European Sales Growth Outlook Modest.
Alfa Romeo Jumps, DS Slumps.
“Growth might be slowing, but the fundamentals for car-buying remain robust”
European car sales remain healthy but some investors are beginning to worry about a day of reckoning for manufacturers which remains unlikely in the short term.
Citi Research thinks the furrowed brows are misplaced.
“Growth might be slowing, but the fundamentals for car-buying remain robust. The problem is ‘peak’ thinking is like a runaway train – the faster it goes and the better the volumes and earnings, the harder it is too jump off,” said Citi Research analyst Michael Tyndall.
In June 2017, E.U. car sales growth slowed to 2.1 per cent to about 1.5 million. Over the first half of 2017, E.U. sales cars grew 4.7 per cent to more than 8 million.
In Western Europe sales rose 1.4 per cent in June to an annual rate of 1.4 million, according to LMC Automotive, which retained its forecast for the year of 2.9 per cent growth and a total of between 14.3 and 14.4 million. Last year sales rose 5.8 per cent, down from 2015’s 8.9 per cent.
Notable performances in the first half in Western Europe included Alfa Romeo with sales up 38.6 per cent at 44,808, and PSA’s DS, down 36.8 per cent to 24,799, according to the European Automobile Manufacturers Association (ACEA).
Industry analyst IHS Market said the overall European Union market was losing momentum, but retained a forecast of a modest increase in sales for the year of 1.5 per cent to 14.7 million.
Relative uncertainty coming
“The first-half performance in the E.U. car market is one of solid growth, although we appear to be moving into a period of relative uncertainty and it would a surprise if the growth during the first half of the year is maintained through the second half,” said IHS Markit analyst Tim Urquhart.
The European Commission expects euro area GDP growth of 1.7 per cent in 2017 and 1.8 per cent in 2018. It said inflation has threatened to increase because of rising oil prices. But core inflation which excludes volatile energy and some food prices, has remained stable.
Last month ACEA raised its forecast for E.U. sales to 1.5 per cent to 2.0 per cent, up from its previous expectation of about a 1 per cent gain.
Citi Research still thinks this bodes well for the industry and its stock market values. Analyst Tyndall said stock market prices already have fallen to a level which takes into account a fall in profits. More declines aren’t likely.
“A re-rating is unlikely until earnings collapse, which begs the question what is the downside risk to our estimates and target (stock market) prices. We have flexed our models to see what a 10 per cent fall in the major markets might do to earnings. Additionally we considered a simultaneous collapse in all three (Europe, China, U.S.). Most (manufacturers) look already priced for an earnings collapse except FCA,” Tyndall said.
Tyndall explained that his “doomsday” scenario has earnings falling an average 29 per cent. FCA is more vulnerable because of its huge debt.
“Daimler and Renault hold up well versus the rest and perhaps unsurprisingly FCA looks most risky,” Tyndall said.