Unlike Previous Crisis, Balance Sheets, Stocks Under Control
But Lack Of Political Action Could Infect Even BMW, Mercedes
“Although we currently expect BMW, Mercedes-Benz and Audi to continue to post positive growth in 2012, there is little doubt there will be contingencies for a sudden downturn in global demand”
Although latest car sales figures look relatively healthy, most experts expect stagnation at best for next year in Western Europe. Thankfully for investors and employees most mass car manufacturers are in much better shape financially than before the 2008 crisis, with only Fiat’s prospects causing concern.
For those looking for a worst case scenario, the failure of European political leaders to nail down a solution to the debt crisis is a worry that might lead to a sales crunch that would even envelop the German premium manufacturers BMW, Mercedes and Audi.
That nightmare scenario is currently an outside bet.
“European automotive OEMs look better placed to cope with a second financial crisis, with stronger balance sheets, better cash generation, lower inventory levels and better pricing than in 2007,” said Royal Bank of Scotland analyst Jose Asumendi in a report.
According to automotive forecaster J.D.Power, Western European car sales were a barely perceptible 0.4 per cent higher in September at just over 1.2 million compared with the same period last year, and down 1.1 per cent for the first nine months at 9.9 million. J.D.Power expects 2011 sales to slip 1.4 per cent, and lose another 1.3 per cent in 2012.
“It’s not the same as the last time around,” said Asumendi.
Indeed it is not, bearing in mind that sales dived almost 8-1/2 per cent in 2008.
Asumendi said for investors seeking to buy automotive stocks Volkswagen is a standout with its strong business model and cash flow generation. He prefers BMW and Daimler over Renault and Peugeot-Citroen, although the two French companies are still rated as “buys”. This is mainly because of Renault’s link with Nissan and its exposure to the U.S. market, and Peugeot-Citroen’s ownership of components maker Faurecia, and Banque PSA Finance.
Fiat concerns
Only Fiat is cause for concern.
“We acknowledge the efforts taken by Fiat to restructure its plants in Italy, but its high dependence of group profits on the Brazilian market in combination with our view of a flat market in Europe raises some questions about the profitability of the group in the event of a downturn,” Asumendi said.
IHS Automotive analyst Tim Urquhart is worried by the failure of the two main governments, Germany and France, to find a lasting solution to the debt crisis that he says has played havoc with the region’s financial markets.
“The chances of a global double-dip recession appear to be increasing and sustained growth can no longer be assured (even) for the premium OEMs. Although we currently expect BMW, Mercedes-Benz and Audi to continue to post positive growth in 2012, there is little doubt there will be contingency plans in place for a sudden and rapid downturn in global demand,” Urquhart said.
Royal Bank of Scotland’ Asumendi believes that any economic dip won’t be as bad as 2008’s and that car manufacturers will be saved by the fact that recent economic weakness has led to a growing queue of people who have delayed buying cars, coming back to the market.
“Volumes in both Western Europe and the U.S. remain substantially below average levels for the majority of the past decade. As a result, we believe that there is significant underlying demand, and we don’t expect to see volumes falling to previous crisis low levels,” he said.
Neil Winton – October 20, 2011
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