European Auto Gross sales Will Advance In 2023, However Earnings Probably To Wilt

Europe’s automakers happy buyers with sturdy revenue stories for 2022 however they are going to be elevating eyebrows as some specialists see deteriorating earnings prospects for this yr.

The consensus view is that gross sales in Western Europe will improve strongly this yr to nearly 11 million in contrast with final yr, however that also leaves the market severely in need of pre-Covid’s 14.29 million in 2019. The consensus begins to falter although when profitability comes beneath the microscope.

Fitch Rankings factors to many massive producers like Stellantis, Mercedes and BMW, flush with money, launching massive share buy-back applications, whereas Renault reinstated a dividend after a 3-year hole. Fitch expects general earnings to stay sturdy, boosted by pent-up demand and falling uncooked materials costs.

“We anticipate profitability to stay stable, supported by the transition to battery electrical automobiles, pent-up demand and decrease accessible volumes resulting from ongoing provide chain points that improve pricing energy for producers. Though we anticipate pricing circumstances to develop into more difficult in 2023, particularly in Europe, we imagine easing uncooked materials costs and enhancing stock administration ought to mitigate the nonetheless excessive inflationary surroundings and weaker client sentiment,” Fitch Group mentioned in a press release.

That’s information to funding financial institution UBS, which sees an oversupplied market resulting in pricing weak point with earnings per share dropping by 40% this yr. Tesla has triggered an electrical automobile worth battle, which is spreading throughout the so-called “legacy” auto producers, UBS mentioned.

“(producers) will doubtless see difficulties in sustaining worth self-discipline and excessive combine, whereas moreover anticipating solely flat to barely up volumes yr on yr with EBIT (earnings earlier than curiosity and tax) to reasonably endure from decrease monetary subsidiary earnings and better value. We’re cautious on all mass (producers) for 2023, whereas preferring extra cycle-resistant luxurious names and Tesla due to value and tech management,” UBS mentioned in a report.

Germany’s IFO Institute is selecting up adverse vibes too in its March report.

“(Automotive) Producers particularly assess their present scenario as drastically worse than within the earlier month. This presumably has to do with the truth that consumers are being very cautious for the time being,” mentioned IFO director Professor Oliver Falck.

LMC Automotive’s common month-to-month gross sales report raises its Western Europe forecast a bit for 2023 to a achieve of seven.9% to 10.96 million sedans and SUVs, up from its earlier month’s forecast of plus 7.8%. Nevertheless it concedes that the market carries some worrying options.

“We nonetheless see provide constraints dominating this yr. Underlying demand faces challenges too, with many West European nations at present dealing with recessionary circumstances and weak progress thereafter. In current months although, client sentiment has develop into rather less pessimistic, and with a backlog of orders, we nonetheless view {that a} quicker restoration in manufacturing this yr can be supported by demand. Nonetheless, it stays clear that rising prices of dwelling and elevated ranges of inflation seen throughout the area pose a draw back threat to our forecasts,” the report mentioned.

In the meantime, turning to the revenue facet, LMC analyst Peter Kelly factors to some ominous developments.

In a report entitled “A change in automotive fortunes is coming”, Kelly says the surge in new automobile costs within the U.S. and Europe and general producer profitability is coming to an finish.

“In some unspecified time in the future, probably later this yr, although unlikely before that, rising provide ought to meet falling demand,” Kelly mentioned.

Kelly doubts producers who say they may by no means return to the unhealthy outdated methods of sacrificing earnings for quantity.

“We’re not satisfied by this logic and anticipate market competitors to develop into a significant component as soon as the supply-demand imbalance dissipates. It would take a courageous (producer) to face by and preside over vital market share loss to an aggressive competitor keen to ship extra shortly and/or at higher costs. It would solely take one or two giant (producers) to vary any market – and the notion that the business might self-discipline itself with out collusion, which might appeal to severe regulatory consideration, can largely be dismissed,” Kelly mentioned.