Little upside to PTs but our favoured stocks still look attractive: When we look at our current price targets we’re painfully aware that there is only 5% upside to our sector favourites. So is it time to sell out of autos or could we be wrong on either our valuation multiples or earnings outlook? Our analysis drives us to believe the latter, and more specifically that we could potentially be underestimating the speed of the European recovery. We currently forecast similar 2 year earnings growth for OEM’s as ‘04-‘07 and multiples are also largely in-line, implying limited re-rating potential. Our regression models point to a rather anaemic EU auto sales recovery (1.4% in 14E) but if they are leading us to undershoot, and upward earnings revisions are required, which names will benefit most? We caution that investors should be careful in stock selection and remember that a simple sensitivity analysis does not factor in market share movements among the players. We continue to prefer VOW3 (PT €225), and also see RNO (OW, €69), Valeo (OW, €83) and Conti (OW, €156) as leveraged to a better EU outlook.
VW, Renault and Valeo most exposed to a recovering Europe: While unsurprisingly our EPS sensitivity analysis to European volumes highlights Peugeot (UW, €6) as the company with the greatest delta to a European recovery, this presumes no loss in market share. In 2013 PSA’s volumes underperformed the Big 5 EU markets -660bp. By contrast Renault’s volumes outperformed +560bp and VW group +110bp. We expect Peugeot to continue to lose share in 14E, given recent underspend on capex. If we are indeed too cautious in our expectation for 1.4% growth, every 1% change in volumes would boost VW group EPS by 3% (€0.7) and Renault 2.3% (even assuming no impact on Nissan). A purer play into Europe without the same pricing/fixed cost absorption lift but ex-model cycle risk are suppliers. Valeo (OW, €83) remains our favoured name for growth and product exposure.