After significant underperformance in 2018, auto supplier stocks have on average performed in-line-with or better than the S&P500 YTD in 2019. This is unusual during the Peak-to-Trend phase of the Cycle. And particularly unusual in the context of continued downward estimate revisions. Broadly speaking, we believe that a repeat in 2020 is unlikely. Investors continue to under-appreciate the magnitude of headwinds that Automakers face in Europe over the near term and China over the Intermediate term. We already expect that this will lead to minimal (if any) 2020 earnings growth for most suppliers in our coverage universe.
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Q3 was a “throwaway” quarter for many in the U. S. The GM Strike shaved up to 15% off of Supplier earnings for Q3, and it’s expected to shave up to 50% off of Q4. Investors largely ignored these downward revisions.
DOJ Investigating Ford Transmissions; We Continue to Look at Ford’s $2 bn Warranty Problem
Detroit Free Press reported that DOJ investigators are looking into Ford’s DPS6 transmissions. The implications are not yet clear. But we note that Warranty expenses have become a massive problem for this company. They’re already up $900 MM YTD. Expenses are now running $2 bn above long term average levels.
Mobileye Analyst Day (Part 2): This could be a game changer for AVs and Mobility as a Service
Want to know what was so impressive (and differentiated) about Mobileye’s Autonomous Vehicle demonstration in Jerusalem? This vehicle did everything that we have seen from the best in the business… Cruise, Argo, Waymo, Aptiv… and in a very complex environment. But this vehicle was merely equipped with cameras! There were no spinning lidars, radars, or other expensive devices mounted on the car’s exterior. The vehicle’s software was run on very inexpensive hardware (EyeQ4 chips).
We attended Mobileye’s inaugural analyst day in Jerusalem, where we were able to gather interesting insights into the outlook for semi-autonomous (L2+) driving technologies and capabilities that will expand dramatically over the next few years. Mobileye believes that they’ve had a 100% win rate on these systems (12 design wins to-date), which implies significant upside for Mobileye’s partners (primarily APTV but also MGA, Valeo, and ZF). We see potential for a $15bn addressable market for L2+ in 2025, double the current ADAS market. Also interesting, Mobileye highlighted that their proprietary REM based mapping technology has made great strides. They will fully map Europe / US by Q1 2020 / 2020YE. This technology will produce a major leap in functionality, and it provides a recurring revenue stream starting in 2020. We’ll have more on Mobileye’s unique AV / MaaS strategy in tomorrow’s Daily.
Uber: Q3 showed solid growth, margin progression, but margins taking a step back in Q4
Q3 revenue growth and EBITDA results were better-than-expected. Based on guidance, top-line remains strong in Q4 but margins take a step back. Improved segment and regional disclosure indicates there is a big gap between good markets and bad ones (particularly in Eats). We’d expect Uber to make some changes to the geographic portfolio that could help to achieve their newly-stated goal of full-year EBITDA profitability by 2021.
Mining the Filings: Our Q3 post-mortem on Tesla indicates most of the margin expansion was sustainable
We took a hard look at the reasons for the 360bp’s of gross margin expansion in Q3 (vs Q2) and see all but 100bp’s as sustainable. Overall very impressive as margins have now returned to 2nd Half 2018 levels even though overall ASP has fallen from around $70k to $57k.
We wanted to flag a few highlights in today's (09/26/19) Wolfe Research Auto Daily....
NIO reported 2Q19 earnings before market open on Tuesday (09/26/19) and held a conf call Wed AM. Cash burn was worse than expected, forward volume and margin guidance was disappointing, and no external financing was announced. The stock was down 25% over two days
We wanted to flag a few highlights in today's (09/06/19) Wolfe Research Auto Daily....
NIO reports weak July sales; August better but not enough
Weak volumes are blamed on a previously-announced recall that consumed most of NIO’s supply of batteries in July. Bottom-line is the newly-launched ES6 and NIO Pilot are getting good reviews but it’s unclear if that is translating to order flow. We’re assuming a 5k per month run-rate starting in September (vs 800 in July and 2,000-2,500 Aug guidance) but risks are clearly to the downside.
Digging Beneath the Surface Raises Concerns About Europe, and a Positive for China
We’ve taken a closer look at the Auto Sales data coming out of several International Markets, digging beneath the headline numbers. Our conclusions: 1) The data looks very weak for Europe (German production continues to decline; and European OEMs appear to be having difficulty making any progress towards complying with CO2 mandates); 2) However, surging luxury demand in China could produce an unexpected positive for certain OEMs & Suppliers.
ALV – 2Q was below consensus and 2019 was reduced. Why should 2020 be better?
ALV’s 2Q and 2019 guide-down was (by now) expected. Investors should ask: Why would 2020 be better? We continue to see downside to 2020 estimates (we’re -23% vs consensus).
A positive data point from a supplier?
GNTX reported earnings on Friday. They beat and modestly raised FY guidance. Significant content growth, along with strong cost control, seemed to be the reason why GNTX was able to offset the very challenging global production environment. This makes us incrementally more constructive on the potential for APTV and BWA’s to hold up better than most.
NIO update – Volume uptick from ES6 should bring some stabilization
Dark clouds starting to lift a bit. In-line volumes in Q3 and lower-than-expected dilution from E-Town investment would be positive, but visibility still low.
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