Auto Maker’s Rosy Profit Outlook Could Be Undermined By Inflation, Chip Shortage.
“Demand will fully recover to pre-pandemic levels by 2022, but there are headwinds to earnings from rising prices, mainly steel, and temporary chips bottlenecks”
The profit party could be over in 2022 for most of Europe’s auto manufacturers which boosted earnings in the first half as sales recovered from the unprecedented coronavirus trough, but even though demand is strengthening, margins will be under pressure as rising raw material prices increase costs and chip shortages block profitable sales.
News Thursday Toyota and VW, the biggest auto makers in the world, would curtail output because of a worsening chip shortage, underlined the problem.
“We expect the (European) industry’s earnings momentum to run of steam in 2021,” according to investment bank UBS.
“Demand will fully recover to pre-pandemic levels by 2022 based on our and consensus estimates, but there are headwinds to earnings from rising commodity prices, mainly steel, and temporary parts bottlenecks (chips) near-term,” UBS said in a recently published report.
Newly merged Stellantis, formed in January with the combination of Fiat Chrysler Automobiles and Groupe PSA of France, in early August raised its operating profit target for the year to around 10% compared with its previous forecast of between 5.5 and 7.5%. In the first half of 2021, Stellantis EBIT (earnings before interest and tax) were €8.62 billion ($10.1 billion) compared with a notional €752 million ($879 million) in 2020. Stellantis now comprises brands like Jeep, Maserati, Dodge, Ram, Maserati, Peugeot, Citroen, Opel, Alfa Romeo and Vauxhall.
Investment bankers applauded the Stellantis performance, including Frank Schwope, analyst with Norddeutsche Landesbank Girozentrale. But Schwope described the company as one of the least sustainable automotive groups and said cutting costs and reducing what he called “massive overcapacities” will need to take place in the next few years to shape the merged group.
UBS doesn’t agree.
Strongest bottom-up earnings
“We believe Stellantis remains the (manufacturer) with the strongest bottom-up earnings growth story, fuelled by merger synergies and best-in-class navigation of the chip shortage situation,” UBS said in a report.
Late last month, Renault of France reported a first half profit of €354 million ($414 million) compared with a loss of €7.3 billion ($8.5 billion) in the same period of 2020. Renault, now led by CEO Luca de Meo, which includes Dacia and Lada brands and an alliance with Nissan, said for the whole year it hopes to report an operating profit margin similar to the first half’s 2.8%.
Barclays Equity Research said in a report Renault had made good progress turning a loss into a small profit, but this was driven by what it called “very favorable market conditions”. In a more normal market, Renault would struggle compared with its manufacturing peers and it was concerned about its long-term structural positioning.
“Renault has improved the underlying business by addressing important cost levers, but we are concerned that the real tailwind is from the strong market environment. In what may be one of the best market environments in a long time, we think the break-even Auto operating result is solid but not enough, in our view. In a more normalized environment we struggle to see strong earnings from the business and expect margins to decline after a peak in 2022/2023,” Barclays analyst Kai Alexander Mueller said.
Mercedes owner Daimler reported EBIT of €5.19 billion ($6.1 billion) for the 2nd quarter compared with a loss of €1.68 billion ($2.0 billion) in the same period of last year. Analysts like its aggressive electric car plans compared with its rival BMW’s. In July, Mercedes said it will invest more than €40 billion ($47 billion) between 2022 and 2030 developing electric vehicles. Daimler has said profit margins will remain strong through 2021, probably between 10 and 12%.
Investment researcher Jefferies said it likes the transformation of Daimler as Mercedes invests in electric vehicles but downgraded its share advice to “hold” from “buy”.
Jefferies expressed confidence in the overeall industry’s long-term ability to prosper as electric vehicle sales gather pace and internal combustion engine (ICE) technology is gradually run down. In an electric car world, manufacturing will be simpler as what it called “variant complexity” is reduced, with beneficial effects on inventory and pricing.
BMW investors worry about its electric vehicle policy which also leaves room for ICE and possibly fuel cells too. BMW’s main competitors have designed special and separate designs for their electric vehicles, while BMW has tried to combine them with ICE propulsion.
BMW reported 2nd quarter net income of €4.8 billion ($5.7 billion) compared with a loss of €212 million ($250 million) in the same period of 2020 and raised its profit forecast for 2021. BMW now expects the full year operating profit margin for its automotive business of between 7% and 9% compared with the previous 6% to 8% forecast.
UBS described the outlook as relatively cautious and said BMW had handled the chip shortage better than most.
BMW was living up to its cautious reputation.
“Our performance has benefitted from strong customer demand during the 1st half of the year, enabling us to achieve significant growth. However, in the light of a number of prevailing risks, including raw materials prices and a shortage of semiconductors, the 2nd 6-month period is likely to be more volatile for the BMW Group,” it said in a statement.
VW does it again
VW raised its profit forecast again for 2021 – to an operating margin of 6.0 to 7.5% following an earlier guess of 5.5 to 7% – after previously announcing a record first half operating profit before special items of €11.4 billion ($13.6 billion). The previous record of €10 billion ($11.9 billion) was achieved in 2019, while 2020 was undermined by the coronavirus shutdown. VW said the strong profit performance was boosted by its Porsche and Audi premium giants.
Nord LB’s Frank Schwope, said many aspects of VW’s long-range prospects looked positive but he worried about unforeseen possibilities like the unexpected coronavirus disruption or the self-inflicted wound of dieselgate. Schwope also wondered about the new enthusiasm for electric vehicles and their profit-making possibilities.
Analysts worry about VW’s problems in China and the poor performance of its ID electric cars.
Reuters reported that VW’s sales target for ID electric vehicles in China this year is between 80,000 and 100,000, while in the first half deliveries stood at 18,285.
Meanwhile LMC Automotive has cut its West European sales growth forecast for 2021 to 3.0% from its prediction last month of 9.6% growth. Sales dropped 24.5% in 2020 to 10.79 million and should reach 11.12 million this year. LMC said the chip shortage is crippling supply chains and won’t go away any time soon. This will stop auto makers taking full advantage of the global economic recovery.
Meanwhile data and analytics company GlobalData reiterated Thursday that despite Toyota’s cutback its world car and SUV sales forecast for the year remains at 84.7 million, an 11.9% increase on 2020 but still almost 5% down on pre-virus 2019.
GlobalData said the first half had seen a big boost for car manufacturers’ profits in the U.S., Europe and China as pent-up demand allowed for high margin sales.
It remains to be seen how many of these brave words from the big auto makers will still look plausible when they report on profits for all of 2021.