Wall Avenue eyes auto trade earnings for indicators of ‘demand destruction’

DETROIT – For the reason that begin of the pandemic in early 2020, U.S. automakers and sellers have seen document earnings as demand outpaced provides of latest automobiles amid provide chain issues.

However with rates of interest rising, inflation at document highs and recession fears looming, Wall Avenue is carefully watching third-quarter earnings outcomes and steering for any indicators shopper demand is likely to be weakening.

“Auto sentiment could be very poor. We get it. Larger charges, nonetheless excessive costs, low shopper confidence, a possible recession and European power threat doesn’t make autos a pleasant place,” RBC Capital Markets analyst Joseph Spak wrote in an investor be aware final week.

Spak stated third-quarter earnings “ought to principally be positive,” with the main focus being on firm commentary and steering revisions. He stated 2023 estimates for the sector have to “transfer materially decrease.”

RBC and different monetary corporations have signaled the auto trade’s provide chain points might rapidly shift to demand issues.

Earnings for U.S. and European automotive firms are set to drop by half subsequent yr as weakening demand results in an oversupply of autos, UBS analysts led by Patrick Hummel informed buyers final week.

He stated the general automotive sector in 2023 “is deteriorating quick in order that demand destruction appears inevitable at a time when provide is bettering.”

On Oct. 10, Hummel additionally downgraded Basic Motors and Ford Motor, predicting it that it will take three to 6 months for the auto trade to finish up in oversupply. He stated that can “put an abrupt finish” to the unprecedented pricing energy and revenue margins for the automakers up to now three years.

The funding agency downgraded Ford to “promote” from “impartial” and GM to “impartial” from “purchase” – sending each shares tumbling roughly 8% throughout intraday buying and selling on Oct. 10.

The downgrades got here weeks after Ford stated components shortages affected roughly 40,000 to 45,000 autos, primarily high-margin vans and SUVs that have not been capable of attain sellers. Ford additionally stated on the time that it expects to e-book an additional $1 billion in sudden provider prices throughout the third quarter.

GM has not signaled such issues for the third quarter, however skilled comparable points throughout the second quarter that it was anticipating to make up for throughout the second half of the yr.

GM CEO Mary Barra this previous week informed Yahoo! Finance that the Detroit automaker is getting ready for elevated demand for its autos subsequent yr, however that it needs to be ready “whatever the atmosphere” to proceed investing in its electrical car plans.

GM is about to report third-quarter outcomes earlier than markets open Tuesday, adopted by Ford a day later after the bell.

Earlier than Detroit’s largest automakers report earnings subsequent week, electrical car chief Tesla, which has a cult following amongst buyers, is scheduled to report after markets shut Wednesday.

CarMax fueled Wall Avenue’s considerations final month after the used automotive supplier posted one in all its greatest earnings misses ever. In its fiscal second quarter ending Aug. 31, same-store unit gross sales fell 8.3%, steeper than the three.6% decline Wall Avenue anticipated.

Used automotive costs stay elevated, however Cox Automotive stated wholesale costs for supplier auctions have declined for 4 consecutive months. That might sign customers are fed up with the near-record costs.

Citing CarMax’s outcomes, J.P. Morgan analyst Rajat Gupta stated the sentiment for franchised sellers’ third-quarter earnings “is essentially the most unfavorable we have now encountered for the reason that pandemic.”

“The sector shouldn’t be proof against ongoing macro challenges and we’re dialing again our estimates for 2023 materially to replicate a gentle recession and hitting a brand new regular by 2025,” Gupta stated in an Oct. 6 investor be aware.

A possible brilliant spot for the trade is the low new automotive availability and gross sales. Even when there may be an financial downturn, gross sales might nonetheless enhance although earnings can be anticipated to tighten.

Lithia Automotive on Wednesday reported its highest third-quarter income and earnings per share in firm historical past, regardless of lacking Wall Avenue’s high and bottom-line expectations.

Morgan Stanley analyst Adam Jonas stated Lithia’s third quarter could be the final of the “actually, actually, actually good” gross revenue per unit quarter of this cycle.

“Whereas [CarMax’s] weak fiscal 2Q outcomes (reported a pair weeks again) set the tone for the used market, we consider [Lithia’s] 3Q miss ought to set the sample for the franchise gamers,” he stated in an investor be aware Wednesday.

Different main sellers scheduled to report third-quarter earnings embrace Group 1 Automotive on Oct. 26, adopted by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct. 27.

Seeking to auto suppliers, which have skilled vital value will increase throughout the coronavirus pandemic, a number of Wall Avenue analysts anticipate continued progress this yr, adopted by single-digit progress, if not much less, subsequent yr.

Suppliers are largely paid after they ship components or merchandise to bigger suppliers or automakers. Smaller suppliers that produce supplies or components for lager firms have notably been underneath stress resulting from decrease volumes, elevated prices and labor shortages.

Gary Silberg, KPMG’s international head of automotive, informed CNBC {that a} vital variety of suppliers are going again to the unique gear producers asking for assist.

“Not solely only for them however for his or her suppliers. It is a dance principally that everybody’s doing on a regular basis,” Silberg stated. “They do not have numerous leverage is the issue. It has been a really, very powerful 18 months” for smaller automotive suppliers.

A KPMG survey that included greater than 100 automotive trade CEOs whose firms have annual revenues of over $500 million discovered 86% consider there might be a recession in subsequent 12 months, and 60% stated it will likely be delicate and brief.

Responses for the KPMG CEO Outlook survey have been submitted from mid-July to late-August.  

Deutsche Financial institution expects auto suppliers to report third-quarter outcomes in-line with Wall Avenue’s expectations. Analyst Emmanuel Rosner stated in a be aware to buyers Wednesday that the agency favors suppliers over automakers into subsequent yr, however sees potential earnings draw back threat from smaller suppliers comparable to American Axle & Manufacturing and Dana Inc.

– CNBC’s Michael Bloom contributed to this report.