Gloom And Doom Dominates, But First Recovery Signs Sighted

But Watch Out For The Japanese, Liberated By Falling Yen

The headlines are all about gloom and doom as European manufacturers’ profits are slashed and sales droop, but some experts see evidence that the worst may be over.

The sunlit uplands are in sight, say some, although that is not a majority view. Others worry about a resurgent threat from Japan.

Leading the glass half-full tendency, the Financial Times’ Lex column said that despite the miserable news, investors reacted calmly and stock prices didn’t dive. This despite expected bad news from the Germans –  Volkswagen first quarter profits were sharply lower and Mercedes cut its profit forecast for the year – while Renault and Peugeot’s sales dropped again although the two French companies never reveal their bottom lines after the first and third quarters. We’ll have to wait another three months before the extent of French losses are made public.

 Nevertheless, Lex was hopeful.

“Overall, the sense that a sector trough is finally being reached was reinforced,” Lex said.

Lex spied positives in a rundown of stocks by Peugeot and a burgeoning order book at Renault, while pricing pressures eased a bit.

Deutsche Bank also saw some green shoots, although it had to delve into the truck sector to find them.

“We observe several signs that the European demand/production levels of the auto/truck industry has reached bottom and could well improve into the second half of the year. March was the first month that incoming orders on several levels of the value chain surprised on the upside and production schedules for coming months are showing signs of sequential improvement,” said Deutsche Bank analyst Joechen Gehrke.

Surprise
Ford Europe also surprised some analysts with its decision to raise European production six per cent in the second quarter from a year ago’s 390,000 after falling eight per cent in the first quarter to 386,000. Ford Europe CEO Stephen Odell said after months of reducing stocks at dealers, the company was being pressed to raise output, including 8,000 more Kugas, although he didn’t say over what period.

Ford Europe’s losses expanded to $462 million in the first quarter compared with a loss of $149 million in the same period of 2012, but it left unchanged its prediction for a $2 billion loss for all of 2013.

Not everybody saw a silver lining in the latest data.

“The classic time to buy auto stocks is when volumes are deeply depressed, when companies are struggling and when some sort of recovery is in sight,” said Bernstein Research analyst Max Warburton in a report on Peugeot and Renault.

“The two French manufacturers qualify on the first two points. But it’s hard to argue there is a recovery in sight,” Warburton said.

Yen might spur Japanese
Standard & Poors couldn’t  see any positives either.

“In the E.U., our base-case outlook assumes that 2013 sales of cars and light trucks will continue to decline modestly to some 13 million, the sixth consecutive year of decline as the region’s economy remains mired in recession,” said S&P’s Dan Picciotto.

And if the threat to Europe’s mass manufacturers’ profits from the ailing economy wasn’t enough, Morgan Stanley has spied another potentially fatal blow aimed amidships; the currency torpedo in the form of the falling Japanese yen. Peugeot-Citroen, Renault, Fiat, Opel-Vauxhall and Ford are most at risk.

“A weaker yen could spell further difficulties for Europe’s already beleaguered mass carmakers,” said Morgan Stanley analyst Adam Jonas.

Japanese market share in Europe has falling to around 12 per cent today from close to 15 per cent in 2008, as the yen strengthened against the euro, with the Koreans benefitting mightily too, Jonas said.

“Peugeot-Citroen, Renault, Fiat, Opel and Ford have not gained any share from the Japanese in recent years, and are already struggling to compete with the strong product and competitive pricing of VW and Hyundai-Kia. We believe it would be these relatively weaker players most at risk from Japanese share gains,” Jonas said.

Meanwhile Deutsche Bank’s Gehrke was convinced things are getting better in Europe, with truck orders turning positive, while the shedding of stocks was another good omen which might kick in later.

“We generally see truck orders as leading indicators and believe it to be a first sign of potentially firmer economic development towards the second half of the year,” Gehrke said.

Who wins from greenshoots?
“We believe, with first “greenshoots” occurring in the sector, it has become about time to focus on stocks which have a solid “2014” story,” he said, adding the proviso that any potential economic recovery was highly fragile.

Fragile or not, it could the Japanese benefiting from Europe’s recovery, not the locals.

Neil Winton – April 30, 2013