European automakers insist profits are secure, but storm clouds are gathering
European automakers reported mixed profits in the first half of 2022 as they emerged from coronavirus lockdowns and a shortage of semiconductors. Forecasts for the rest of the year were surprisingly positive, despite worries about peace following the Russian invasion of Ukraine and an economic recovery threatened by inflation and recession.
But if power shortages force lights to go out and factories to close, all bets are off. The drought is also causing the water levels of the Rhine to drop, threatening economically crucial trans-European transport.
Stellantis was the best performing performer and is posting strong profits for the remainder of 2022. Even struggling Renault was able to show a brave face to its prospects. Mercedes have been said to be a bit overconfident. BMW’s latest earnings were down, but it stuck to its 2022 target.
LMC Automotive’s August forecast predicts sales in Western Europe will fall 6.4% in 2022, about the same as its July forecast, although this is an improvement on the month’s forecast. previous decline of 7.4%. It looks unhealthy compared to its forecast at the start of the year that sales would increase by 8.6%. The invasion of Ukraine destroyed it.
Stellantis’ adjusted profit before interest and tax jumped 44% in the first half, compared to the same period of 2021, to 12.4 billion euros ($12.8 billion). Stellantis was born from the merger of Groupe PSA and Fiat Chrysler Automobiles in January 2021. Stellantis owns European brands such as Peugeot, Citroën, Opel, Vauxhall, Fiat, Maserati, Alfa Romeo and Lancia, and American Jeep, Dodge and Chrysler. The profit margin for the first half rose to 14.1% from 11.4% a year earlier. Stellantis only reports profits every six months.
Stellantis still expects double-digit margins for the full year, although sales in Europe and North America would fall 12% and 8% this year.
Moody’s Investors Service raised some of Stellantis’ debt and appreciated its strong liquidity and high margins “which should be resilient even in times of increasing headwinds related to the availability of product components, raw materials as well as energy cost inflation and deteriorating consumer sentiment,” the Moody’s analyst said. said Matthias Heck.
Heck appreciated Stellantis’ ability to use merger synergies to reduce costs.
Moody’s summarized the tough times ahead, common to the world’s largest automakers.
“Moody’s expects Stellantis’ margins to come under pressure once global automotive production becomes less constrained by the global semiconductor shortage. Additionally, consumer confidence will likely suffer from high price inflation, including rising energy prices and the cost of living, and rising interest rates,” Stellantis said.
“In such an environment, Stellantis margins will be squeezed, especially from 2023. At the same time, margins will be somewhat protected by lower one-off and restructuring charges compared to 2022 and by the very competitiveness of the company which continues to benefit from the realization of ongoing synergies. »
Volkswagen, the European sales leader, and its brands like SEAT, Skoda, Audi, Porsche, Lamborghini and Bentley, saw their profits fall by almost 30% in the 2n/a quarter to 4.7 billion euros ($4.9 billion) despite a slight increase in revenue. Profit was impacted by technical accounting factors and VW maintained its guidance that full-year operating profit would be between 7 and 8.5%. VW was once the sales winner in Western Europe, but in the first half of 2022 it barely overtook Stellantis with sales of 1,195,000 from 1,031,000. Investors will be wary of VW’s new management, when Herbert Diess will be replaced by Porsche CEO Oliver Blume on September 1.
Analysts liked what they saw and expected VW to hit its profit targets, despite economic and political rumbles appearing to be gathering momentum.
“This year is going to be very good for Volkswagen. Demand continues to outstrip car supply, and an increase in (semiconductor) availability will help it drive up volumes. We expect price improvements to help VW reach the upper end of its 2022 target, but we are wary of 2023: when cost pressures increase and volumes return, price headwinds could back to the margins,” said Daniel Roeska, an analyst at Bernstein Research.
VW investors will be watching whether the planned IPO of part of the luxury sports car subsidiary Porsche proceeds. “It’s time for Volkswagen to park its Porsche IPO,” Financial Times column Lex said last month.
BMW reported profit down 31% in 2n/a quarter at 3.4 billion euros ($3.5 billion) in line with expectations. BMW lowered its production forecast, said orders were weakening and worried about volatility 2n/a half. The company stuck to its 2022 forecast of auto profits in the 7-9% range.
The Wall Street Journal’s Heard on the Street column said BMW was flashing its warning lights and pointed out that the company had cut its free cash flow target for the year to at least 10 billion euros ( $10.3 billion) compared to a previous estimate of at least €12 billion. ($12.4 billion). The column said BMW blamed a continued shortage of semiconductors and higher spending on electric vehicles for the shortfall.
Investors fear BMW’s electric car plans, where it currently uses traditional engineering with electrics as an add-on, could mean it loses out in the race to rivals like Mercedes and VW with their dedicated platforms.
This is expected to change in 2025 with the introduction of the so-called Neue Klasse.
“BMW needs to provide more details on the final bill for the EV transition to help convince long-term owners to buy into the story. It has been unnecessarily opaque on Neue Klasse – the team now intends to share more details in December…long to wait for investors,” Bernstein’s Roeska said.
Mercedes was more optimistic about its outlook by raising its profit forecast for the year. Mercedes’ upgraded 2n/a quarterly profit by 8% to 4.9 billion euros ($5.1 billion) and raised its profit target for the year by 12-14% from a previous target of 11.5-13% .
Hamburg’s Berenberg Bank said if Mercedes could make that kind of profit during what could be a recession, it could persuade investors that the stock deserved a higher and more luxurious stock rating.
Investment researcher Jefferies said that despite BMW’s more negative outlook, he continues to prefer BMW, which he calls “Hold”.
“We continue to believe Mercedes has oversold on luxury revaluation or it will take time given current yields and cyclical exposure,” Jefferies analyst Philippe Houchois said in a statement.
Renault has had a torrid time lately as it has consistently fallen behind its competitors in Europe. This year it was handicapped by the disappearance of its Russian operation, but its CEO, Luca de Meo, spoke of a good game, pointing to the success of its new electric car, the Mégane-E-Tech, and reminding investors that Renault has paved the way for Europe’s evolution towards electrification.
In the first half, Renault lost 1.36 billion euros ($1.4 billion) due to the cost of closing its Russian site, but it said its turnaround plan was working. The loss included a Russian writedown of 2.2 billion euros, including its stake in AvtoVAZ. De Meo said the turnaround plan was based on seeking profits rather than sales. Renault’s full-2022 profit forecast is now above 5%, down from a previous target of 3%. In the first half (like Stellantis, Renault only publishes its results half-yearly), the operating margin was 4.7% against 2.1% in the same period last year.
Jefferies appreciated the progress made by Renault, saying although modest, “Renault’s stabilization is accelerating”.
Bernstein Research also liked what it saw.
“The company now seems better placed and management is more confident in Renault’s potential to achieve its long-term goals,” Roeska said.
Renault is planning a meeting in the fall to update its so-called “Renaulution” strategy, which is expected to update targets and unveil new product plans.
“But at the end of the day, we remain cautious about market headwinds in 2023. We wouldn’t want to buy into the strategy today, given the uncertainties ahead,” Roeska said.
Investors are still awaiting news of a resolution of the cross-shareholding with Alliance partner Nissan, which could one day unlock shareholder value. Renault plans to transfer its electric car assets to a separate company.
Ford reported second-quarter European profit of $10 million, up $294 million from the same period last year. In the first half of 2022, Ford Europe sold 236,000 cars and SUVs, compared to 284,000 in the same period of 2021, for a market share of 4.7%, according to ACEA.
LMC Automotive reminded investors that despite the bravado in sight, the auto industry forecast has some big hurdles to clear.
“The full year 2022 forecast (Western European sales) remains at 9.9 million, broadly unchanged from last month. This means that sales rates will need to increase for the rest of the year, and therefore assume that, even if production headwinds continue, they will ease from the start of the year,” LMC said.
“However, demand is also of growing concern as Western Europe faces rapidly rising costs of living, natural gas supply shortages and rising interest rates,” LMC said.