European Sales Accelerate As 2015 Forecasts Ratchet Higher.
But Manufacturers Might Be Diverting Production From Weak Markets.
Economic Recovery Yet To Prove It Is Here To Stay.
“while the headline figure looks encouraging and manufacturers are making positive noises, is this recovery as strong as it appears?”
Many investment banks are waxing lyrical as car sales in Western Europe advance, but some worry that the recovery might be less healthy than it seems.
Could the increased sales pace be down to desperate manufacturers unloading unsold vehicles from weak markets in Russia and Latin America, with big negative implications for profit margins?
According to LMC Automotive, car sales in Western Europe rose 6.7 per cent in April, and it increased its growth forecast for the year to 6.6 per cent for a total of 12.9 million vehicles. This compares with the previous month’s forecast for 2015 of a 4.8 per cent increase.
“The (European) economy continues to improve, helped by strong real wage growth and an eight-year high measure of European sentiment,” LMC Automotive said.
The German market, Europe’s biggest, rose 6.3 per cent in April, led by 11 per cent higher company car sales. Private sales though were down 1.2 per cent.
The Wall Street Journal, in an article headlined “Eurozone’s Recovery Strengthens”, said France and Italy helped first quarter growth to expand at its quickest pace in nearly two years, but a stumble in Germany “highlighted the fragility of the turnaround”.
“A favourable mix of fresh stimulus from the European Central Bank, a sharply weaker euro and lower oil prices are feeding the faster and more evenly spread growth, bringing some relief to a region that has struggled to recover from its debt crisis,” the newspaper’s European edition said.
Investment researcher Evercore ISI was leading the charge of optimists.
“E.U indicators continue to improve and beat expectations – from consumer confidence, bank lending, money supply, to overall E.U. GDP statistics there remains positive momentum in what looks like the first signs of a real E.U recovery,” said Evercore ISI analyst Arndt Ellinghorst.
“After 3-4 years of death by a thousand cuts, our brand new E.U analysis is showing a sustained tick-up over the last four months in European sales and we expect Western European sales to rise in 2015 by four to six per cent. We believe that a return to more normalized, replacement or trend vehicle demand would require a total uplift of 10 to 15 per cent over the next two to three years,” Ellinghorst said.
Ellinghorst expects this to be reflected in improved profitability which will carry on into 2016 and beyond.
Barclays Equity Research analyst Michael Tyndall reckons the European economic fundamentals suggest the good times will continue.
“Q2 is ordinarily the strongest selling season for autos in Europe so perhaps the carmakers will be a bit cheerier if we finish the quarter the way we started it,” Tyndall said.
Unloading surplus cars
Morgan Stanley analyst Harald Hendrikse isn’t so sure, suspecting that the increased sales in Europe might be linked to collapsing emerging market demand as manufacturers seek to unload surplus production anywhere.
“Clearly, Q1 2015 European car sales were stronger than we had forecast, but we believe this is largely the result of (manufacturers) pushing volume into the market, rather than demand strengthening. With sales slowing in LatAm, Russia and Eastern Europe, where else can (manufacturers) generate growth,” Hendrikse said.
Bernstein Research analyst Max Warburton is also a sceptic, calling the European economic recovery “patchy”, and expecting incremental sales will be low margin.
“European car demand appears to be recovering faster than anticipated, a welcome development given the problems building in China and elsewhere. But while the headline figure for registrations looks encouraging and (manufacturers) are making positive noises, is this recovery as strong as it appears,” asked Warburton.
“The two key questions are: is this European recovery real and durable and second, whether (manufacturers) can make enough incremental money in Europe to offset the coming decline in Chinese profitability. From our research, we remain somewhat cautious on the magnitude of the recovery and fear the massive differences in profit per unit between Europe and China will make the task of maintaining margins complex for the industry,” Warburton said.
Fitch Ratings was also a bit cautious.
“The sustainability of the current timid recovery in economic sentiment in Europe will be crucial to support new vehicle sales. Sales in western Europe increased by 4.8 per cent in 2014 after six years of decline and we expect a further four to 4.5 per cent growth in 2015. However, price pressure has not disappeared and the competitive environment is still tough,” Fitch Ratings analyst Emmanuel Bulle said.
Evercore ISI’s Ellinghorst, in an email to clients, said he is standing firm with his positive view on Europe autos and recommends investors keep the faith.
“The improvement in underlying E.U. demand is sustainable, foreign exchange (despite recent easing) and raw materials remain supportive, valuation is low both in absolute terms and relative to stocks history. Auto (manufacturers) have never been cheaper relative to the market,” Ellinghorst said.