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....
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.
Coronavirus: Electronics supply chain update. Won’t know extent of disruption until mid-March, but Tier 1’s seem cautiously optimistic.
We caught up with two key Tier 1 auto suppliers, each of which believes that the extent of potential Coronavirus-related supply chain disruptions won’t begin to be known until mid-to-late March (since the industry is still working through pre-Lunar New Year component inventories). But we also detected cautious optimism that any disruptions may be short and isolated: 1) The timing of this crisis helped; 2) Autos are large, concentrated buyers and are exerting meaningful pressure to secure supplies; 3) Broadly weak domestic China demand for a variety of products (i.e. consumer electronics) is providing breathing room.
Investor concerns about Coronavirus clearly extend well beyond China. With that in mind, we thought it would be instructive to re-visit what earnings (and FCF) would look like if all key markets (i.e. China, North America, and Europe) experienced 10% drops. Our analysis is detailed within.
Cooper Tire’s outlook trumps the quarter. They see much stronger numbers ahead
Cooper Tire’s Q4 EPS contained quite a bit of noise (tax gains, tariff gains). But that wasn’t the Street’s focus. More interestingly, CTB Mgmt. called for a major earnings inflection in 2020, with margins headed toward 10% by year-end (vs. 6.3% in 2019), as pricing, commodities, volumes (new distribution channels), and a new Vietnam facility start to contribute. And they suggested reasons for further upside into 2021 (manufacturing inefficiencies abate, Vietnam continues to ramp, volumes continue to ramp). All of this is predicated on relatively disciplined Industry pricing. And we see this as a reasonable base case (see our supply/demand analysis here).
FX Watch: $/Euro will be important to watch for Suppliers; Brazilian Real likely to offset operational tailwinds in GMI
Key questions ahead of the Wolfe Autos Conference
The Wolfe Auto and Auto Tech Conference starts tomorrow. We detail our key questions for the companies attending within. Click here for the full question list.
Magna Q4 Results better than expected; questions around sustainable top-line growth and margin expansion remain
Magna’s Q4 results came at or above the high-end of its implied guidance range, while its 2020 outlook was left largely unchanged (FCF trimmed by $200 MM to $1.4-$1.6 bn, reflecting WC timing). We do see some near-term downside risk from coronavirus (not embedded in MGA’s guidance) and FX, but still expect meaningful FCF in 2020 and 2021 (10%+ yield). Expect more color around Magna’s ability to sustain above-mkt top-line growth, win new business in key growth areas, and meaningfully grow operating margins at our conference (Feb 25th) and its Investor Day (Feb 27th). We remain on the sidelines due in part to high Europe exposure (44% of revs).
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