F is an automotive, financial services and mobility company with operations in the United States and across the world.
Ford has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 6% for the current year. The Zacks Consensus Estimate for the current year has improved by 14.3% over the past 30 days.
Allison Transmission Holdings, Inc. ALSN is a designer and manufacturer of fully-automatic transmissions for medium and heavy-duty commercial, and heavy-tactical U.S. defense vehicles.
Allison Transmission holds a Zacks Rank #2 and VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 2.3% over the past 30 days.
Cummins Inc. CMI is a leading global designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.
Cummins has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 22.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.6% over the past 30 days.
SORL Auto Parts, Inc. SORL specializes in the development, production and distribution of air brake valves and hydraulic brake valves.
SORL Auto Parts carries a Zacks Rank #2 and VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 0.9% over the past 60 days.
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Ford Motor Company (F) : Free Stock Analysis Report
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