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Despite More Bad News, S&P Still Sees A Strong Industry

But Peugeot, Fiat Said To Be Under Pressure

“we are observing better discipline on inventories and on prices. Moreover, balance sheets have strengthened following leverage reductions in automotive operations”

Car markets across Europe are weakening, sales projections for next year are being slashed, and a small car price war has started threatening Peugeot and Fiat in particular, but ratings agency Standard & Poors said manufacturers are in better shape to fight the crisis than in 2009.

LMC Automotive, formerly J.D.Power, said 2012 sales will fall two per cent to 12.5 million, after predicting a 1.3 per cent fall for last month. LMC said if Europe goes into recession, sales could fall another 1.5 million in 2012.

Bank of America Merrill Lynch said it has cut European GDP economic growth projections for 2012 to minus 0.6 per cent from a previous forecast of plus 0.8 per cent. Merrill Lynch has also cut its Western Europe car sales forecast for 2012 to down 2.1 per cent, adding it could not rule a further cut to down four per cent.

Merrill Lynch said Peugeot-Citroen was particularly exposed .

“(Peugeot-Citroen) market share in Europe is back to a multi-year low, pricing is deteriorating further, and we have their biggest market, France, down seven per cent next year. Oh and they are burning cash at a rate of knots,” Merrill Lynch said in a report.

Fiat was also coming under pressure according to the report. Merrill Lynch didn’t like the look of Fiat-Chrysler’s third quarter results, which  Deutsche Bank had said benefitted from the technical treatment of Chrysler’s operating profit margin which became 5.9 per cent in Fiat’s accounts after appearing as 3.7 per cent under U.S. rules.

Smoke
“Look through the smoke and the optical ”beat” looks to have been entirely driven by accounting,” the Merrill Lynch report said.

“Taxes and financial charges were materially higher and crucially, net debt ballooned to €5.8 billion from €3.2 billion in the second quarter, thanks to mammoth working capital outflows of €1.4 billion. Poor FCF (free cash flow) is what should worry the market – as should a pension liability that just moved up another €200 million to 110 per cent of market cap,”  Merrill Lynch said.

Despite all this, U.S. ratings agency Standard & Poors is still sanguine about Europe’s prospects, saying the industry is better insulated against a potential double-dip recession in Europe.

“This is because automakers have increased their presence in higher growth regions beyond Europe and they are reaping the rewards of cost-saving and efficiency measures,” S&P said in a report.

Better discipline
“Up to now, we are also observing better discipline on inventories and on prices in the auto industry. Moreover, balance sheets have strengthened following leverage reductions in automotive operations,” it said.

Mind you, unlike the economists at Merrill Lynch, S&P’s still say Europe’s economy will grow by 1.1 per cent in 2012.


Neil Winton – November 15, 2011

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