U.S. sales have gotten off to a slow start—with 16.6 MM SAARs in both Jan and Feb (Note: 2018 was 17.2 MM). While this is consistent with our forecast (16.7 MM SAAR for this year), this prompted a flurry of calls regarding the state of industry inventories (which ended Feb at 77 days, 7% above “normal”), and potential risks to production (impacting OEMs/suppliers) and/or pricing (incentives from OEMs). We revisited our production assumptions and concluded that inventories can easily be brought back in-line with historical levels based on a normal seasonal uptick in sales, and very modest (100k) adjustments to production.
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In April 2015 Fiat Chrysler’s then CEO Sergio Marchionne surprised the Street with an impromptu presentation calling for Auto Industry consolidation. The presentation focused on 2 points: 1) The Auto Industry had not earned its cost of capital over a cycle, and; 2) Consolidation is the key to remedying the problem. At the time Marchionne argued that achieving greater scale and eliminating duplicative investment could have meaningful benefits. Clearly, this call did not pan out.
Tenneco reported much weaker than expected 4Q18 EBITDA (significant earnings declines in each of the legacy Tenneco businesses) and weaker than expected 2019 guidance before the open on Thursday (2019 VA margin guidance of 10.4% corresponds with 2019 EBITDA in the $1.6 bn range compared with consensus of $1.7+ bn). The risk/reward for this stock was set up poorly heading into the print, as there was limited disclosure/transparency into quarterly pro formas for the Federal Mogul acquisition (this was the first quarter to include FMO), there were adverse trends within all three legacy TEN segments (margins were down materially), and TEN is now saddled with relatively high leverage (3x net debt/EBITDA). Tenneco’s shares fell 15% for the day.
This afternoon (03/14/19) KBRA Ratings was first on scene in issuing a very thorough Pre-Sale report on the Carvana 2019-1 ABS. Gracefully, they have allowed us to republish some of the data. But you can find the full report here. Overall though, the Carvana Pre-Sale is more supportive to our thesis than expected, given preliminary ratings and that the issuance includes a lot of the deep subprime loans that were likely previously going to an unnamed receivable purchaser (this concerned investors).
Wolfe Research Senior IT Hardware & Networking Analyst, Steve Milunovich, hosted a webcast with Dan Galves, Wolfe Autos Analyst, and Horace Dediu. Topics for discussion included the coming unbundling of transportation, micromobility and why could it be more important than autonomous vehicles, and the early usage statistics and vendors.
This afternoon (3/12/19) CVNA filed an ABS-15G for a due diligence report related to its first ABS - Carvana Auto Receivables Trust 2019-1. This is a massive catalyst that we have been waiting for, and candidly, it is occurring a year or two earlier than we were expecting (though we did find a hint in the 10-K). We think an ABS deal could serve as a double catalyst. First, it will significantly lower the funding cost of CVNA’s financing business. Second, IF the ABS is broad enough to include some of its Deep Subprime loans (Exhibit 5), it will fully dissolve a leading bear thesis that Carvana has been over-earning in its credit business with quasi related-party agreements.
We hosted Tesla IR Martin Viecha for two large group meetings in NYC: Even Tesla bulls have been shaken by the sheer volume of recent noise in the system. So, it was good to look management in the eye and hear that Tesla is selling every car they can produce. Short-term, lower pricing has positively impacted US demand and Europe / China deliveries are brisk. Long-term, demand sustainability isn’t an issue in our view, given the fact that Tesla’s many advantages have led to vehicles now priced below comparable ICE competition and $20k+ below EV competition.
After market close on Tuesday (3/5/19), NIO reported EPS loss of RMB 3.20 vs WRe of 2.16. Rev and gross margin were in-line, but higher R&D / SG&A (47% / 22% above WRe) led to a substantial earnings and FCF miss (for perspective, NIO raised about RMB 5bn in a recent Convert and burned RMB 3bn in qtr).
General Motors disclosures should remind investors that GM has an interesting SOTP angle. While the 10K dropped language related to timing of Cruise Commercialization (we still expect this w/in the next 12-months), the company is clearly preparing for bigger things. Cruise employees and management are receiving Stock Options and RSUs that vest upon an IPO. On the negative side, GM also continues to disclose potential residual risks related to the bankruptcy of old GM (Plaintiffs want 30 MM additional shares for the GUC trust; GM will fight this at a March 11 hearing); The Takata recall could cost $1.2 bn (though GM is still seeking to avoid a recall).
Four factors converged to simulate recessionary conditions for LEA (starting 3Q18) - 1) Production of key Lear platforms in North America was dragged down by temporary downtime for major model changeovers; 2) European production was disrupted by an emissions certification logjam; 3) China experienced its first downturn in over 20 years; 4) Lear's net new business backlog had an unusual, but temporary gap.
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