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Barron's: Why trade wrangles won’t stop German auto stocks driving higher

Tariff-related angst has dented stocks of German auto makers, but they should be capable of climb again on the autobahn in a while.

While trade-war fears are dragging on the sector, Barclays analysts have estimated the likely injury and staked out its limits. They’re sticking with their Overweight rankings for BMW BMW, -1.08% BMWYY, -0.63% and Volkswagen VOW3, -1.52% VLKAY, -0.46% .

The distress ramped up after Düsseldorf-based mag WirtschaftsWoche reported that President Donald Trump had threatened to bar German automotive makers from the U.S. The May 31 tale cited unnamed U.S. and European diplomats familiar with an April dialogue between the president and his French counterpart, Emmanuel Macron. It followed news that the Trump administration is thinking about new price lists of up to 25% on automotive imports, the usage of a national-security rationale, as used to be executed with the new levies on aluminum and metal imports.

The dispute has been brewing for a while. Just prior to his inauguration in January 2017, Trump talked a couple of imaginable tax of 35% on imported vehicles, while decrying the auto-related trade between the U.S. and Germany as a “one-way street.”

So how dangerous may it get for investors in Germany’s storied automotive industry? “BMW and Daimler DAI, -0.18% DDAIF, -0.16% will doubtlessly be most impacted, as U.S. car imports constitute 10% and eight%, respectively, of their international volumes. The number is far smaller for VW: a mere 3% of worldwide gross sales volumes,” write Barclays analysts Dorothee Cresswell and Kristina Church in a contemporary observe.

“Given the below-average margins within the extra aggressive U.S. market, the prospective profits have an effect on can be relatively smaller than the have an effect on on the best line, but we however calculate an EPS risk of 7% for BMW, 3% for Daimler, and a couple of% of VW,” they upload, relating to the prospective misplaced profits in keeping with share.

Those EPS figures assume that the producers successfully abandon U.S. market share, but what’s more likely is that they sacrifice some gross sales while also passing on some pain to automotive buyers through value hikes, Cresswell and Church reckon. The hits may well be extra restricted if the producers put, say, 75% of the tariff cost on shoppers. However, they may well be better if the companies go on 25%.

The metal and aluminum price lists “have a in large part negligible have an effect on on profits,” the Barclays analysts say, though Daimler seems extra affected than its opponents, given its U.S.-based truck-manufacturing trade, which is especially delicate to raised costs for the ones materials. Also encouraging: Many strategists view the tariff threats in large part as a White House negotiating tactic.

See: Trump’s reversals lead investors to peer him as boy who cried wolf

Overall, the market is undervaluing BMW specifically, in step with Cresswell and Church. They see the Munich-based company’s electric-vehicle momentum and its modular production strategy as overpassed strengths. The inventory is their best pick out in this sector. The analysts put a value goal of 116 euros ($137) on the stocks, implying a rally of 35% from a contemporary €86. BMW, which fell 1% on the May 31 news and is down about 5% during the last month, trades at seven times profits, matching VW and Daimler’s undemanding multiples.

The Barclays workforce has an Underweight rating on Stuttgart-based Daimler, knocking it for “deteriorating profits dynamics” at its core Mercedes trade, in addition to for turning up “relatively late to the electrification recreation.” A Barron’s duvet tale last fall (“Will Traditional Auto Makers Steal the Future From Tesla TSLA, +0.50% ?” Nov. 11) suggested that Daimler used to be a few of the most undervalued primary automotive makers.

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Wolfsburg-based VW, which misplaced 2% on the WirtschaftsWoche report and is off about 7% during the last month, draws a value goal of €210 from the Barclays analysts, implying a 29% upward thrust from a contemporary value of about €129. They are upbeat about upcoming new merchandise, but warn that “some unknown prices stay from dieselgate.”

Victor Reklaitis is a London-based markets writer for MarketWatch. Follow him on Twitter @VicRek.

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