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Q1 was a throwaway quarter – as the world changed in mid-March and expectations rapidly reset. Guidance was pulled, revolvers were drawn, and auto stocks sold off. But since then investor interest has soared as trough-to-trend is the one phase of the economic cycle where auto stocks have consistently outperformed. Best-performing stocks since the trough on March 18th have been TEN, DAN, ADNT, and AXL.
Auto and Auto Supplier stocks have risen sharply over the past 30 days – Driven by evidence of liquidity from both the Fed and Private Capital Markets, signs of bottoming for Auto Demand, and indications that Auto Production is poised to resume. For the near term, we believe that newsflow could remain broadly supportive. The mechanics of SAAR calcs could lead to (perhaps misleadingly) strong SAARs in the months ahead. And we believe that tightening of new and used car inventory could support some improvement in pricing.
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.
JD Power provided an update on their U.S. Auto Sales outlook in a presentation yesterday. The presentation included interesting datapoints illustrating the magnitude of declines in new and used vehicle sales over the past few weeks. Notably they expect April to come in softer than March. And surprisingly, used is weakening even more than New. JDP shares our concerns about falling used prices, and they see elevated dealer inventories as a headwind to a production recovery later this year.
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.
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