BMW Hold / Daimler Sell / Volkswagen Sell / Renault Hold / PSA Sell / FCA Hold / GM Sell / Ford Sell
● The cycle starts to unwind: An automotive cycle that until 2017 was lifted by a
combination of cheap credit, cost deflation, underinvestment, and currency
tailwinds is by all appearances drawing to a close. In 2018, the first signals that
these factors are softening or reversing have become more apparent, leading to a
series of downwards adjustments to guidance by a number of OEMs. While the
blame for this year’s setback has been laid at external and temporary drivers like
tariffs and emissions testing, more concerning realities exist beneath this
narrative, such as contracting margins in once highly profitable markets and
products, and sharply deteriorating cash flows that in some cases already fail to
cover dividend payments. The danger for companies caught in these headwinds
is due to their willingness to place the blame on extraordinary factors, and
ignore the greater risks from the steady removal of the cyclical tailwinds that
have supported the industry for nearly a decade.
● Cash flow the key concern: The industry’s cash margins, which take into
account investments made, fell from 3.1% in 2015 to 2.7% in 2017. That decline
has been most pronounced at premium OEMs, where it declined from 5.1% to
3.6%, while the mass market has seen cash margins remain stable at c2.5%. This
divergence can be largely attributed to a sizeable increase in investments at
premium OEMs, while the mass market has instead focused on delivering shortterm
earnings and cash flows rather than investing in future technology. The
cash flow risk will come from two directions. Firstly, this year will be the first
year since 2012 that the industry will likely see a yoy earnings decline, based on
our estimates (H1 is already down c12% yoy). Secondly, investments committed
to products like EVs and emissions reduction may not be easily pared as
technology disruption increases and the distance to CO2 targets fails to narrow.
Additional risk for mass market OEMs likely comes from a potential reversal of
their constantly growing negative working capital positions over the past few
years.
● Compressing financing margins: A widening retail financing margin has been a
key driver for growing volumes, as it enabled financial services businesses
(fincos) to expand the balance sheets at a fast pace. In Europe, refinancing rates
for automotive fincos have stayed at the same low level for the past two years,
but financing margins have already begun to compress. In our view, this is an
indication that price pressure is taking a stronger hold on the market, as OEMs
struggle to avoid rising incentivisation. It follows a similar trajectory to the US,
where OEMs like Ford have already exhibited significant financing margin
compression as higher refinancing costs could not be passed on to consumers.
Such a compression reduces the ability to expand assets and support industrial
growth.
● Labour cost inflation another late-cycle headwind: Moderate labour cost
inflation of 2-3% pa between 2014 and 2017 was significantly below the c6% pa
sales growth, which provided margin support. However, labour cost inflation in
key producing countries like Germany (up 8% from January to May) or the US (up
4% from January to June) has materially accelerated in 2018, while sales growth
for European OEMs slowed to just c1% in H1 2018. Like raw materials, labour cost
inflation is another late-cycle headwind, which will weigh on profits and
margins in a more meaningful way in the coming quarters.
● Earnings and cash flow risks underestimated: After multiple years of solid
earnings growth and margin expansion, the sector is likely to head into a
prolonged period of earnings downgrades, as the up-cycle is gradually
unwinding. The market likely underestimated the magnitude of cyclical
tailwinds since 2010 and will probably underestimate the deterioration of the
same factors. We see little reason to become more constructive on the sector, as
the de-rating is set to accelerate once shareholder return support fades.
Tesla investors should focus on Elon Musk’s related-party history
Buyout of SolarCity for $2.6bn in 2016 is now the subject of litigation
Mind-altering substances are a growing distraction for investors in Elon Musk’s electric car company Tesla.
The New York Times last week reported that Tesla’s board was worried about their chief executive’s use of Ambien, a sedative Mr Musk himself has previously joked about.
While it is understandable that investors in a public company might be concerned by tales of a chief executive using medication, Tesla shareholders should really focus on Mr Musk’s history of raising debt at related parties.
Back in 2014, Mr Musk’s SolarCity announced an exciting new opportunity for America’s mom and pop investors: solar bonds. The solar-panel maker was looking to borrow up to $200m ostensibly from the American people themselves, opening up the bond offering to any adult US citizen willing to lend as little as £1,000.
“Solar Bonds are a new way to invest,” the marketing materials said. “Now you can get paid while driving the solar revolution.”
Retail investors, however, did not rush to support the solar revolution with their pocket books. Instead, it later emerged that the main buyer of SolarCity’s bonds was in fact SpaceX, another Musk company that bought $165m of the offering.
This should have rung alarm bells for investors in any corner of the celebrity entrepreneur’s empire. There is nothing inherently wrong with transactions between so-called related parties, but they do deserve a lot more scrutiny.
This is especially true in the complex world of debt market funding. The history of accounting scandals is littered with unusual related party arrangements, from Enron to Espírito Santo and Parmalat to Steinhoff.
SolarCity and SpaceX’s debt relationship was relatively straightforward and publicly disclosed. But the natural question with these deals is whether the borrower is reliant on a lender willing to offer off-market or much cheaper rates of funding.
And the bond deal prefigured a much bigger related party arrangement: Tesla’s buyout of SolarCity for $2.6bn in 2016, a deal that is now the subject of litigation.
For investors trying to work out how Mr Musk might square the circle of his now infamous “funding secured” Twitter post, this history of turning to related parties for support should be one of their biggest causes for concern.
The dollar extended a decline against major peers on comments from U.S. President Donald Trump, and Asian stocks traded mixed after muted gains in U.S. equities.
The greenback accelerated a slide after the euro broke through the key $1.15 level amid thin summer liquidity. It had weakened earlier after a report from Reuters that Trump said China and Europe manipulate their currencies as well as separate remarks lamenting the Federal Reserve’s interest-rate increases. Treasuries gave back some of Monday’s gains ahead of a meeting of central bankers later this week.
Equities drifted in Japan after they pared declines as the yen trimmed gains. Australia’s shares had the biggest decline in the region after the benchmark touched a 10 1/2 year high Monday. The Shanghai Composite Index continued Monday’s rebound when state-backed funds were seen buying stocks to stabilize the market. Earlier, the S&P 500 Index advanced for a third day to close within 15 points of a record.
US After Hours FN +7%, NDSN -8% following earnings/guidance
Nikkei +0.19% Hang Seng +0.49% CSI +1.74% Shanghai +1.26% Shenzen +1.27%
Eur$ 1.1530 CNH 6.8323 CNY 6.8419 JPY 110.05 GBP 1.2837 CHF 0.9885 TRY 6.0921 RUB 66.9345 WTI$ 66.74 +0.47%
S&P +0.03% EuroStoxx -0.21% Dax -0.10% FTSE -0.33% SMI -0.43%
Macro :
- Turkish Lira Leads Global Losses on Downgrades, Sanction Concern
- Trump Says China, Europe Manipulating Currencies: Reuters - https://reut.rs/2nVh24W
- Automotive Cycle Showing Signs of Beginning to Unwind: Berenberg
Keep an eye on :
- ABI BB : AB InBev Brazilian Holders Buy EU88.1M of Brewer’s Stock: FSMA
- AF FP : Air France Pilot Union Asks New CEO To Help French Airline Grow
- AMBEA SS : Ambea Second Quarter Operating Profit 2.2% Above Estimates
- ASML NA : Zeiss, ASML Win First Round in Nikon Cameras Fight at ITC
- ATL IM : Transport officials were warned over Genoa bridge 6 months ago, Italian government knew of structure’s weaknesses before collapse but did nothing to limit traffic - FT - https://on.ft.com/2MnWLU5
- BAKKA NO : Bakkafrost Cuts Full Year Harvest Forecast
- BAYN GY : Bayer Now At ‘Extreme Discount,’ Berenberg Upgrades to Buy
- ACA FP : ECB Supervision: ECB Sanctions Credit Agricole
- CSGN SW : Credit Suisse Is Said to Be 1st Bank to Sell Sofr-Tied Debt: FT
- DIA SM : DIA Short Interest Climbs to 20.85% From 18.69% Aug. 3
- DUFN SW : Dufry to End Brazil Stock Listing Because of Poor Liquidity
- GKTX FP : Genkyotex Gets up to €7.5M Financing to Develope Gkt831
- HUBN SW : Huber + Suhner First Half Ebit Beats Estimates
- IMPN SW : Implenia First Half Sales Beat Estimates
- IWG LN : IWG to Start Private Club in Battersea Power Station, FT Says
- KOMN SW : Komax First Half Revenue Beats Estimates
- MONT BB : Montea Revises Full Year Operating Margin Forecast
- PGN GY : Paragon Raises 2018 Revenue Forecast, Lowers Margin Target
- PRS NO : Prosafe Gets Safe Boreas Contract Extension Valued at $6M
- RDSA NA : Shell Pernis Plant Stopped Amid Short-Term Failure: DCMR
- SFZN SW : Siegfried First Half Sales Meet Estimates
- SKY LN : Sky Independent Panel Advises Holders No Action on Fox Offer
- STAN LN : Actis Buys StanChart’s Asia Principal Finance Real Estate Ops
- FP FP : Total Is Said Struggling to Exit Iran Natural Gas Project: WSJ
>>> Up
* Aggreko Upgraded to Buy at HSBC; PT 10.50 Pounds
* Bayer Upgraded to Buy at Berenberg
* Deutsche Wohnen Upgraded to Buy at HSBC; PT 50 Euros
* H&R Upgraded to Hold at DZ Bank; PT 8.50 Euros
* SKF Upgraded to Buy at Jefferies
>>> Down
* Atlantia Downgraded to Hold at Santander; PT 22.50 Euros
* Bodycote Downgraded to Sell at Panmure Gordon; PT 8.60 Pounds
* Medistim Downgraded to Sell at SpareBank; PT 75 Kroner
>>> Initiation
* Conzzeta Rated New Buy at Mirabaud Securities
* Jost Werke Rated New Neutral at MainFirst; PT 40 Euros
* SAF Holland Rated New Outperform at MainFirst; PT 17.50 Euros
>>> Call
After Hours Summary: FN +7%, NDSN -8% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: FN +6.9%
Companies trading higher in after hours in reaction to news: VTL +2.8% (ticking higher - initiated with Overweight rating and $18 tgt at Cantor Fitzgerald), CVSI +1% (after closing more than 35% lower on the day following Citron report), GTN +0.9% (ticking higher; confirms agreements to sell television stations in eight markets -- proposed divestitures will close concurrently with the closing of the Gray/Raycom transaction), CDAY +0.8% and WDAY +0.5% (light volume; initiated with Buy at Guggenheim)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: NDSN -7.8%, FANH -2.1% (light volume)
Companies trading lower in after hours in reaction to news: APPN -3.4% (to offer 2 mln shares of its Class A common stock - includes 325K shares by existing stockholders), CREE -3.1% (announces private offering of $500 mln aggregate principal amount of convertible senior notes due 2023), MELI -1.5% (commences $800 mln offering of Convertible Senior Notes due 2028), HTZ -1% (CFO resigns to pursue other interests)
Exclusive: Trump says not thrilled with Fed's Powell for raising rates --> Link : https://reut.rs/2nVh24W
WASHINGTON (Reuters) - U.S. President Donald Trump said on Monday he was “not thrilled” with Federal Reserve Chairman Jerome Powell for raising interest rates and accused China and Europe of manipulating their respective currencies.
Trump, who spooked investors in July when he criticized the U.S. central bank’s monetary policy tightening, told Reuters in an interview that he believed the Fed should be more accommodating.
“I’m not thrilled with his raising of interest rates, no. I’m not thrilled,” Trump said in the interview, referring to Powell. Trump nominated Powell last year to replace former Fed Chair Janet Yellen.
American presidents have rarely criticized the Fed in recent decades because the independence of the Fed is seen as important for economic stability.
U.S. stocks dipped after Trump’s comments to Reuters and the dollar .DXY edged down against a basket of currencies.
Trump, who also criticized the Fed as a candidate for president in 2016, said other countries benefited from their central banks’ moves during tough trade talks, but the United States was not getting support from the Fed.
“We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated,” Trump said.
The Fed has raised rates twice this year and is expected to do so again next month.
“I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also,” Trump said.
Trump has made reducing U.S. trade deficits a priority and the combination of rising interest rates and a strengthening dollar pose risks for export growth.
Asked on Monday if he believed in the Fed’s independence, Trump said: “I believe in the Fed doing what’s good for the country.”
Powell took over as Fed chief earlier this year.
“Am I happy with my choice?” Trump said to Reuters about Powell. “I’ll let you know in seven years.”
Closing Market Summary: Wall Street Extends Winning Streak Amid Trade OptimismThe S&P 500 advanced 0.2% on Monday, closing higher for a third straight session. The benchmark index is now just 0.6% below its January 26 record high. As for the other major averages, the Dow climbed 0.4% on Monday, hitting its best level since early February, and the tech-heavy Nasdaq added 0.1%.
Optimism ahead of resumed trade talks between the U.S. and China, which are set to kick off on Wednesday, helped fuel the bullish bias on Wall Street and helped push stocks higher across the globe. China's Shanghai Composite rallied 1.1% on Monday, rebounding from a two-year low, and Germany's export-heavy DAX led the way in Europe with a gain of 1.0%.
Eight of eleven S&P sectors finished Monday in the green, with consumer discretionary (+0.6%), industrials (+0.6%), energy (+0.7%), and materials (+0.7%) being the top performers. However, the top-weighted information technology sector (-0.2%) underperformed, keeping the S&P 500 in check.
Within the tech space, giants like Apple (AAPL 215.46, -2.12), Microsoft (MSFT 106.87, -0.71), and Facebook (FB 172.50, -1.30) lost between 0.7% and 1.0%. Chipmakers also trailed the broader market, with Dow component Intel (INTC 46.50, -0.60) sliding 1.3%. The Philadelphia Semiconductor Index lost 0.1%.
On the M&A front, SodaStream (SODA 142.11, +12.26) spiked 9.4% after the Israeli company, which is best known for its at-home carbonated drink maker, agreed to be acquired by beverage and snack giant PepsiCo (PEP 114.84, -0.12, -0.1%) for $144 per share, in cash, or roughly $3.2 billion.
Away from equities, U.S. Treasuries rallied on Monday -- somewhat unusual considering the uptick in equities -- pushing yields lower across the curve; the benchmark 10-yr yield slid five basis points to 2.82%. In currencies, investors kept an eye on the Turkish lira, which lost 1.2% against the U.S. dollar, dropping for a second straight session.
In Washington, President Trump reiterated his displeasure with the Fed, saying he was "not thrilled" with Fed Chair Jerome Powell for raising rates. The president also accused China and the EU of being currency manipulators. Reuters reported the headlines minutes before the close, sending stocks slightly below their session highs.
As for economic data, investors didn't receive any notable reports on Monday, and Tuesday's calendar is also blank.
- Nasdaq Composite +13.3% YTD
- Russell 2000 +10.6% YTD
- S&P 500 +6.9% YTD
- Dow Jones Industrial Average +4.2% YTD
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