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23 Jun 2020
The Shape of U
Bayerische Motoren Werke AG (BMW:WBO), 0 | Continental AG (CON:WBO), 0 | Forvia SE (FRVIA:PAR), 0 | Plastic Omnium SE (POM:PAR), 0 | Renault SA (RNO:WBO), 0 | Porsche Automobil Holding SE Pref (PAH3:WBO), 0 | Stellantis N.V. (STLA:WBO), 0 | Mercedes-Benz Group AG (MBG:WBO), 0 | Goodyear Tire & Rubber Company (0QLL:LON), 0 | Autoliv Inc. (0HJH:LON), 0 | Nokian Renkaat Oyj (NRE1:WBO), 0 | Tesla, Inc. (0R0X:LON), 14,995 | Ferrari NV (RACE:MIL), 0 | Valeo SE (0RH5:LON), 0
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The Shape of U
Bayerische Motoren Werke AG (BMW:WBO), 0 | Continental AG (CON:WBO), 0 | Forvia SE (FRVIA:PAR), 0 | Plastic Omnium SE (POM:PAR), 0 | Renault SA (RNO:WBO), 0 | Porsche Automobil Holding SE Pref (PAH3:WBO), 0 | Stellantis N.V. (STLA:WBO), 0 | Mercedes-Benz Group AG (MBG:WBO), 0 | Goodyear Tire & Rubber Company (0QLL:LON), 0 | Autoliv Inc. (0HJH:LON), 0 | Nokian Renkaat Oyj (NRE1:WBO), 0 | Tesla, Inc. (0R0X:LON), 14,995 | Ferrari NV (RACE:MIL), 0 | Valeo SE (0RH5:LON), 0
- Published:
23 Jun 2020 -
Author:
Stuart Pearson -
Pages:
133
The acute stage of the crisis may be behind us, but a chronic period of rising unemployment and depressed car demand may just be beginning. We cut FY''20e sector EBIT by 13% and turn more tactically cautious ahead of up to EUR40bn in expected Q2 cash burn. PSA (+) is our new top pick.
In love with the shape of U... Unemployment to puncture hopes for a V shaped recovery?
As lockdowns ease and stimulus arrives, a collective sigh of investor relief has seen the sector reclaim 50% of its peak 2020 losses in anticipation of a V-shaped recovery. However with the ''acute'' stage of the crisis now behind us, we may soon enter a ''chronic'' period of rising unemployment and tighter credit availability. Neither are good for car sales, and we expect 1H''21e to see a sequential decline in volumes as pent up demand and stimulus fade, and job cuts rise. Put simply, fears of a ''U'' (or even ''W'') shaped downturn may slowly return as recent momentum fades.
Weak Q2 reporting set to come early... we cut FY20e sector EBIT by 13%
We expect reporting season to come early this quarter, with many companies likely to pre-release due to the magnitude of variance versus consensus. In this note we thus update our earnings estimates for latest market trends and recent company feedback, and set out our current best estimates for Q2. This sees us cut our FY20e aggregate sector EBIT expectation by 13%, primarily driven by steeper Q2 losses, where EUR37bn in forecast cash burn looks likely to surprise negatively, not least due to the hefty destocking required in the quarter.
Time for tactical caution: we favour the resilience of PSA (+) - our new top pick
While the sector may still offer value appeal on a longer term view, we think it time for increasing tactical caution as the flow of good news fades. Indeed we now see only 7% upside on average to our 12m target prices, versus 30% when we published our Brutal Finale update in late March, arguing it was time to buy quality...