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We wanted to flag a few highlights in today's Wolfe Research Auto Daily...
- Early Model 3 ASP data looks encouraging. Expect Q1 deliveries of 75k units.
- What if Ford cuts International in half?
- If you live in China, you may be waiting 3 more days to buy your car
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).
We expect the US Dept of Commerce to release a report this weekend asserting that automotive-related imports are a national security threat, thus authorizing the Executive branch to enact tariffs without Congressional approval under the Section 232 statute. We think actual tariff enaction is unlikely given widespread opposition from U.S. constituencies (Auto Dealers are politically powerful; even the UAW has not offered its endorsement). Nevertheless, general uncertainty during the 90-day post-report evaluation period could have stock implications: Slightly negative for U.S. Suppliers, negative for U.S. Dealers and Aftermarket Retailers, negative for non-U.S. OEMs, and neutral for U.S. OEMs.
Dealer earnings start on 2/5; however, AN does not report until 2/22. The only other time that it reported even remotely this late was in Q4 09 on 2/11. Hard to tell what this means, though a later date would give time to stabilize operations, finish CEO search, or switch to Non-GAAP.
Once a quarter, we comb through corporate filings and summarize the most noteworthy datapoints. At a high level, developments during the quarter reinforced our view that investors should be Underweight Autos and Auto Parts, Underweight Dealers, and Overweight a relatively small selection of companies that fall into the Auto 2.0 category. In our view the U.S. Auto Cycle is in its 8th or 9th inning, with looming pressures on vehicle affordability. China is experiencing its first real Auto Industry downturn, and we are not convinced that the Central Government will step in to specifically prop up Autos. Europe also faces a number of challenges: These include potential trade risks (7% of Europe produced vehicles are exported to the U.S.), political risks (Brexit), and regulatory risks (vehicles more expensive to produce, at the same time that pricing has become more challenged).
This AM (10/30/2018), AN reported total rev growth of -1.5% missing Cons of +2.3% and our -0.1%. EPS of $1.24 met Cons but beat our $1.30 helped by asset sales and taxes. SG&A came in worse than expected stoking concerns on AN’s elevated level of spend in today’s SAAR environment. AN announced a 7% stake in the #2 online auto dealer. AN -3% vs S&P +1%.
We are decreasing estimates and rolling our price target to a year-end 2019 value of $37 (was CY 18 of $46). Our price target uses a 7.5x EV/Adj. EBTITDA, in-line with both peers and where shares currently trade today.
Our analysis of vehicle affordability and price elasticity suggest that the U.S. market could face a 1- million-unit decline, even without a recession. Partly due to changes in China government policy, this market may no longer be as consistent a source of growth and profitability. Europe faces significant regulatory challenges.
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