Monday, 25 February 2008

Macro-Level Trends – Financial Markets - European Auto Stocks Highlighted

Auto stocks, often recognised (and perhaps overly generalised) for their long cyclical behaviour and current harsh headwinds, appear when fundamentally right, to be back in favour amongst investment bank analysts. Bearing that in mind, whilst the US (VMs & Suppliers) players ‘right-size’ and re-structure, the Japanese maintain cautious slow growth and Koreans face increased price competition, it is a European trio that appear best placed.

For Lehman Brothers’ analysts looking at cross-sector portfolios the European trio of Daimler AG, Renault SA and PSA SA appear to be the vanguard of bright automotive prospects, and it’s a perspective that investment-auto-motives shares (see previous posts: 19.02.08 Daimler / 29.01.08 PSA / 08.01.08 Renault).

The only previous reservation related to the ‘drag’ created by Nissan USA upon the overall performance of the Renault-Nissan alliance, but more recent events such as the critically important Renault-Avtovaz JV finalised recently have once again catapulted Renault’s prospects counter-balancing Nissan.

Daimler given its divorce from Chrysler (including well negotiated liabilities), sector-leading product margins and imminent product wave that sees near complete portfolio renewal within 2.5 years and stock-buyback campaign perhaps demonstrates itself as the best low-risk high-reward option of the recommended Europeans.

PSA appears to back on form after some 3 years of being lost, relying on its well established reputation for technical and product alliances to maximise engineering efficiencies, whilst continuing to extract as great a differentiation as possible between Peugeot and Citroen whilst obviously sharing as much technical hardware as possible, something it has done admirably to date.

Of course whilst the industry talks-up the surge effect of BRIC+ markets, investors recognise that it will be those who can best position themselves in the dominant ‘old markets’ flattening, squeeze and possible shake-out that will win respect and investor Euros, Pounds, Dollars etc.

The writing has been on the wall for some time that those producing premium vehicles, small cars and LCVs would be best placed to face the future, and that future has arrived. Interesting to note that, like others Lehman’s appears to think Fiat success may have slowed, even with the new small 500s launch and a diverse set of group divisions each apparently well placed. Of course shared production 500s don’t hold the margins of Fiat’s own B segment cars, and undoubtedly the rumour Marchionne’s extended responsibilities within the Banking world would not have helped the Italian companies prospects given the weight of contribution Marchionne and Autos have played in recent years.

To surmise, interesting to at last see this trio recommended, done so primarily with reference to the undervalued Auto-sector standing of the Dow Jones Stoxx Autos & Parts index, down 30% since Oct 29th against the Stoxx 600 – the worst of 18 sector performers. Given that this trend-line gap grew so markedly evident so quickly, it’s no surprise that it warranted such investigation and revealed what industry experts already recognised as fundamentally right opportunities.

Zeitsch, Streiff and Ghosn will be happy to see the investment world at large take note.