London regulators moved to strip Uber of its license yesterday. Operations will be as normal during the appeals process and Uber successfully appealed a similar action in early 2018, so this issue is not over. Mounting regulatory issues are a source of selling pressure but, based on our conversations, also a significant impediment to new investors who might otherwise be interested at the current valuation level.
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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.
What does the TEN CFO departure signal?
Early yesterday morning TEN announced that their CFO will be leaving the company to become CFO at TI Automotive. We suspect that this signals a somewhat different strategy vs what we had been expecting. But this could still result in upside.
Volkswagen conference call a mixed bag for Suppliers
Volkswagen held a conference call Monday morning, trimming 2020/2025 targets. While VW does expect challenging markets in 2020 and is facing significant CO2 compliance costs, the company has opportunities to offset those through several initiatives, including greater platform consolidation and material costs savings. Implications to Suppliers would be mixed. .
Ford’s first foray into long-range BEV’s is impressive
Specs and pricing on the Ford Mustang Mach-E were impressive. But we don’t see this as stock-moving for Ford (volume targets are relatively low at 50k units and “contribution margin accretive” likely means not profitable at first).
Whether you are exposed to Automakers or Suppliers, you should read our short summary of takeaways from Daimler’s CMD. They see the cost of compliance with CO2 rules as a 100 bp per annum headwind through 2022. CEO Ola Kallenius stated “If this is the situation you’re in, you need to tackle everything”. Our biggest cost is Material at €45 bn for Mercedes cars. Daimler “won’t pretend that we are not going to put more pressure on suppliers”. The message reinforced our concern that the market may be underestimating headwinds from European CO2 regs.
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.
Q3 results were better than expected, with adj EBITDA -$585 MM about 27% above the cons loss of -$800 MM. FY19 EBITDA guidance was largely adjusted by the magnitude of the Q3 beat (to -$2.8 to -$2.9 bn vs -$3.0 to -$3.2 bn previously), implying a sequential step-down in Q4 (to $700-$800 MM) despite strong Q4 top-line growth (adj net revenue expected up close to 40% y/y). Higher Eats incentives, seasonally higher driver/courier costs, and further investments in other areas are expected to sequentially drive up Q4 losses.
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 (10/23/19) Wolfe Research Auto Daily....
Price Optimization to Improve Near-term Margins; Upgrade LYFT to Peer Perform
We see several catalysts that could improve near-term sentiment on Rideshare stocks… particularly continued actions to optimize price in core markets which we believe could drive above-consensus Q3 results: 1) The Street has been focused on publicly available NYC trip (i.e. volume) data which has been rapidly flattening. But if we include price increases and exclude low-margin “shared rides” (the major source of weakness) revenue growth and profitability is stronger than the market perceives; 2) In major markets outside of NYC, we’ve identified positive price actions in the mid-single digit range which should lead to margin improvements broadly; 3) We think a compromise on the California AB5 employment issue is possible which could remove an overhang and be a positive catalyst.
London Challenges Underscore UBER’s Global Regulatory Pressures
Last week, the city of London announced an extension to Uber’s operating license of just 2 months, requesting more documents before a final ruling. London is a key market where we estimate Uber generates about $2 bn / $500mln in gross bookings / net revenues (3%-3.5% of the business). UBER currently faces the prospects of significant regulatory pressures in 4 of its 5 largest Rideshare markets, including NYC (recent minimum wage/anti-congestion laws in) and LA /San Francisco (passage of AB5).
GM Strike may take more time to resolve, and contentious negotiations with FCA may be looming
It has been difficult to assign a probable outcome or timeline for resolving of the UAW/GM strike. But we’ve noted that our Industry Contacts (who we met during a swing through Detroit this week) are increasingly cautious. A tentative deal may not be reached for another week.
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