Poor auto financial data could lead to lower sales, but forecast points to a strong turnaround
Car sales forecasts for Western Europe are reduced and investors are bracing for the poor 3rd Quarterly financial results from major manufacturers, but analysts say the worst is behind the industry and next year will be in the sunny highlands.
The industry is being disrupted by the chip supply crisis, and while this has perversely helped German high-profit carmakers who can make a lot of money selling a limited number of popular gas guzzlers, even them are starting to feel the effects of the drop in production. that assembly lines stammered for lack of critical components.
BMW and Daimler are expected to weather the storm better than Volkswagen, including its high-end subsidiaries. Mass market manufacturers face the biggest hits.
Forecaster LMC Automotive lowered its forecast for the 3rd month following a barely noticeable 0.5% increase for 2021 to 10.74 million cars and SUVs, even less than the previous year’s coronavirus-crushed total of 10.79 million. LMC had forecast a healthy 9.6% gain for the year as recently as July, but continued with a forecast up 3.0%, then 2.5% a month later and now 0.5%.
“The outlook for the market has once again been downgraded, reflecting the continued and deeper impact of the supply disruption, with tight inventories unable to absorb the impact of the disruption. We currently anticipate that this year will not eclipse the hopelessly weak result of 2020, ”LMC said in a report.
“Our assumption is that supply issues (chips) will be with us throughout next year and will continue to undermine the link between the positive underlying demand drivers and new vehicle sales. The downside risk of some form of virus-related restrictions remains, although in market terms this is currently overshadowed by bottlenecks in vehicle production, ”the report said.
UBS investment bank agrees that the next 3rd The quarter will be gloomy, but next year’s profits will rise by up to 20% for European automakers, adding that it is time to buy auto stocks. UBS said global production fell about 18% in the 3rd quarter, which resulted in lower profits for most companies.
“But the low point in the global production rate may already be behind us and the demand for cars is still far outstripping supply. It’s time to increase exposure to auto stocks. We put Daimler (owner of Mercedes-Benz) to “buy” because of its earnings momentum, its compelling luxury electric vehicle (electric vehicle) strategy and its potential for value creation after the Trucks spin-off UBS said in a report.
The Daimler Truck Holdings spin-off will take place in December. Daimler retains a 35% stake.
UBS said global production will increase 15% in 2022 to 88 million cars and SUVs.
“In a context of low dealer inventories and a large order book, prices and the mix will probably remain solid. We are increasing our EPS (earnings per share) for automakers by 15-20% in 2022. With this, automotive will likely be among the sectors where earnings dynamics will be the highest over the next 12 months, ”said UBS.
Bernstein Research agrees that the 3rd quarter will hurt manufacturers’ profits a bit, but not all. Mercedes from BMW and Daimler will look great compared to VW.
“The current volatility will also reveal which companies have done their homework when it comes to managing fixed costs in recent years. From our conversations with companies, it looks like the fundamentals of BMW and Daimler will be much more protected than those of the VW Group. We recommend that you be long Daimler / BMW in the next results season. VW will need to explain more, ”said Arndt Ellinghorst, analyst at Bernstein Research, in a research note titled“ What a quarter tells us about quality ”.
“VW has by far the highest fixed costs as a percentage of industrial revenue, over 30%, while Daimler and BMW operate with fixed costs in the order of 25% of sales. This largely explains why margins will decline further at VW during the current supply disruption, ”said Ellinghorst.
“We expect VW’s mass market brands to lose money and the margins of its premium brands to shrink significantly,” he said.
Volkswagen’s mass market brands include its own VW nameplate, as well as Skoda and SEAT, while the biggest premium brands are Audi and Porsche.
Morgan Stanley Investment Bank
“We are prepared for a very messy third quarter automotive results (in the US) at the worst of the chip shortage. But the production cuts seem well telegraphed, so don’t be surprised to see investors buying the Q3 chip drop. But to what end, ”said Adam Jonas, analyst at Morgan Stanley.
Jonas said that a recent forecast of sharply declining global vehicle production by data forecaster IHS Markit
“In a recent survey of our customers, more than half of survey respondents believe the IHS has cut too much and is more of a lagging indicator on chips,” Jonas said.
Jonas said Morgan Stanley estimates 2021 production at 76.4 million and 2022 at 84.5 million.
IHS Markit said last month that global light vehicle production could be reduced by 6.2% – about 5 million vehicles – in 2021. For 2022, the forecast has been reduced by 9.3%, or about 8, 4 million vehicles. IHS Markit also cut its 2023 forecast, by 1.1%, to just over 1 million vehicles. IHS Markit now estimates production at 75.8 million vehicles this year and 82.6 million in 2022.
This compares to UBS’s expectations of 88 million vehicles in 2022.