How will VW, BMW and Daimler shares behave in 2020?
With Q1 results season upon us, we look at the damage done to the motor industry and likely outcomes.
16th April 2020 14:51
by Graeme Evans from interactive investor
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With Q1 results season upon us, we look at the damage done to the motor industry and likely outcomes.
Despite factory shutdowns and empty roads pointing to a battle for survival for the European car industry, there were more signs today that investors have been manoeuvring themselves for a recovery in heavyweight stocks Volkswagen (XETRA:VOW), Daimler (XETRA:DAI) and BMW (XETRA:BMW).
The trio were among the biggest risers on the Frankfurt market this morning, having outperformed their American peers General Motors (NYSE:GM) and Ford (NYSE:F) since the Covid-19 crisis began in February.
While visibility on demand remains very low and it is still way too early to be talking about a definite recovery, analysts at broker UBS keep “buy” recommendations on a number of European automotive stocks including VW and BMW.
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That will offer encouragement to interactive investor customers, given that the three German multinationals are in the top 12 most-bought European shares on our platform in 2020.
| Company | Ticker | Country | Share price change since 20 Feb 2020 (%) | Share price change in 2020 (%) | Results due | UBS comment on the dividend |
|---|---|---|---|---|---|---|
| General Motors (NYSE:GM) | GM | US | -38.6 | -40.9 | 06-May | NA |
| Ford Motor (NYSE:F) | F | US | -37.2 | -45.8 | 28-Apr | NA |
| Daimler (XETRA:DAI) | DAI | Germany | -35.8 | -42.8 | 29-Apr | Likely to guide sales and profits down significantly year-on-year. Downside risk to dividend |
| BMW (XETRA:BMW) | BMW | Germany | -24.2 | -32.3 | 06-May | Expect confirmation of already revised 2020 guidance. Dividend cut unlikely |
| Volkswagen (XETRA:VOW3) | VOW3 | Germany | -22.8 | -24 | 29-Apr | Likely to revise group margin to ~4% for 2020. €1.5bn profit expected in Q1 |
| Source: Sharepad as at lunchtime 16 April 2020 |
Unsurprisingly, UBS expects that Q1 results due at the end of April and in early May will be grim, with the current quarter set to be even worse as cash balances are strained by companies getting ready to restart production.
Many plants are expected to come back online by mid-May, with VW-owned Bentley today announcing that it will gradually reopen its Crewe plant from 11 May.
Many companies have cancelled their 2020 financial guidance, but UBS thinks that Q1 earnings season will be an opportunity to provide some new targets. These are likely to reflect a 10-15% decline in global car production, which, if achieved, would point to positive growth in the second half of 2020.
UBS added: “We think the recent share price recovery reflects such an outcome, as well as easing balance sheet concerns.” However, without stimulus measures specific to the automotive industry, its analysts warn that the top line could shrink by as much as 18%.
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Both VW and BMW should stay earnings positive in Q2, although with sharply reduced margins. Free cash flow is likely to have been negative for both companies, although UBS expects BMW to reiterate the forecast made in March for auto margins of between 2-4% and positive cash flow across 2020. It also thinks that the 2019 dividend will be paid as previously announced.
While VW hasn't realised unit sales for Q1 yet, UBS expects that the quarter will show a 12% decline in revenues and 63% drop in operating profits. Should VW provide updated targets for 2020, the bank's analysts estimate they will forecast an 11% decline in revenues and 4.4% operating margin.
They added:
“We think VW's ability to manoeuvre through this crisis with a strong cash flow focus, a resilient balance sheet and a healthy underlying business is stronger than ever, particularly in direct comparison with the dieselgate crisis and the 2008/9 financial crisis.”
UBS has a “neutral” recommendation on Mercedes-Benz owner Daimler, which it warns could reduce or withdraw its 2019 dividend. The note added: “We still expect Daimler to guide for a positive adjusted free cash flow in 2020 under the assumption of a gradual recovery in the key auto markets in H2 and tight working capital management.”
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