UBS outlines potential impact on auto stocks under tariff scenarios

On Wednesday, UBS released an analysis of how US Auto Parts and Auto-Tech stocks might be affected under different tariff scenarios involving Mexico and Canada. The analysis, which considered the impact of a 25% tariff without any exemptions under the USMCA, suggested significant potential industry earnings damage if companies do not mitigate costs through price adjustments or volume reductions. According to InvestingPro data, many companies in this sector are currently trading at attractive valuations, with comprehensive analysis available through Pro Research Reports covering 1,400+ top US stocks.

The first scenario outlined by UBS, which is considered unlikely due to the absence of mitigation strategies, would see no exemption from tariffs under the USMCA and no adjustments made to counteract the tariffs. This scenario was included to demonstrate the extent of possible earnings damage to the industry.

In the second scenario, which assumes a 50% cost mitigation through price increases, the impact on EBIT (earnings before interest and taxes) for suppliers would average around 15%. Companies like Gentex Corporation (NASDAQ:GNTX), with its strong financial health score of 2.88 and robust balance sheet showing more cash than debt, BorgWarner Inc. (NYSE:BWA), Dana Incorporated (DAN), and Phenix Corporation (PHIN) would fare better, while Lear Corporation (NYSE:LEA), Visteon Corporation (NASDAQ:VC), Aptiv PLC (NYSE:APTV), and Magna International Inc (TSX:MG). (MGA) could fare worse. InvestingPro analysis indicates that Gentex appears undervalued at current levels, with additional insights available through their detailed Pro Research Report. This scenario also predicts a significant decline, approximately 56%, in EBIT for automakers Ford (F) and General Motors (NYSE:GM).

The third scenario takes into account the same 50% cost mitigation as the second scenario but adds a 5% reduction in North American volume, reflecting decreased US sales for OEMs (Original Equipment Manufacturers). This volume decrease would weigh on average supplier EBIT, with an estimated impact of around 41%. Gentex, BorgWarner, Phenix, and Aptiv are expected to manage better under these conditions, while American Axle (NYSE:AXL) & Manufacturing Holdings Inc. (AXL), Lear, and Magna would likely experience more challenges. The incremental impact to OEMs is anticipated to diminish compared to the second scenario, as price adjustments would have a more significant effect than volume changes.

UBS’s analysis provides a framework for understanding the potential financial impacts on the auto industry if tariffs were imposed without mitigation. The firm’s assessment indicates that the ability to manage increased costs through pricing strategies and volume adjustments will be crucial for companies in the sector. For Gentex specifically, InvestingPro data shows the company is well-positioned with a P/E ratio of 13.8, strong liquidity metrics, and a 23-year track record of consistent dividend payments, suggesting resilience in challenging market conditions.

In other recent news, Gentex Corporation reported its financial results for the fourth quarter of 2024, missing both earnings per share (EPS) and revenue forecasts. The company announced an EPS of $0.39, falling short of the projected $0.49, while revenue came in at $541.6 million, below the expected $604.6 million. This performance marks a challenging period for Gentex, with a year-over-year revenue decline of 8%, largely due to decreased light vehicle production. Despite these setbacks, Gentex achieved its highest annual sales in history, with full-year 2024 net sales of $2.31 billion, a slight increase from the previous year.

Looking ahead, Gentex has provided revenue guidance for 2025, projecting between $2.4 billion and $2.45 billion, with expectations of achieving a 35% gross margin by the end of the year. The company also anticipates a 6-7% outgrowth compared to the underlying market. In terms of strategic moves, Gentex is set to acquire VOXX International Corporation, with the deal expected to close in the first quarter of 2025. Analysts’ feedback on Gentex’s performance was not mentioned in the provided context, but the company’s guidance and strategic plans indicate a focus on innovation and efficiency improvements. These recent developments highlight the company’s efforts to navigate a challenging market environment while aiming for growth and improved financial performance in the coming year.

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