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Automotive Earnings Toolkit
SECTOR REVIEW
Bring on the Restructuring Advisors;
Q4 is a Disaster and It's Only Getting Worse
■
The fourth quarter of 2008 is going to be one of the most difficult earnings
seasons in years for the auto sector, with production plunging in North
America, and the positive contribution from Europe having turned sharply
negative with output dropping in that region as well.
■
We’re cutting our fourth quarter earnings estimates for the group, but we
think considerable risk remains that US suppliers will come up short of the
consensus and our new estimates. The swiftness with which most OEs
slashed production in the fourth quarter was so severe that the decremental
margin is difficult to gauge.
■
The fourth quarter is behind us; that’s the good news. The bad news is that
the year-to-year production declines are getting worse in the first quarter.
Focus on the fourth quarter conference calls will be on the outlook for 2009
cash burn, including working capital expectations, cap-ex cuts, restructuring
measures, and liquidity.
■
There’s a dearth of bright spots on our Q4 Platform Monitor. No suppliers
have favorable platform exposure in either Europe or North America. The
largest negative exposure in North America belongs to SUP, AXL, VC, and
MGA; the largest negative exposure in Europe is HAR, TRW, LEA, and VC.
■
Valuation is difficult to read, especially for those stocks with low single-digit
share prices (AXL, LEA, TEN, TRW, and VC). Our Under the Hood analysis
(included in this report) is more meaningful for better balance sheet names
like JCI, BWA, HAR, and MGA.
■
Market implied profit expectations are higher than consensus for most stocks
in our sector, including many of the better quality names like BWA and HAR.
JCI may be an exception, with market implied 2010 profitability at the EPS
equivalent of about $1.17 per share, versus the consensus estimate of $1.53.
However, we note that JCI may be suffering from a re-valuation (back to an
auto supplier discount rate). If this is true, market expectations are still
above consensus.
■
Bottom line: We see no reason to own the US auto sector at this time, with
sales still in decline. We maintain our long standing view that these stocks
won’t begin to work until light vehicle sales make a meaningful and
sustained move higher.
■
We would keep an eye on quality names like BWA or JCI; although we
would prefer to buy both at lower prices. Europe-driven disappointments
may provide such an opportunity sometime in the first half of 2009.
Table of contents
Investment Summary 3
North America Production 5
Raw Materials 7
Currency Update 7
OEM Analysis 8
General Motors 8
Ford Motor 12
Platform Monitor 15
North America 15
Europe 16
Under the Hood 19
Short Interest Update 21
Inventory Situation and Outlook 22
Car and Truck Inventories by Automaker 22
Foreign Brand Update 25
Forecasting March Inventory 26
General Motors Corp. (GM) 27
Lowering Estimates 27
Ford Motor Co. (F) 28
Lowering Estimates 28
American Axle & Manufacturing Holdings Inc. (AXL) 29
Lowering Estimates 29
BorgWarner, Inc. (BWA) 30
Lowering Estimates 30
Magna International (MGA) 31
Lowering Estimates 31
Superior Industries, Intl. (SUP) 32
Lowering Estimates 32
Tenneco Inc. (TEN) 33
Lowering Estimates 33
Visteon Corporation (VC) 34
Lowering Estimates 34
TRW Automotive Holdings Corp. (TRW) 35
Lowering Estimates 35
Lear Corporation (LEA) 36
Lowering Estimates 36
Harman International Industries (HAR) 37
Lowering Estimates 37
Appendix 38
Raw Materials Update 38
Platform Monitor (full version) 41
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