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Wall Road eyes auto business earnings for indicators of ‘demand destruction’

An indication advertises to buy vehicles at a used automobile dealership in Arlington, Virginia, February 15, 2022.

Saul Loeb | AFP | Getty Photographs

DETROIT – Because the begin of the pandemic in early 2020, U.S. automakers and sellers have seen document earnings as demand outpaced provides of latest vehicles amid provide chain issues.

However with rates of interest rising, inflation at document highs and recession fears looming, Wall Road is carefully watching third-quarter earnings outcomes and steering for any indicators consumer demand might be weakening.

“Auto sentiment may be very poor. We get it. Larger charges, nonetheless excessive costs, low client confidence, a possible recession and European power threat doesn’t make autos a pleasant place,” RBC Capital Markets analyst Joseph Spak wrote in an investor notice final week.

Spak stated third-quarter earnings “ought to largely be tremendous,” with the main target being on firm commentary and steering revisions. He stated 2023 estimates for the sector have to “transfer materially decrease.”

RBC and different monetary corporations have signaled the auto business’s provide chain points might shortly shift to demand issues.

Earnings for U.S. and European automobile firms are set to drop by half subsequent 12 months as weakening demand results in an oversupply of automobiles, UBS analysts led by Patrick Hummel told investors last week.

He stated the general automotive sector in 2023 “is deteriorating quick in order that demand destruction seems inevitable at a time when provide is enhancing.”


On Oct. 10, Hummel additionally downgraded General Motors and Ford Motor, predicting it that it could take three to 6 months for the auto business to finish up in oversupply. He stated that can “put an abrupt finish” to the unprecedented pricing energy and revenue margins for the automakers previously three years.

The funding agency downgraded Ford to “promote” from “impartial” and GM to “impartial” from “purchase” – sending both stocks tumbling roughly 8% throughout intraday buying and selling on Oct. 10.

The downgrades got here weeks after Ford stated components shortages affected roughly 40,000 to 45,000 automobiles, primarily high-margin vans and SUVs that have not been in a position to attain sellers. Ford additionally stated on the time that it expects to e-book an extra $1 billion in unexpected supplier costs through the third quarter.

Jim Farley, CEO, Ford, left, and Mary Barra, CEO, Normal Motors

Reuters; Normal Motors

GM has not signaled such issues for the third quarter, but experienced similar issues through the second quarter that it was anticipating to make up for through the second half of the 12 months.

GM CEO Mary Barra this previous week told Yahoo! Finance that the Detroit automaker is getting ready for elevated demand for its automobiles subsequent 12 months, however that it needs to be ready “whatever the setting” to proceed investing in its electrical automobile plans.

GM is about to report third-quarter outcomes earlier than markets open Tuesday, adopted by Ford a day later after the bell.

Earlier than Detroit’s largest automakers report earnings subsequent week, electrical automobile chief Tesla, which has a cult following amongst buyers, is scheduled to report after markets shut Wednesday.


CarMax fueled Wall Road’s issues final month after the used automobile supplier posted one in all its greatest earnings misses ever. In its fiscal second quarter ending Aug. 31, same-store unit gross sales fell 8.3%, steeper than the three.6% decline Wall Road anticipated.

Used automobile costs stay elevated, however Cox Automotive stated wholesale costs for supplier auctions have declined for 4 consecutive months. That would sign shoppers are fed up with the near-record costs.

Citing CarMax’s results, J.P. Morgan analyst Rajat Gupta stated the sentiment for franchised sellers’ third-quarter earnings “is probably the most destructive we’ve encountered for the reason that pandemic.”

CarMax shares sink as 'affordability problems' weigh on results

“The sector isn’t resistant to ongoing macro challenges and we’re dialing again our estimates for 2023 materially to replicate a light recession and hitting a brand new regular by 2025,” Gupta stated in an Oct. 6 investor notice.

A possible vibrant spot for the business is the low new automobile availability and gross sales. Even when there may be an financial downturn, gross sales might nonetheless improve although earnings can be anticipated to tighten.

Lithia Automotive on Wednesday reported its highest third-quarter income and earnings per share in firm historical past, regardless of lacking Wall Road’s prime and bottom-line expectations.

Morgan Stanley analyst Adam Jonas stated Lithia’s third quarter often is the final of the “actually, actually, actually good” gross revenue per unit quarter of this cycle.

“Whereas [CarMax’s] weak fiscal 2Q outcomes (reported a pair weeks again) set the tone for the used market, we imagine [Lithia’s] 3Q miss ought to set the sample for the franchise gamers,” he stated in an investor notice Wednesday.

Different main sellers scheduled to report third-quarter earnings embrace Group 1 Automotive on Oct. 26, adopted by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct. 27.

Auto suppliers

Trying to auto suppliers, which have skilled vital value will increase through the coronavirus pandemic, a number of Wall Road analysts anticipate continued progress this 12 months, adopted by single-digit progress, if not much less, subsequent 12 months.

Suppliers are largely paid after they ship components or merchandise to bigger suppliers or automakers. Smaller suppliers that produce supplies or components for lager firms have significantly been below stress as a consequence of decrease volumes, elevated prices and labor shortages.

Gary Silberg, KPMG’s world head of automotive, advised CNBC {that a} vital variety of suppliers are going again to the unique gear producers asking for assist.

“Not solely only for them however for his or her suppliers. It is a dance mainly that everybody’s doing on a regular basis,” Silberg stated. “They do not have lots of leverage is the issue. It has been a really, very robust 18 months” for smaller automotive suppliers.

A KPMG survey that included greater than 100 automotive business CEOs whose firms have annual revenues of over $500 million discovered 86% imagine there might be a recession in subsequent 12 months, and 60% stated it is going to be gentle and brief.

Responses for the KPMG CEO Outlook survey have been submitted from mid-July to late-August.  

Deutsche Financial institution expects auto suppliers to report third-quarter outcomes in-line with Wall Road’s expectations. Analyst Emmanuel Rosner stated in a notice to buyers Wednesday that the agency favors suppliers over automakers into subsequent 12 months, however sees potential earnings draw back threat from smaller suppliers equivalent to American Axle & Manufacturing and Dana Inc.

– CNBC’s Michael Bloom contributed to this report.

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