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 document income as demand outpaced provides of recent vehicles amid provide chain issues.
However with rates of interest rising, inflation at document highs and recession fears looming, Wall Avenue is intently watching third-quarter earnings outcomes and steerage for any indicators consumer demand might be weakening.
“Auto sentiment may be very poor. We get it. Increased charges, nonetheless excessive costs, low shopper confidence, a possible recession and European power danger doesn’t make autos a pleasant place,” RBC Capital Markets analyst Joseph Spak wrote in an investor notice final week.
Spak mentioned third-quarter earnings “ought to largely be wonderful,” with the main target being on firm commentary and steerage revisions. He mentioned 2023 estimates for the sector have to “transfer materially decrease.”
RBC and different monetary corporations have signaled the auto business’s provide chain points might shortly shift to demand issues.
Income for U.S. and European automotive firms are set to drop by half subsequent yr as weakening demand results in an oversupply of automobiles, UBS analysts led by Patrick Hummel told investors last week.
He mentioned the general automotive sector in 2023 “is deteriorating quick in order that demand destruction seems inevitable at a time when provide is bettering.”
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 mentioned that can “put an abrupt finish” to the unprecedented pricing energy and revenue margins for the automakers prior 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 mentioned components shortages affected roughly 40,000 to 45,000 automobiles, primarily high-margin vehicles and SUVs that have not been in a position to attain sellers. Ford additionally mentioned on the time that it expects to guide an extra $1 billion in unexpected supplier costs in the course of 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 in the course of the second quarter that it was anticipating to make up for in the course of the second half of the yr.
GM CEO Mary Barra this previous week told Yahoo! Finance that the Detroit automaker is getting ready for elevated demand for its automobiles subsequent yr, however that it needs to be ready “whatever the atmosphere” to proceed investing in its electrical automobile plans.
GM is about 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 automobile chief Tesla, which has a cult following amongst buyers, is scheduled to report after markets shut Wednesday.
Sellers
CarMax fueled Wall Avenue’s considerations final month after the used automotive seller posted one in every of its largest 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 mentioned wholesale costs for seller auctions have declined for 4 consecutive months. That would sign shoppers are fed up with the near-record costs.
Citing CarMax’s results, J.P. Morgan analyst Rajat Gupta mentioned the sentiment for franchised sellers’ third-quarter earnings “is probably the most detrimental we’ve encountered for the reason that pandemic.”
“The sector shouldn’t be proof against ongoing macro challenges and we’re dialing again our estimates for 2023 materially to replicate a light recession and hitting a brand new regular by 2025,” Gupta mentioned in an Oct. 6 investor notice.
A possible shiny spot for the business is the low new automotive availability and gross sales. Even when there’s an financial downturn, gross sales might nonetheless enhance although income could be anticipated to tighten.
Lithia Motors on Wednesday reported its highest third-quarter income and earnings per share in firm historical past, regardless of lacking Wall Avenue’s prime and bottom-line expectations.
Morgan Stanley analyst Adam Jonas mentioned Lithia’s third quarter would 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 mentioned in an investor notice Wednesday.
Different main sellers scheduled to report third-quarter earnings embody Group 1 Automotive on Oct. 26, adopted by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct. 27.
Auto suppliers
Seeking to auto suppliers, which have skilled vital value will increase in the course of the coronavirus pandemic, a number of Wall Avenue analysts count on continued progress this yr, adopted by single-digit progress, if not much less, subsequent yr.
Suppliers are largely paid after they ship components or merchandise to bigger suppliers or automakers. Smaller suppliers that produce supplies or components for lager firms have significantly been below strain on account of decrease volumes, elevated prices and labor shortages.
Gary Silberg, KPMG’s world head of automotive, advised 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 mentioned. “They do not have lots 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 can be a recession in subsequent 12 months, and 60% mentioned it is going to be gentle and quick.
Responses for the KPMG CEO Outlook survey have 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 mentioned in a notice to buyers Wednesday that the agency favors suppliers over automakers into subsequent yr, however sees potential earnings draw back danger from smaller suppliers resembling American Axle & Manufacturing and Dana Inc.
– CNBC’s Michael Bloom contributed to this report.
