In a report out today, we explore the level of cash burn while US facilities are not operating. Bottom-line is Tesla has plenty of liquidity to withstand a 6+ month shutdown…far beyond what we think is likely. We also take a stab at revised estimates, which assume that a weakened consumer leads to lower volumes, although we see several reasons that Tesla volumes will hold up better than most.
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The breadth and slope of the decline in global economic activity post COVID-19 is unprecedented. For Autos, while there is still relatively little visibility into the intermediate term outlook, there is a growing view within the Industry that the pattern of declines globally will mirror that which was experienced in China. We’ve been seeing this in Europe. And our contacts suggest that a similar pattern is emerging in the U.S. We are lowering our Global Auto Production forecast for 2020 to -20%. Embedded within this is a U.S. Light Vehicle Sales assumption of 12 million (down from 17 million in 2019), in-line with the 10-12 million unit “guestimate” that we’ve heard from Industry contacts.
We wanted to flag a few highlights in today's (03/19/20) Wolfe Research Auto Daily....
We wanted to flag a few highlights in today's (03/18/20) Wolfe Research Auto Daily....
GM and Ford try to “Keep America Rolling”
GM appears to be taking a page out of a 20-year old playbook to help re-ignite dealership traffic. If it works Investors will be relieved (and likely surprised). If it does not, we’d expect significant production cuts.
The Street’s assessment of this downturn has gotten worse
Investors’ assessment of potential downside has gotten worse over the past few days. And we’ve also grown a bit more concerned about the shape of the expected production downturn. PSA announced that they plan to temporarily close their plants in Europe. If others follow, the near-term impact could be much deeper, stressing the supply chain’s liquidity to a much greater extent than we’ve been modeling.
In our Game-Plan for a Downturn report we re-cast estimates to reflect a 10% Global Downturn (which would put global Auto Sales 16% below the 2017 peak), and then examined the multiples that companies are trading at against this number. Our finding was that ALV, BWA, DAN, LEA, and ST are trading below historical average multiples against these downturn numbers. TEL, APTV, and MGA are trading relatively close to historical average multiples but against downturn numbers. We use this metric as a guide for determining the level of downside that each stock is pricing in.
The most common question that our team has been getting… every day… is “Where do these Auto stocks typically bottom”... We wish that there was a compelling answer… but the reality is that in a deep downturn we’ve seen exceedingly low multiples applied to trough EBITDAs, earnings, or free cash flows, largely because in the midst of the decline, Investors lack confidence that numbers won’t get worse. The catalyst for an Autos inflection typically comes from a signal that a floor or an inflection is near.
We are making adjustments across our coverage universe to reflect updated assumptions for China (we now assume a 10% production decline for this market) and FX (due to the sharp decline in the Brazilian Real over the past 30 days). Our GM numbers move quite a bit (we now assume zero earnings from China this year). But we expect their FCF to remain relatively strong (2020 and 2021 drivers discussed in the Daily). Pressure on Autos/Auto Parts typically does not abate until investors are able to gauge where this cycle bottoms (irrespective of valuation). That said, we continue to see compelling fundamental developments here, and see potential for significant upside in the intermediate term.
Where’s the bottom for Autos stocks?
While Coronavirus related risks are not directly comparable to prior (and arguably more dire) crises such as the Global Financial Crisis and 9/11... there is some similarity in that the impact of these were all very difficult for Investors to estimate (Coronavirus could theoretically precipitate a global recession if fear impacts consumer sentiment). With this in mind, we looked back at where EV/Sales and other multiples bottomed during prior crises. AXL and BWA both screen favorably based on this analysis.
Aptiv: Updating 2020 est’s, reiterating relative Outperform
We’re updating our Aptiv model based on the Feb 18th Coronavirus disclosure which implies 28%-35% China revenue decline in Q1. We’re assuming the low-end (-35%), as we estimate that this implies production back to normal levels by the 2nd or 3rd week of March (production is still around 50% rate given low OEM customer demand).
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