An indication advertises to buy automobiles at a used automotive dealership in Arlington, Virginia, February 15, 2022.
Saul Loeb | AFP | Getty Images
DETROIT – Since the beginning of the pandemic in early 2020, U.S. automakers and sellers have seen document earnings as demand outpaced provides of recent automobiles amid provide chain issues.
But with rates of interest rising, inflation at document highs and recession fears looming, Wall Street is intently watching third-quarter earnings outcomes and steerage for any indicators shopper demand is perhaps weakening.
“Auto sentiment is very poor. We get it. Higher rates, still high prices, low consumer confidence, a potential recession and European energy risk does not make autos a friendly place,” RBC Capital Markets analyst Joseph Spak wrote in an investor notice final week.
Spak mentioned third-quarter earnings “should mostly be fine,” with the main target being on firm commentary and steerage revisions. He mentioned 2023 estimates for the sector must “move materially lower.”
RBC and different monetary companies have signaled the auto business’s provide chain points might rapidly shift to demand issues.
Profits for U.S. and European automotive corporations are set to drop by half subsequent 12 months as weakening demand results in an oversupply of automobiles, UBS analysts led by Patrick Hummel instructed traders final week.
He mentioned the general automotive sector in 2023 “is deteriorating fast so that demand destruction seems inevitable at a time when supply is improving.”
GM/Ford
On Oct. 10, Hummel additionally downgraded General Motors and Ford Motor, predicting it that it could take three to 6 months for the auto business to finish up in oversupply. He mentioned that may “put an abrupt end” to the unprecedented pricing energy and revenue margins for the automakers up to now three years.
The funding agency downgraded Ford to “sell” from “neutral” and GM to “neutral” from “buy” – sending each shares 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 ebook an additional $1 billion in surprising provider prices in the course of the third quarter.
Jim Farley, CEO, Ford, left, and Mary Barra, CEO, General Motors
Reuters; General Motors
GM has not signaled such issues for the third quarter, however skilled comparable points in the course of the second quarter that it was anticipating to make up for in the course of the second half of the 12 months.
GM CEO Mary Barra this previous week instructed Yahoo! Finance that the Detroit automaker is getting ready for elevated demand for its automobiles subsequent 12 months, however that it needs to be ready “regardless of the environment” to proceed investing in its electrical car plans.
GM is about to report third-quarter outcomes earlier than markets open Tuesday, adopted by Ford a day later after the bell.
Before 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.
Dealers
CarMax fueled Wall Street’s issues final month after the used automotive seller posted one in every 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 Street anticipated.
Used automotive costs stay elevated, however Cox Automotive mentioned wholesale costs for seller auctions have declined for 4 consecutive months. That might sign shoppers are fed up with the near-record costs.
Citing CarMax’s outcomes, J.P. Morgan analyst Rajat Gupta mentioned the sentiment for franchised sellers’ third-quarter earnings “is the most negative we have encountered since the pandemic.”
“The sector is not immune to ongoing macro challenges and we are dialing back our estimates for 2023 materially to reflect a mild recession and hitting a new normal by 2025,” Gupta mentioned in an Oct. 6 investor notice.
A possible vibrant spot for the business is the low new automotive availability and gross sales. Even if there’s an financial downturn, gross sales might nonetheless improve although earnings could 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 Street’s prime and bottom-line expectations.
Morgan Stanley analyst Adam Jonas mentioned Lithia’s third quarter could be the final of the “really, really, really good” gross revenue per unit quarter of this cycle.
“While [CarMax’s] weak fiscal 2Q results (reported a couple weeks back) set the tone for the used market, we believe [Lithia’s] 3Q miss should set the pattern for the franchise players,” he mentioned in an investor notice Wednesday.
Other 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
Looking to auto suppliers, which have skilled important value will increase in the course of the coronavirus pandemic, a number of Wall Street analysts anticipate continued progress this 12 months, adopted by single-digit progress, if not much less, subsequent 12 months.
Suppliers are largely paid after they ship components or merchandise to bigger suppliers or automakers. Smaller suppliers that produce supplies or components for lager corporations have significantly been below stress attributable to decrease volumes, elevated prices and labor shortages.
Gary Silberg, KPMG’s international head of automotive, instructed CNBC {that a} important variety of suppliers are going again to the unique gear producers asking for assist.
“Not only just for them but for their suppliers. It’s a dance basically that everyone’s doing all the time,” Silberg mentioned. “They don’t have a lot of leverage is the problem. It’s been a very, very tough 18 months” for smaller automotive suppliers.
A KPMG survey that included greater than 100 automotive business CEOs whose corporations have annual revenues of over $500 million discovered 86% imagine there will likely be a recession in subsequent 12 months, and 60% mentioned will probably be gentle and quick.
Responses for the KPMG CEO Outlook survey had been submitted from mid-July to late-August.
Deutsche Bank expects auto suppliers to report third-quarter outcomes in-line with Wall Street’s expectations. Analyst Emmanuel Rosner mentioned 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 akin to American Axle & Manufacturing and Dana Inc.
– CNBC’s Michael Bloom contributed to this report.
Source: www.cnbc.com”