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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.
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).
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.
We wanted to flag a few highlights in today's (02/27/20) Wolfe Research Auto Daily....
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
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.
We wanted to flag a few highlights in today's (02/20/20) 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.
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