Al Root
With a second Trump administration taking shape, it is time for automotive investors, especially Tesla stockholders, to brush up on their acronyms.
Knowing them -- especially a key one -- can help investors react to changing policies and protect their money. For now, the ones to remember are IRA, CAFE, EPA, USMCA, and the big one, CARB.
The IRA, or Inflation Reduction Act, passed in August 2022, included electric-vehicle purchase tax credits of up to $7,500, which most Wall Street analysts expect President-elect Donald Trump to eliminate. Reuters reported Thursday that Trump was planning to do just that; his transition team didn't immediately respond to a request for comment.
That would be bad for EV sales, but the effects on U.S. manufacturing might be less significant than they seem at first glance. It isn't clear whether Trump would want to do away with a host of rules, intended to create incentives for making batteries in the U.S., that allowed auto makers to qualify for the full credit. Those mean more U.S. manufacturing jobs, so he might want to keep them, if possible.
Trump is also likely to loosen the Environmental Protection Agency's corporate average fuel economy standards -- the EPA's CAFE standards, to use a few more acronyms. That wouldn't be a bad thing for traditional auto manufacturers because it would mean reduced fines for noncompliance and slower adoption of EVs.
And it makes sense. Hitting the current targets requires companies to sell more battery-electric vehicles than consumers are willing to buy.
CARB -- the California Air Resources Board -- is the main acronym Tesla investors need to worry about. The agency, which regulates California emissions, is the source of most of the zero-emission-vehicle credits Tesla sells to other car companies that don't meet their quotas for producing EVs. Several other states follow CARB guidelines.
ZEV credits have generated almost $10 billion in sales for Tesla since the end of 2018. That is roughly 25% of the $36 billion in operating profit Tesla has reported in the same span. They also play a key role for EV start-ups: Rivian Automotive is projecting $300 million in 2024 credit sales.
The "potential for a disruption in regulatory credit pricing" is one reason BofA Securities analyst John Murphy downgraded Rivian stock to Hold from Buy recently.
The disruption would come from the federal government. Trump can challenge California's authority to regulate its emissions, as he did unsuccessfully in his first term.
Nevertheless, Murphy rates Tesla shares at Buy, with a target of $350 for the price. While it is possible that Tesla could take a hit in terms of ZEV credits, the company also has Elon Musk, a Trump ally.
"It is difficult to judge how Elon Musk's increasingly close public relationship with President Trump could benefit Tesla," wrote Murphy after the election. "But this needs to be monitored closely."
If Trump were to challenge CARB's authority by removing waivers that let California use its own air-quality standards, rather than those set by the EPA, the agency would likely fight back in court. CARB declined to comment to Barron's on what might happen in Trump's second term.
Finally, there is the USMCA, the U.S. Mexico Canada Agreement, which replaced the North American Free Trade Agreement, or Nafta. If Trump revises it to increase tariffs, it would complicate life for all car manufacturers. Barron's estimates it could raise costs for domestic auto makers by 2% to 5%, given that both U.S. and foreign auto makers have a lot of production capacity in Canada and Mexico.
That is manageable, if not ideal. Tesla would be the least affected because it assembles all of the vehicles it sells in the U.S. within the country.
Investors appear to doing the mental math needed to track the various risks. While Tesla stock fell 5.8% Thursday in response to the Reuters report about EV tax credits, the shares were still up about 24% since election on Nov. 5.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 15, 2024 12:19 ET (17:19 GMT)
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