By Michael Elkins
A Citi Research analyst is expecting lower production levels from auto manufacturers in the 3Q, reflecting the outlook for tight supply chains into 2023, as well as a worsening macro-outlook in Europe.
The analyst wrote in a note: “We’re taking a first step ahead of Q3 reporting by adjusting our Traditional Automaker & Tier-1 supplier models to reflect lower production expectations mainly reflecting the outlook for tight supply-chains into 2023, as well as a worsening macro outlook in Europe. No ratings/thesis change (please see below for revisions). We also provide initial thoughts on the Q3 setup, where at this stage we actually see a relatively better setup for automakers than suppliers, though we expect the setup to evolve as Q3 reporting nears as we’re still anticipating additional Q3 datapoints and company catch-up calls.”
The analyst believes that suppliers should be able to largely hold prior 2022 outlook ranges. However, Citi research expects companies to adopt a cautious stance on 2023. Citi’s latest estimates consider 2023 global auto production +4% but wouldn’t be shocked to hear some companies set the initial bar even lower.
At this junction, Citi actually sees a relatively better 3Q setup for General Motors (NYSE:GM) and Ford (NYSE:F) than for suppliers. Ford’s 3Q guide-down revived near-term supply-chain and inflation concerns. But the analyst believes automaker fundamentals still appear more macro resilient than what’s currently priced in.
Citi believes that General Motors’ lack of material exposure to Europe, and upcoming investor day in November, significantly improve the risk/reward at the current ~12% Auto FCF yield. The analyst thinks GM could still earn roughly $4.00-$5.50 EPS (or better) under a modest U.S. downturn, and roughly $2-$3 EPS under a more severe downturn.
GM remains Citi’s Top Pick on ideal exposures and heading into the Ultium EV and Cruise AV deployment ramps. Citi remains Neutral on Ford as the Q3 guide-down left a number of unanswered questions, but believes the stock could conceivably recover ground if management adequately addresses these questions/concerns on the Q3 call.