The unwinding of existing raw material supply contracts and renewal at considerably higher costs have probably yet to be fully reflected in supplier earnings estimates for 2005 and beyond.
It seems clear that many areas of the supplier industry remain under considerable pressure – and October’s earnings releases could prove the most crucial for many quarters.
Even some companies themselves appear uncertain of longer-term trends and appear to be leaning more heavily on hope than realistic expectations. A week ahead of its third quarter earnings release, Dana took an axe to its 2004 earnings outlook, cutting its forecast of $US1.90 per share to a range of $1.60 to $1.65.
Consensus analyst estimates for 2004 earnings per share had been just over $2. In contrast to encouraging management comments in July, the company was more downbeat, undoubtedly echoing more widely-held concerns across the sector.
According to the company’s chairman and CEO Michael Burns: “Like most in our industry, we are being impacted by the rising cost of steel and other raw materials, as well as reduced North American light-vehicle production volumes. Both factors are contributing to lower-than-expected operating results….We had expected that the bottom-line impact of these factors could be offset by the stronger performance in our heavy vehicle business and continuing cost-reduction efforts. But, given more recent trends in commodity prices and light-vehicle production volumes, it’s now clear that we will see a negative effect on our 2004 earnings.”
These sentiments followed similar earlier warnings at Visteon , Tower, Delphi, American Axle, Hayes Lemmerz and others. The recent share prices of three major North American suppliers reviewed each month in SupplierBusiness.com – American Axle, TRW and Visteon – have been more than 30% below recent 12-month peaks, indicating a significant reversal by investors as confidence in earnings projections has eroded. Visteon has suffered the greatest erosion in confidence, its 9 September announcement having helped drive the share price some 38% below the $12.50 12-month high. A further three suppliers, Dana, Delphi and Lear, have experienced declines of over 20%.
Some real casualties have emerged among heavily steel-dependent lower tier suppliers. On 18 September, Citation Corp., a privately-held castings supplier based in Alabama filed for Chapter 11 bankruptcy protection, citing a doubling of steel prices since March. In late September, Intermet, a NASDA Q-quoted company and one of the auto industry’s key casting suppliers followed a similar route, noting that its payments for scrap steel rose from $160 per ton in early 2003 to $395 a ton in August 2004. Customer surcharges and other measures failed to prevent the inevitable collapse of the US business (the company’s European operations were not included in the bankruptcy). In 2003, Intermet’s largest customers were Delphi (11% of sales), Ford (11%) and DaimlerChrysler (11%).
However not all raw material cost rises are having a big effect. Brett Hoselton, senior automotive analyst with KeyBanc Capital Markets, says that the increase in resin costs (for plastics) will not impact tier 1 and OEM earnings as much as some might believe.
Johnson Controls is currently trading less than 10% below its 12-month high share price, and Autoliv has made a convincing case that it will be only slightly affected by material price increases, an d that its loss of sales to GM and Ford will be partly offset by growing volumes with transplants. Continental still appears to be strong, as do the Japanese first tiers. Perhaps exposure to GM and Ford might at present be the most important ingredient in the weakening of the outlook for the North American suppliers – at least for the first tiers that buy in a lot of their parts.