July 5, 2018 / 12:05 PM / 17 days ago

Breakingviews - Auto tariff deal hopes are rightly restrained

LONDON (Reuters Breakingviews) - U.S. President Donald Trump made his name as a negotiator. Yet investors are reacting cautiously to the idea that he might strike a deal on car tariffs with the European Union. Their prudence is sensible.

Employees walk next to the production line on an Opel Corsa car at the Adam Opel AG plant in Eisenach April 23, 2014. REUTERS/Fabrizio Bensch

The U.S. ambassador to Germany told auto executives that the president would abandon a threatened increase on European car imports if the EU scrapped its 10 percent duty on vehicles shipped over from the United States, Handelsblatt newspaper reported on Wednesday.

That is good news for BMW, Daimler and Volkswagen, which together sold around 990,000 imported vehicles in the United States last year, Deutsche Bank calculates. Much of that business would be unprofitable if Trump hiked the U.S. duty on European auto imports to 20 percent. No wonder European carmakers’ shares rose by between 3 and 5 percent on Thursday.

The gains are, however, modest compared with how much their stock prices have fallen because of tariff concerns. At their January peak, BMW, Daimler and Volkswagen were on average valued at 8.1 times this year’s earnings, according to Eikon data. Even after Thursday’s surge, their average forward price earnings multiple is 6.5, or a fifth lower than in January. Daimler and Volkswagen’s consensus earnings per share estimates for 2018 have also fallen by 3 per cent and 5 percent respectively over the same period. Investors expect carmakers to make less money and are unwilling to pay the same price for a claim on those earnings.

If the U.S. ambassador’s words reflect Trump’s thinking, such valuations are unduly pessimistic. Were Europe and America to strike a deal on auto tariffs, the three German carmakers may revert to January’s earnings multiples, at the least. That implies an average increase in their share price of almost a quarter.

But investors have good reason to curb their enthusiasm. If his Twitter feed is any guide, Trump’s main gripe is with Europe’s 10 percent car tariff, which is higher than the 2.5 percent that the United States levies on similar imports. Yet Wirtschaftswoche magazine reported in May that Trump told French President Emmanuel Macron his real aim was to exclude German premium carmakers from the United States altogether. One of his more recent tweets, with the slogan “Build them here!”, only added to investors’ confusion about his ultimate goal. In this climate, caution is the better part of valour.

Breakingviews

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