European Auto Stocks – Fundamentals? Not Good, But Thankfully They Are “Blessed” By ECB

Looking at the internal corporate numbers for European auto manufacturers, 2016 was a reasonably positive year. Used car availability was generally low, resulting in relatively more attractive new car values. In the US truck and SUV sales held up overall industry numbers to respectable levels and earnings projections generally held steady. The Chinese market was looking generally robust, particularly for premium vehicles, and even European new car registrations provided a positive surprise while Brexit impact “was limited and the UK market held up relatively well.” So why did European auto stocks struggle, trading below historic averages? Deutsche Bank’s European-based automotive analysts see Terminal Value threatened by disruptive headwinds, which have impacted flat to negative stock prices in the sector.

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European auto stocks are a “QE blessed” stock sector, perhaps more so than most industries

Automotive markets, particularly in Europe, are a “QE blessed” sector, as negative interest rates set an artificial floor for generally historically low-cost auto loans, impacting European auto stocks.

In a December 13 report, Deutsche Bank Auto Manufacturing Research Analysts Tim Rokossa, Christoph Laskawi, Gaetan Toulemonde and Beili Chen recognize that the central bank quantitative easing benefit has its limits, but think that rates are not going to rise as fast as the market generally thinks. They think the market is generally overestimating the need for investment find positives in select strategic areas, but other concerns persist.

“Financially corporates are also in much better shape than ever before. The net industrial cash positions are at record highs and pension deficits shrink with rising rates,” the report stated. “We also believe investment needs for trends like e-mobility are overdone.

2017 is expected to be a difficult year, with year over year heavy truck sales are expected to decline by 7% in North America, Europe and Brazil. Europe is expected to be down mid-single digits overall, with Germany leading the economic pack to the upside, however. India “finally showed encouraging momentum” while Russia and Brazil “sunk further.”

In the US, 2017 is expected to be a generally positive year as Deutsche Bank sees “the market at peak demand” as “low interest rates and higher lease penetration” are factors that appear exhausted. The top of the trend might also be at hand due to increased supply of low mileage used cars resulting in migration to this market rather than new cars. “That said, our economists are bullish on the impact of President-elect Trump’s stimulus plan,” the report said, pointing to higher GDP growth expectations that “could drive upside to our outlook in a bullish scenario.”

But factors that seem to be hitting the auto sector, real headwinds, are more of a macro trend.

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Electrification of cars not positive for European auto stocks

The automotive industry is facing both cyclical and structural trends. Saying “it is easy to be bearish on European autos,” the Deutsche bank report points to threats to future cash flow. These threats include electrification of cars, “pedestrian” European market growth, increasing regulatory costs, interest rates “no longer falling” even though they might not rise as fast as anticipated, and used car availability providing price competition to new cars.

While electric cars “will not materially dilute contribution margins before 2019/20,” it is a trend that could disrupt the industry. China is leading in the development of electronic vehicles, pushed higher by central and local government subsidies as the source of significant auto demand plans to implement a carbon emission credit program to combat dangerous air pollution in the region.

The electrification trend is not going to immediately disrupt the industry, but its impact on a stock’s Terminal Value is being closely monitored.