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....
GM and Ford try to “Keep America Rolling”
GM appears to be taking a page out of a 20-year old playbook to help re-ignite dealership traffic. If it works Investors will be relieved (and likely surprised). If it does not, we’d expect significant production cuts.
The Street’s assessment of this downturn has gotten worse
Investors’ assessment of potential downside has gotten worse over the past few days. And we’ve also grown a bit more concerned about the shape of the expected production downturn. PSA announced that they plan to temporarily close their plants in Europe. If others follow, the near-term impact could be much deeper, stressing the supply chain’s liquidity to a much greater extent than we’ve been modeling.
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.
A tool for assessing the impact of global production on earnings
Given the risk to Global Economic Growth and Global Auto Production in 2020, we thought it would be helpful to provide a sensitivity model that allows our clients to input their own regional assumptions and assess the impact to Earnings and FCF across our U.S. coverage universe. Click here to download.
The risk to Fiat Chrysler from Italy’s escalating Coronavirus crisis
Italy announced over the weekend that it is applying new quarantine measures in response to the coronavirus outbreak. Italy is a 2.1 MM unit market (12% of EU sales), with the areas under quarantine accounting for 20% of the country’s sales. FCA has 25% market share in Italy. We assessed the implications for FCA of more negative assumptions for this particular market, while acknowledging that the implications are likely broader (i.e. macro impact across multiple markets).
This file allows users to input their own regional production estimates and will calculate the impact to 2020 earnings and free cash flow.
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.
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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