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There were numerous interesting takeaways from the Wolfe Research Auto Conference in Detroit, including revealing insights into recent shifts amongst U.S. New Vehicle Buyers (there may be less risk to industry mix than we perceived), the trajectory of battery costs, insights into Powertrain plans being made by Auto OEMs, and revelations on the Ride-Share business model. All of these have long term implications.
There were 3 major takeaways from GM’s CMD on Friday (1/11/19): 1) Prospective tailwinds appear to significantly exceed potential headwinds for GM’s core Auto business; 2) GM’s earnings runway is much longer than the Street appreciates (extends into 2020 and beyond), and; 3) GM reinforced our view that they are on track to achieve impressive value creating milestones at Cruise. Investor confidence is the primary driver of multiple expansion/contraction for Auto Stocks. Confidence in GM’s prospects should be on the rise. And the opportunity for upside is compelling. We reiterate our Buy, $50 target.
After 2.5 frenetic days at CES, we’d report the following key takeaways: 1) Multiple industry leaders are acknowledging (primarily behind the scenes) that deployment of Level 4 / 5 Autonomous Driving technology without safety drivers is farther away than most public targets. At the same time, demand for consumer-targeted safety / convenience systems (primarily Level 2+) continues to accelerate. 2) Reinforcement of the narrative that the next generation of high-volume internal combustion engine / transmission families will be the last one for many automakers.
No surprise, Ford announced the beginning of what is likely to become a major restructuring plan for its underperforming European business. Details are sparse. Ford did not provide any info on the cost (restructuring in Europe can cost $350k/head) or timing of benefits (we would not expect achievement of Ford’s 6% margin target until 2021, at the earliest). Per Ford’s release, they are “accelerating key fitness actions and reducing structural costs. In parallel, the fundamental redesign will include changes to Ford’s vehicle portfolio, expanding offerings and volumes in its most profitable growth vehicle segments, while ... addressing underperforming markets.”
Over the past 3 months, KAR is -18% versus CPRT (-3%), Business Service peers (-10%) and the S&P 500 (-11%). We think this is a name worth revisiting given visibility into near-term growth, strong returns with limited cyclicality, two new growth streams (TradeRev and Int’l), and a looming catalyst for valuation, which while delayed, is not far away (spin-off).
The Market is bracing for challenges as we transition to 2019, including lower Auto Production (particularly in China and Europe during 1H19), higher Rates (which raise concerns about Mix, Pricing), the strong U.S. Dollar, Regulatory Content, unpredictable Government Policy/Tariffs, the burden of increased Spending on Technology with uncertain returns, and in some cases discontinued passenger car products.
Demand and Margin (i. e. pricing) concerns have driven a sharp change in sentiment since mid-Dec. These types of concerns have always proven to be unfounded, and we believe this will be the case again, as we continue to see TSLA as a high-conviction Outperform. Shares are down 15% since Dec 14 (vs S&P -4%) and back to levels directly post-Q3 results. At 12.6x the 3Q18 EBITDA run-rate, valuation is compelling given our belief that Tesla can grow volume at a 5-year CAGR of 30%+. We have raised our 4Q18 EPS forecast to $2.57 from $1.92, reflecting stronger than expected deliveries.
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