Wall Avenue eyes auto business earnings for indicators of ‘demand destruction’

An indication advertises to buy vehicles at a used automotive dealership in Arlington, Virginia, February 15, 2022.

Saul Loeb | AFP | Getty Photographs

DETROIT – Because the begin of the pandemic in early 2020, U.S. automakers and sellers have seen report earnings as demand outpaced provides of recent vehicles amid provide chain issues.

However with rates of interest rising, inflation at report highs and recession fears looming, Wall Avenue is carefully watching third-quarter earnings outcomes and steerage for any indicators consumer demand might be weakening.

“Auto sentiment may be very poor. We get it. Greater charges, nonetheless excessive costs, low shopper confidence, a possible recession and European power threat doesn’t make autos a pleasant place,” RBC Capital Markets analyst Joseph Spak wrote in an investor notice final week.

Spak stated third-quarter earnings “ought to principally be advantageous,” with the main target being on firm commentary and steerage revisions. He stated 2023 estimates for the sector have to “transfer materially decrease.”

RBC and different monetary companies have signaled the auto business’s provide chain points may shortly shift to demand issues.

Income for U.S. and European automotive firms are set to drop by half subsequent 12 months as weakening demand results in an oversupply of autos, UBS analysts led by Patrick Hummel told investors last week.

He stated the general automotive sector in 2023 “is deteriorating quick in order that demand destruction seems inevitable at a time when provide is enhancing.”

GM/Ford

On Oct. 10, Hummel additionally downgraded General Motors and Ford Motor, predicting it that it might take three to 6 months for the auto business to finish up in oversupply. He stated that may “put an abrupt finish” to the unprecedented pricing energy and revenue margins for the automakers up to now three years.

The funding agency downgraded Ford to “promote” from “impartial” and GM to “impartial” from “purchase” – sending both stocks tumbling roughly 8% throughout intraday buying and selling on Oct. 10.

The downgrades got here weeks after Ford stated elements shortages affected roughly 40,000 to 45,000 autos, primarily high-margin vehicles and SUVs that have not been in a position to attain sellers. Ford additionally stated on the time that it expects to e book an extra $1 billion in unexpected supplier costs through the third quarter.

Jim Farley, CEO, Ford, left, and Mary Barra, CEO, Normal Motors

Reuters; Normal Motors

GM has not signaled such issues for the third quarter, but experienced similar issues through the second quarter that it was anticipating to make up for through the second half of the 12 months.

GM CEO Mary Barra this previous week told Yahoo! Finance that the Detroit automaker is making ready for elevated demand for its autos subsequent 12 months, however that it needs to be ready “whatever the setting” to proceed investing in its electrical car plans.

GM is ready to report third-quarter outcomes earlier than markets open Tuesday, adopted by Ford a day later after the bell.

Earlier than Detroit’s largest automakers report earnings subsequent week, electrical car chief Tesla, which has a cult following amongst traders, is scheduled to report after markets shut Wednesday.

Sellers

CarMax fueled Wall Avenue’s issues final month after the used automotive supplier posted considered one of its greatest earnings misses ever. In its fiscal second quarter ending Aug. 31, same-store unit gross sales fell 8.3%, steeper than the three.6% decline Wall Avenue anticipated.

Used automotive costs stay elevated, however Cox Automotive stated wholesale costs for supplier auctions have declined for 4 consecutive months. That might sign customers are fed up with the near-record costs.

Citing CarMax’s results, J.P. Morgan analyst Rajat Gupta stated the sentiment for franchised sellers’ third-quarter earnings “is essentially the most damaging now we have encountered because the pandemic.”

CarMax shares sink as 'affordability problems' weigh on results

“The sector isn’t proof against ongoing macro challenges and we’re dialing again our estimates for 2023 materially to mirror a gentle recession and hitting a brand new regular by 2025,” Gupta stated in an Oct. 6 investor notice.

A possible vibrant spot for the business is the low new automotive availability and gross sales. Even when there may be an financial downturn, gross sales may nonetheless enhance although earnings can be anticipated to tighten.

Lithia Automotive on Wednesday reported its highest third-quarter income and earnings per share in firm historical past, regardless of lacking Wall Avenue’s high and bottom-line expectations.

Morgan Stanley analyst Adam Jonas stated Lithia’s third quarter could be the final of the “actually, actually, actually good” gross revenue per unit quarter of this cycle.

“Whereas [CarMax’s] weak fiscal 2Q outcomes (reported a pair weeks again) set the tone for the used market, we consider [Lithia’s] 3Q miss ought to set the sample for the franchise gamers,” he stated in an investor notice Wednesday.

Different main sellers scheduled to report third-quarter earnings embrace Group 1 Automotive on Oct. 26, adopted by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct. 27.

Auto suppliers

Trying to auto suppliers, which have skilled vital value will increase through the coronavirus pandemic, a number of Wall Avenue analysts anticipate continued development this 12 months, adopted by single-digit development, if not much less, subsequent 12 months.

Suppliers are largely paid after they ship elements or merchandise to bigger suppliers or automakers. Smaller suppliers that produce supplies or elements for lager firms have significantly been beneath strain as a result of decrease volumes, elevated prices and labor shortages.

Gary Silberg, KPMG’s world head of automotive, instructed CNBC {that a} vital variety of suppliers are going again to the unique tools producers asking for assist.

“Not solely only for them however for his or her suppliers. It is a dance principally that everybody’s doing on a regular basis,” Silberg stated. “They do not have plenty of leverage is the issue. It has been a really, very robust 18 months” for smaller automotive suppliers.

A KPMG survey that included greater than 100 automotive business CEOs whose firms have annual revenues of over $500 million discovered 86% consider there will likely be a recession in subsequent 12 months, and 60% stated will probably be delicate and quick.

Responses for the KPMG CEO Outlook survey had been submitted from mid-July to late-August.  

Deutsche Financial institution expects auto suppliers to report third-quarter outcomes in-line with Wall Avenue’s expectations. Analyst Emmanuel Rosner stated in a notice to traders Wednesday that the agency favors suppliers over automakers into subsequent 12 months, however sees potential earnings draw back threat from smaller suppliers resembling American Axle & Manufacturing and Dana Inc.

– CNBC’s Michael Bloom contributed to this report.

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