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.
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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).
We wanted to flag a few highlights in today's (02/20/20) Wolfe Research Auto Daily....
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.
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.
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).
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.
Aptiv’s 2020 guidance reflected 7 points of top line “growth over market”. This compared with our assumption of 8-9 points, and this fully explained the earnings gap to consensus. We believe that this is just timing. In fact 2021 and 2022 are looking better and better, as customers are pulling-forward a massive L2+ opportunity. APTV will have to pull forward engineering spending to support this growth, and investors noticed that this will affect Active Safety and User Experience margins (29% of the company)). We’d note that total company margins are still expected to rise. And we are also confident of the margin inflection for the overall company (and for this division) next year. This is one of the few companies where confidence in the outlook is likely to be significantly higher a year from now than it is today. We maintain Outperform.
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