We wanted to flag a few highlights in today's (02/20/20) Wolfe Research Auto Daily....
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We wanted to flag a few highlights in today's (02/19/20) Wolfe Research Auto Daily....
GM’s announcement bullish for buybacks in 2020, earnings growth in 2021
We liked what we heard at GM’s CMD (two weeks ago) about expectations for free cash flow, and opportunities to turn around underperforming operations. But at the time we also noted ambiguity in a few areas, including specific drivers of an expected GMI turnaround (GMI lost $1.3 bn last year), and whether cash restructuring could mitigate buybacks (in 2020). We got a bit more insight into both on Sunday night: GM’s exit from Australia and an underutilized Thai plant should eliminate $400 MM of losses. And the net cost of restructuring will only be $300 MM this year (net of asset sale proceeds). This implies more room for share repurchases.
AXL and the melting ice cube
We spoke to a number of investors who were baffled by the reaction to AXL’s numbers on Friday (shares down 14%). The company’s Q4 EBITDA and FCF #’s significantly exceeded expectations.
GT reports tomorrow – Will lower raw materials and higher prices drive a tire earnings inflection in 2020?
GT will report earnings before the market opens tomorrow. We’re expecting flat SOI (ex a $30 MM VAT gain). Our key area of focus, however, will be whether GT’s Price – Raw Material spread widens. If it does, this will be the first time in 11 quarters ($760 MM of SOI has been sacrificed a compressing raw material spread since 1Q17). And we believe that this widening spread may signal a margin inflection
Sensata Earnings Preview: See some risk on 2020 margins
We’re not sure why the Sell-side is assuming that margins grow +60bp’s yoy. We see two high probability drags that are unlikely to be fully offset by tailwinds: 1) End-market declines vs. new business growth is usually margin-dilutive, particularly when Comm’l Vehicle is likely the worst end-market; 2) FX hedging gains added 70/80 bp’s of margin in 2018 / 2019 and a portion of that benefit could reverse in 2020.
Fiat Chrysler – Plenty of risks priced-in, but tough to find a catalyst given high CO2 concerns
FCA’s Q4 results were largely in-line with Mgmt’s prior guidance, with FCF slightly better on favorable working capital. 2020 guidance was left unchanged, and we were aware of most of the major headwinds and tailwinds (i.e. tailwinds from the non-repeat of inventory corrections, UAW bonus, and diesel fines in NA; Europe CO2, higher capex, UAW labor costs, Warren Truck downtime, etc). Surging palladium and rhodium prices are a new risk, as is the coronavirus. But these appear to be in the stock (FCA mkt cap less dividends is €13.3 bn). The key question is whether there is a catalyst on the horizon… We don’t see one at the moment, as near (and long-term) concerns around Europe remain (FCA/PSA business will be 46% Europe).
We wanted to flag a few highlights in today's (02/06/20) Wolfe Research Auto Daily....
GM’s 2019 ex-strike performance was solid, with the company generating EPS / FCF of $4.82 / $6.5 bn, in-line to above targets mgmt set early in the year (impressive considering the multitude of (largely) macro challenges the company faced).
Ford surprised us by indicating that their 2020 Automotive segment EBIT would only increase “nominally”. And investors came away from Ford’s Earnings Call universally frustrated by Mgmt’s lack of transparency regarding the drivers, as it seemed that tailwinds could be substantial (e.g. Nonrecur of the Explorer launch issues and the UAW bonus; restructuring in Europe; restructuring in SA; localization in China; new products). Management would not answer questions about regional expectations…refusing to provide even directional color around positives and negatives or detail any of the attributes of the EBIT bridge. While we are disappointed to once again see Ford alienating the company’s shareholders, and we expect F’s shares to weaken today, our view is that risk/reward is skewed positive. Market cap in the low $30 bn’s likely corresponds with long term FCF in the low $3 bn’s, not far from what Ford is achieving today. In other words, the stock is pricing in a failed turnaround.
Fiat Chrysler’s Q4 is likely to be in-line. And they’ve already provided 2020 guidance. So why have the shares been so weak?
FCA shares are down 16% since its announced merger with PSA, even as consensus 2020 and 2021 estimates have largely remained unchanged. We suspect the market is bracing for stiffer headwinds on multiple fronts, including in North America (soft pricing conditions, weakening Jeep sales in the US) and Europe (risks of much larger CO2 costs). Mgmt. may be able to address near term concerns. But for the stock to really “work”, we believe Investors need more visibility into the puts and takes for 2021 and beyond. FCA’s shares could reach upwards of €17.58/share (+50% vs current levels) if they are able to instill confidence in the runway that lays beyond this year.
Investors are heading into GM’s Capital Markets Day (Wednesday, Feb 5) with a relatively pessimistic view. And we can’t really blame them, given what appears to be a number of significant challenges. These include softer US pricing trends, massive FX headwinds in SA (already in our #’s), and uncertainty around China (Equity earnings have been running $300 MM/qtr; we see risk to Q1 due to production disruptions). That said, we believe that GM has the opportunity to address uncertainty and restore confidence in the investment thesis, but only if they successfully address 3 key issues: 1) GM needs to deliver on the investment thesis from 2 years ago… that they'd be more profitable/cash generative at any point in the cycle (we believe that 2020 FCF will impress), 2) GM needs to convey that they have earnings/fcf runway into 2021 and beyond, and 3) GM needs to more clearly articulate plans to convey cash to shareholders. We preview what to look for in GM’s CMD in today’s WR Auto Daily.
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