The current auto sales run rate in China, if sustained, would imply a 10% sales/production decline in 2019. Europe won’t be easy either, as production headwinds spill into 1H19. The U.S. has been relatively strong, but we remain concerned about affordability headwinds. Given these uncertainties, we question why OEM/Supplier margin expectations are up from 2nd half 2018 levels.
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Tesla’s volume growth opportunity has been clear for some time, but persistent cash burn made it impossible for the broad investor community to evaluate the margin profile and the company’s ability to self-fund capital growth. In turn, substantial external funding needs made the risk profile unfavorable. This has limited the investor pool to essentially “true believers”, driven persistent short interest, and kept the market cap largely range-bound for 4 years.
This morning (12/4/18), AZO printed Q1 results with SSS of 2.7% above Consensus of 1.8% and our 1.5%. Adj. EPS $13.47 beat Consensus of $12.21 and our $12.32. AZO also beat on GM, SG&A, and tax (Exhibit 2). AZO shares were up 7% versus S&P 500 -3%.
This AM (12/4/2018), KMX announced the rollout of its new omni-channel offering that it’s launching in Atlanta. KMX plans for it to be available to a majority of its customers by Feb. 2020. In its FQ2 call, KMX said that it would bring this experience to a major metro market by year end; however, it did not name the market nor signal a timeline for a broader roll-out.
Late Sunday night (12/02/18), President Trump tweeted that China had agreed to reduce the tariff on vehicles produced in the U.S. and exported to China (China had increased this tariff from 15% to 40% in August). In addition, the U.S. will refrain from ratcheting up tariffs (would have gone from 10% to 25%) on $10.4 bn of Chinese made Auto Parts that are imported to the U.S. Although we have no detail as of yet, and these actions are contingent on the U.S. and China making progress towards a permanent trade agreement over the next 90 days, this development could have meaningful positive implications for U.S. Automakers and Suppliers:
We came away from Carvana’s Investor Day with reinforced conviction in our Outperform rating and 3 key takeaways: 1) The company’s competitive advantages (structural, technological, and cultural) are larger than perceived; 2) The market opportunity is massive, and; 3) The business model has clear opportunities for significant margin expansion.
The $6 bn cash flow savings ($4.5 bn operating cost and $1.5 bn capex) is so large, that we find it increasingly unlikely that GM’s free cash flow will moderate (ex-working capital), even in a deep downturn. The most common questions from investors: 1) What’s the “real” net cost reduction? 2) What are the chances GM will be forced to reverse course? 3) What are the implications for Ford?
Our Outperform recommendation on GM was based on 2 major pillars: 1) We believed that the potential upside from GM’s AV business was too large to ignore, and; 2) We believed that investors underestimated the magnitude of positive earnings/cash flow drivers in the pipeline. GM’s restructuring plans, announced early Monday, underscored our view. And frankly, we do not believe that the magnitude is yet fully appreciated. Clients are still asking us what the “real net cost reduction number” might be. Folks, $6 bn is the “real net number”. Over the next 2-years GM believes that its fixed costs should decline by $4.5 bn, and capex should decline by $1.5 bn. There is no offsetting negative from higher EV or AV spending (within GM’s reduced cost structure, spending will be increasingly redirected towards EVs).
Copart reported FQ1 ‘19 results this morning (11/21/18). Total revenue of $461m met Cons. $460m but missed our $469m; however, the more important Service revenue missed. Adj. EPS of $0.47 met Cons. $0.47 but missed our $0.50. Shares were up 5% vs. +1% S&P 500.
We think the used car industry is at an inflection point in online adoption driven by Carvana which has reinvented the used car experience with a better mousetrap. CVNA is hosting its inaugural analyst day on 11/29 and we believe the event will be a catalyst that removes opacity from the long-term margin outlook and demonstrates the superiority of CVNA’s business model to a larger set of institutional investors.