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The Immigration Tariff And Mexico-Linked Stocks

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Once again President Trump threatens tariffs, but this time it’s directed to our southern neighbor. Trump says that if Mexico doesn’t take action to avert the flood of Central Americans illegally entering the US, we will impose more tariffs starting on June 10 with a 5% levy on all Mexican goods coming into the US. “The Tariff will gradually increase until the Illegal Immigration problem is remedied”, Trump explained in a tweet last night. The White House said this broad-based tariff could hit 25% by October if issues aren’t resolved.

This is a very unorthodox move for a president to impose trade restrictions on an issue unrelated to trade. It is disconcerting to investors because there is no telling what countries Trump may threaten next and for what reason.

The market broke on this news. The DOW, S&P 500, and NASDAQ all down over 1%, with Mexico-linked firms being the catalyst. In this article, I will discuss some stocks that will be materially impacted if this tariff and its further escalation come to fruition.

Constellation Brands (STZ - Free Report)

STZ has fallen over 6% today with this new threatened tariff having substantial implications on their Mexican made beers like Corona, Modelo, and Pacifico. Constellation has more than tripled its beer production capacity in Mexico since 2013 with roughly 75% of Constellation’s beer portfolio being imported from there. A 5% tariff would have a 4% negative impact on STZ’s bottom-line, and if it reached 25% this could cut their profits by as much as 19%, according to a WSJ article today which cited Morgan Stanley as the source.

STZ is up 10% YTD but down more than 20% over the past 52-weeks due to the massive sell-off it saw at the end of 2018. I would expect earnings estimates to be revised down for this firm and STZ will likely drop to a Zacks Rank #4/5 (Sell/Strong Sell).

US Automakers

All of the big three automakers are going to be impacted by this newly imposed tariff, with the greatest exposure being held by General Motors (GM - Free Report) and Fiat Chrysler (FCAU - Free Report) . GM has the largest number of Mexican-made cars sold in the US with 663,000 units and about 22% of its US sales being made up by these vehicles. Roughly 18% of domestically sold Fiat Chrysler vehicles were made in Mexico. These tariffs could cut bottom-lines as much as 10% if they materialize. This automotive data was acquired through today’s WSJ article which cited LMC Automotive and Evercore ISI as sources.

GM is down over 4% while FCAU saw a drop exceeding 5% in trading today. Both of these stocks have seen significant 52-week losses with GM down 22% and FCAU sliding over 45%.

 

FCAU and GM are subject to downwardly revised EPS estimates for the remainder of this year and likely next. Look to see these stocks drift down to Zacks Rank #4/5 (Sell/Strong Sell).

Take Away

This tariff isn’t set in stone yet, and White House advisers are opposing it, citing that it could impact the impending NAFTA revision, which has already seen resistance from the Democratic Party. I don’t believe that the full impact of this broad-based tariff has been priced into the markets yet and these stocks that I mentioned above could see further declines if this issue isn’t resolved. Look to buy these stocks on lower valuations if a resolution is imminent.

 

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General Motors Company (GM) - free report >>

Fiat Chrysler Automobiles N.V. (FCAU) - free report >>

Constellation Brands Inc (STZ) - free report >>