Strong new business growth (we estimate 12-13 points growth over market) is yet again being almost fully offset by VC-specific headwinds that we assumed would abate in 2020. We believe the content growth thesis is intact and there are encouraging signs that operating leverage will be very strong, but we are concerned that investors will start to wonder whether legacy headwinds are a perpetual issue. We are maintaining an Outperform rating and $87 target price but believe it will take some time to regain confidence and see limited potential for positive catalysts in the near-term.
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We wanted to flag a few highlights in today's (02/20/20) Wolfe Research Auto Daily....
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.
The big question heading into Thursday results was when revenue growth/EBIT metrics would start to inflect meaningfully higher. We see sizable potential tailwinds in the 2022-2025+ timeframe (especially as BWA integrates DLPH power electronics into its existing motor/electric drivetrain offerings). But we don’t see these propelling growth in 2020 or 2021. BWA’s strong FCF (10% FCF yield on 2020 numbers) should provide support at current levels. But we don’t yet see a near-term catalyst to support a re-rating of the shares.
American Axle 4Q and 2020 Preview
American Axle reports their 4Q and 2020 outlook before the open on Friday. We expect the quarter to be in-line, but also note that our 2020 EBITDA estimate is slightly below consensus (we expect weakness on a few key platforms—in the U.S. and Internationally—to continue into this year). That said, if our estimates prove correct AXL should be poised for impressive FCF (we’re at $290 MM adj FCF; $260 MM after restructuring).
NIO Update: Meaningful improvement in fundamentals requires a lot more volume (and a lot more capital)
We were able to catch up with NIO management after the recent $100mln convertible bond issuance. The likelihood of longer-term financing is not clear to us, although we think state-owned funding sources are likely to be supportive.
We wanted to flag a few highlights in today's (02/12/20) Wolfe Research Auto Daily....
Many of the Sell-side analysts that follow Goodyear have heard PM’s lament that this company “hasn’t missed an opportunity to miss an opportunity”. This is a bit of an exaggeration… but this description seems apt as we take stock of the company’s Q4 and their outlook for 2020… with an earnings inflection pushed out to 2021.
Did BorgWarner make the right call?
BorgWarner’s shares have declined by 13% since they announced the acquisition of Delphi on January 28. From investors’ perspective, many of the worries that were ascribed by DLPH (exposure to Commercial Trucks, Light Vehicle Diesel, Europe, smaller OEMs in China) have transferred over. We traveled to BWA’s HQ to gain additional insights into the opportunities and risks and come away with three takeaways: 1) The Delphi acquisition could be a game changer for BWA in vehicle electrification, 2) Once the deal closes, we would not be surprised to see asset sales, and 3) BWA has underwritten much more conservative DLPH numbers than the Street. We came away encouraged.
Restarting China auto production will not be easy
Yesterday (February 10th) was supposed to be the first day back to work for most Auto workers in China, after the New Year Holiday was extended 1 week.
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.
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