* Reiterating cautious sector view, more on 2014 than Q4 2013
Heading into Q4 2013 earnings we reiterate our cautious sector stance as spelt out
in our 2014 year ahead and preview the results season. With EU car sales +6% in
Q4 we do not expect too many companies to report a weak quarter but, in general,
we think outlook statements may provide little reason for consensus to upgrade
already high 20% sector EPS growth forecasts for both 2014 and 2015. Risks do
exist in the form of weakening LATAM vols and pricing, still tough EU Car pricing,
Truck pricing and FX headwinds. Trading back at a pre-crisis P/E of 10x and a P/E
rel of 73% vs. the long-term average of 70% we now see limited sector wide
valuation multiple support.
* German OEM guidance likely to remain cautious
Given the aforementioned fundamental challenges to earnings we would expect
outlook comments to remain somewhat cautious. Of the German OEMs for 2014 we sit
furthest below consensus EBIT at Daimler (U/P) (-5%), broadly in line with VW (Buy),
and slightly ahead at BMW (N). With consensus modelling a €2bn jump in 2014 EBIT
for DAI the bar looks high to us. Cars launch costs together with Truck pricing could
limit upgrades and at 12x P/E valuation is full, in our view. VW should guide for growth
in EBIT (but this may be non-specific) while BMW will likely point to flat PBT (expected).
* Below Q4 consensus EBIT in trucks; above for RNO, Valeo
Specifically for Q4/H2 we are furthest below EBIT for Volvo (-14%), Scania (-10%)
and Peugeot (-5%). We see potential upside to current quarter earnings for Renault
(+3%) and Valeo. We provide detailed company previews within the document.
* A new mid-term plan vs. a capital increase. RNO vs. Peugeot
We see Renault as offering perhaps the most interesting short term catalyst over
results with the announcement of its multi-year plan alongside what we expect to be
a good set of H2 earnings. Peugeot aims to announce details of its cap raise with
results meaning cash is likely to be managed well into year end. Looking further into
2015 we are less convinced on Peugeot’s ability to stem the cash drain.
* Trucks: still cautious, avoid Volvo on EU weakness
Of all the sub-sectors we cover we remain the furthest below 2014 and Q4 2013
consensus for Trucks. We still see pricing headwinds in EU and LATAM and downside
to volume expectations as well. We are 10% below 2014 EBIT consensus for
Volvo but 3% above for Scania. Volvo in particular trading on 21x 2014 P/E looks
expensive to us.
* Tyres: Michelin over Pirelli. Suppliers still looking solid
The outlook for tyre markets in 2014 is more positive than 2013 but we think current
valuations broadly capture this. Stock specifically we prefer Michelin at 9.4x 1yr fwd P/E
over Pirelli at 13.2x. For 2014 EBIT we sit 5% below Nokian consensus. In Auto
suppliers we think Q4 is well underpinned for both Valeo and Norma given Q4 EU Auto
production +3% YoY. Conti has already set a solid tone with its encouraging results.