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UK: European automakers face 28% fall in earnings - analysts

By just-auto.com editorial team | 21 October 2008

European auto and parts makers face a gloomy couple of years, according to a new report on the sector by Credit Suisse analysts.

"Perceptions throughout industry have moved from 'denial' to 'recession' mode. Meanwhile, financial markets have moved from 'recession' to 'liquidity crisis'," they said.

They compared the current situation to that of the sector's performance and stock valuation during the 1992-93 recession and said: "We note that the sector now already looks priced for recession."

Noting a "preference for quality names such as BMW, Daimler, Michelin and Porsche", Credit Suisse recommends "only selective buying of auto stocks", saying that "concerns now rightly focus on carmakers' liquidity and their ability to finance their customers".

The analysts said that earnings were set to decline 28% in 2009: "Consumer confidence, credit conditions and housing markets look as difficult now as in the 1993 recession".

They added that write-downs of tooling and R&D and restructuring expenses may lead some OEMs into loss in 2009.

The analysts nonetheless said they nonethless rated Daimler, BMW, Porsche and Michelin as 'outperform'.

"Company targets are outdated; consensus estimates are slow to adapt; and our assumption of a significant 1992/93-style volume and earnings decline next year is based on the prerequisite that the global financial system returns to work.

"If instead we see a prolonged liquidity crisis, the auto industry would potentially experience the biggest fallout post-WW2.

"The consequences would likely be state aid in order to safeguard major regional industry players in Europe. This scenario is - hopefully - unlikely post global legislative intervention over the past weeks," the analysts said.

They added that the European auto industry did not share the financial markets' concern of a major dry-out in available liquidity and, though refinancing was getting more expensive, it was not impossible to find.

"The assumption that we are not experiencing an ongoing liquidity crunch leaves us with the scenario of a severe slowdown in demand and likely falling earnings in 2009, similar to the pattern seen during the 1992-93 recession.

"This 'recession scenario' is already reflected in share prices in our view. We are thus becoming relatively more upbeat, highlighting Daimler, BMW and Michelin as our core preferences in the sector. We also recommend building a position in Porsche, which we expect to increase its holding in VW to above 50% by end November," the analysts said.

They added that Credit Suisse expects financial markets "will come back to work at some stage later this year" but, as housing markets fall and consumer financing dries up, also expects any remaining optimism regarding 2009 car sales "to have now been extinguished.

"A return to the pessismistic days of the early 1990s downturn, when car sales fell 17% peak-to-trough in Western Europe, now appears inevitable in our view.

"We therefore now assume a 7% decline in 2008 western European volumes, followed by a further 10% drop in 2009 before rebounding modestly in 2010."

And they cautioned that impact could be "very severe".

"We are talking about an estimated 2.7m fewer car sales in western Europe in 2009 versus 2007. This volume equates to the annual output of up to eight medium-sized production plants in Europe, each producing 300,000 units a year.

"The implications would be major restructuring and redundancies."

They predicted a 10% decline in western Europe and a 7% decline in Eastern Europe.

"Both regions will be hurt by the lack of credit availability in our view. We also expect emerging markets to stutter on the lack of credit availability."

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