June 3, 2020

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Automotive Stocks Gear Up To Fight COVID-19

KIEV, UKRAINE – 2020/03/06: A view of a Ford logo on steering wheel. (Photo by...

Major automotive and auto component manufacturers have seen their stock prices decline by an average of over -30% year-to-date, due to the Coronavirus pandemic. While General Motors stock is down by about -41% year-to-date, Ford is down by -47%. However, Tesla has bucked the trend, rising 68%. The health crisis has meant people really don’t need to drive much right now, and not many are buying new cars either. Irrespective of what local and country governments prescribe or guide, we don’t believe this is likely to change in a hurry. Discretionary spending is likely to drop as the economy slips into a recession, impacting auto sales.

Though steep declines have happened, more pain and declines are possible in the coming weeks as earnings and accompanying guidance confirm the bad on-the-ground situation. That said, given the U.S Federal Reserve’s backing, most of the companies should survive. All said, it might be wise to wait to invest in the theme, however brave investors could choose to invest a fraction into the theme now, still keeping funds ready if things unfold for the worse in the coming weeks and months. As part of our theme: Autos Fight COVID-19, we discuss further our analysis of the recent performance of key automotive stocks, the survival risks the key auto names face, and the potential downside.

Performance Summary

Our Automobile portfolio of 10 stocks including Ford, General Motors, Tesla, Navistar, Harley Davidson
HOG
, Advance Wabco, and Lear, shows an average decline of about -2% in the last five trading days (through April 23) compared with a -1.5% decline in the S&P 500 over the same period. Year-to-date, the portfolio is down by about -21% (or over -30% excluding Tesla), compared to about -14% for the S&P 500. Harley Davidson and Ford were the worst performers, posting declines of about -50% and -47% respectively year-to-date. On the other hand, Tesla has soared 68% year-to-date while Wabco Holdings, an auto components manufacturer, has seen its stock remain relatively flat. Overall, there is a significant variance and summarized on the dashboard Autos Fight COVID-19

Survival Check

We dive a little deeper to look at the vulnerability of key automotive players through the current downturn. Our analysis Can GM survive the crash indicates that with over $19 billion in cash in hand, General Motors will have a relatively low probability of bankruptcy. On the other hand, Advance Auto Parts, which has higher relative fixed costs and a lower cash balance faces more uncertainty. The company recently issued $500 million in notes to better manage its liquidity. View our analysis Advance Auto Parts: A COVID Recession can consume $513 Mil in cash during 2020 for more details on how a demand shock will impact the company’s financials and cash flows.

How Low Can Automotive Stocks Go?

Automotive stocks could be poised to head lower still, going forward. Come late April/Early May, most automotive companies would have reported Q1 results, confirming the hit to revenues and potentially setting lower expectations for Q2 as-well-as full-year 2020, causing their stock prices to decline. For instance, for General Motors, full-year revenue expectations formed by the market at the time of Q1 results in May will likely be closer to $74 billion – about 40% lower than the $123 billion that the company posted in 2019. Assuming a P/S multiple of 0.2x, roughly in line with the multiple the company saw in 2011, and a share count of 1.4 billion, this would translate into a share price of $10. View our analysis on General Motors Downside: How Low Can General Motors Stock Go? for a complete breakdown of our downside case for GM.

The Ripple Effects On Other Industries

Lower auto sales will have ripple effects across other industries. For one, commodities such as Steel and aluminum demand will suffer. For instance, the transport industry accounted for about 32% of aluminum demand in 2019. Similarly, the recovery of crude oil prices, which have declined sharply this year could also be slow, given that transportation demand accounts for as much as 69% of total oil consumption in the United States.

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