Bernstein Assesses Trump Tariffs' Impact Across Multiple Sectors

Bernstein analysts weigh Trump tariffs' impact on US Alcohol and US Autos & Auto Parts sectors.

The analysts commented: "On Saturday, President Donald Trump announced the U.S. is implementing a 25% imports tariff from Canada and Mexico (and a 10% additional tariff on imports from China). President Trump is due to hold separate calls on Monday morning with both countries. Furthermore, on Friday President Donald Trump stated that he would “absolutely” impose tariffs on imports from the EU. The EU has warned that it will retaliate if tariffs are imposed.

US Autos:

Constellation to feel the most pain. On F24 numbers, 82% of Constellation’s net sales (i.e. its super premium Mexican imports business) will be affected by tariffs on imports from Mexico. Assuming no incremental pricing or FX tailwind, Constellation’s group operating income would feel an ~33% hit. This hit would fall to ‘just’ 23% should it be able to pass through 5%pts of incremental pricing. Given the weakness in the low income American consumer today, we are not convinced that Constellation would consider this (management often say something to the effect of: ‘it’s easier to lose a consumer than regain one’). We suspect the impact would not be felt immediately, with a higher-than-usual amount of beer already over the border in anticipation of this.

Cuervo is a close second in terms of the hit to profits. On F24 numbers, 40% of Cuervo’s net sales will be affected by import tariffs, largely tequila from Mexico. Given the increasingly weak pricing environment for US tequila (and in some areas promotional), we suspect Cuervo will struggle to offset the tariff through incremental pricing. This would lead (all else equal) to an ~30% hit to group operating income. However, it is our understanding that Cuervo has already shipped a significant amount of tequila across the border, which will help delay the impact to the P&L.

Brown-Forman faces a limited hit from Mexican imports, but the EU retaliatory tariff risk has just meaningfully increased. On F24 numbers, 4% of Brown-Forman’s net sales (i.e. its tequila sold in the US) is at risk of Trump tariffs on imports from Mexico. Even with no incremental pricing, the hit to group operating income would only be ~1%. The real kicker, however, is that given the comments from both President Trump and the EU this weekend, the probability that EU retaliatory tariffs on US whiskey come into effect by March 2025 has meaningfully increased. On F24 numbers, 14% of Brown-Forman’s net sales (i.e. its US whiskey sold in the EU) is at risk of retaliatory EU tariffs at a rate of 50%. We estimate that this would result in an ~10% hit to group operating income.

We suspect a significant amount of this risk is already priced into the stocks. However, until clarity is reached on a number of factors (i.e. how long they will last, how much incremental pricing companies will take, etc.) we expect the stocks to remain weak.

US Autos & Auto Parts

On February 1st, President Trump announced 25% tariffs on Mexico and Canada and 10% additional tariffs on China. The tariffs for Canada go into effect on Tuesday, while the timeline for Mexico and China was still uncertain. Importantly, the tariffs will not allow drawbacks. Short-term, we expect the US industry to face a headwind of up to $110m per day. On unchanged trade-flows, we would expect an annual headwind of up to $40b for the US industry. However, we expect the industry to have taken mitigating steps and swift action that will help limit the final burden. Higher prices in the U.S. mean lower volumes in 2025. Given the outsized impact of the tariffs that - left unmitigated - would wipe away all earnings for the large three U.S. OEMs, we expect the car industry to raise prices and pass some cost on to consumers. This in turn, will weigh on full-year volumes, potentially leading to declining registrations in 2025. In the medium-term, the U.S. industry will try to shift back to the U.S. However, given the large amount of supply in parts and vehicles from Mexico, we do not think this will change the overall picture. If tariffs stay in place, we would expect significant lower earnings for the U.S. automotive industry. In the long-term: Lower profits and lower investments. Should the tariffs remain in place for an extended period, we would expect lower profits across all OEMs manufacturing in North America even after mitigating actions. Crucially, the uncertainty of the longevity of the tariffs, in our view, will significantly reduce OEMs ability to approve investments in U.S. manufacturing in the upcoming years. Largest impact at Detroit Three.

The largest impact will be felt at GM, Ford, and Stellantis who have significant exposure to Mexico and Canada. Transplants Honda and Nissan (both not covered), also see higher than average impact. US EV companies like Rivian or Tesla (not covered) will mainly see impact through their parts suppliers. And many European OEMs will be able to offset tariffs by using duty draw-backs on their exports from the U.S."

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