Concerns about auto sector in 2017 are rising as US president-elect Donald Trump threats against US companies relocating their production to Mexico. Local players have capitulated to the President-elect’s dictates- Ford cancelled plans to build a new Mexican plant- which suggests that the industry’s spine is a weak one after all as it lobbies its way into the new balance of power.
Analysts at CaraxAlphavalue also think European players are likely to be absorbed in this storm with potentially rising costs as a result.
Furthermore they point while the autonomous car seems to be for today with daily media opinions on the required extent of human interaction and Alphabet/Google/Waymo claiming a quantum leap in “cheap” lidar, German car component group Continental is making more cautious noises about the 2017 outlook.
“Volumes are unlikely to be explosive contrary to 2016, including in China where the market is seen up 4% and higher input costs are clearly biting into margins across the board. As a reminder, Continental’s mix of tyres and car electronics manufacturing gives it a good vantage point.”
Why is it then that the sector holds up well? “The answer is we do not know,” say experts.
As they explain last December’s figures show a fair degree of retreat in US registration numbers including for FCA (Sell, Netherlands) with a 10% drop. FCA’s share price gained 23% last month so that it was clearly not driven by US demand even though this is its biggest market (Chrysler).
The US picture is actually quite murky with VW (Sell, Germany) gaining US market share across the board that same month. Conversely, November’s and December’s registration figures have been pretty strong in Europe, offsetting the US uncertainty and the relative loss of market share in China (except for VW) for European manufacturers. China is, like the US, moving into SUVs which Europeans do not have. In addition, China sponsors local manufacturers of cheap electric cars on massive pollution concerns at the expense of European-designed cars.
“The near-term outlook is thus one of slower growth, political pressure, not to mention the costs of shifting away from diesel for which demand is dropping fast in Europe and back to gasoline, and multiplying loss-making electric cars.”
AlphaValue’s universe of 14 stocks (manufacturers, car components and trucks) is looking into an 11% downside potential which looks at odds with the earnings surge (see valuation table below).
“Actually more than 2/3rds of the 2016 and 2017 sector earnings growth is due to the recovery of Volkswagen earnings after its massive 2015 provisions. The genuine earnings growth of 2017 is actually limited to Daimler (Reduce, Germany).”
“In terms of remaining upsides, one would have to focus on Faurecia (Add, France) or Renault (Add, France) but with too little left to justify taking risks.”