Monday, 23 January 2012

Micro Level Trends - American Manufacturers – Sizing-Up US Growth in a Vehicle Down-Sizing Age

Perhaps never in the history of US have its two most over-used phrases been so juxtaposed. “Its the economy, stupid” and “ the business of America is business” highlight the present near schizophrenic conditions that exist, a now engrained cautious attitude given the midst of fiscal and social upheaval of the nation, versus the rote conditioning of American business and populace to be optimistic and ambitious.

A recent front-page of Economist newspaper starkly depicts the present picture with the headline “America's Next CEO?”, referring to the results of the Presidential primaries across New Hampshire and South Carolina (poll rating) for the Republicans which show Mitt Romney as current favourite.

On paper, his background of ex-management consultant and ex-Governor looks to bolster the 'assets' side of a euphemistic personal balance sheet. But with the election a year away, the electorate will have noted President Obama's recent Asiatic focus to boost growth, US military presence in the region historically the precursor to strengthened trans-Pacific economic ties; this time however having to power-broke its way vis a vis China and a loss of previous 'reach' from S.Korea.

That combination of current economic fragility sat beside retained global aspiration is no better viewed than at the recent 2012 Detroit Auto Show. Though the state of Michigan has long lost its prowess as auto manufacturing powerhouse relative to the Japanese, Koreans, Chinese and of course the 'trans-plant' states in the “deep south”.

Yet for all the soulful remonstrations of the city's very real decline - by the likes of urban music artist Eminem - Detroit still endeavours to present itself as the vanguard of the global automotive sector as the new year gets under way.

And it is a very much needed show of confidence.

GM's stock price, though improved recently sits at $25, is well below its $33 IPO offering price; the IPO timed to ride previous market peak. Chrysler parent FIAT recognises the need to attract new capital into the US company from the markets, a necessary evolution, but made all the more prescient given FIAT's own concerns about the economic stagnation of Europe and its cash-burning effect upon the overall group balance sheet. And Ford has no doubt most disappointingly seen its stock price fall from its year ago high at near $19 to a present $12.50 due to the retraction of market confidence because of the macro-effects of the EU and global slow-down rather than company fundamentals.

Thus the Detroit trio all face capitalisation challenges.

However, as well recognised, 2011 (on a monthly YtD basis) did bring a glimpse of light for all in the US by way of the improved TIV demand figures, shoppers on Main Street seemingly more upbeat in the short-term than Wall Street traders besieged by the red price boards and 'Occupy Wall Street'.

Whilst 2009 gave 10.4m units sold, and 2010 gave 11.6 units, 2011 is expected to offer approximately 12.5m units. As for 2012, the market pollsters JD Power and sales outlet AutoNation seem agreed on a total of 14m units. That may at first appear a case of wishful thinking and pro-active sentiment boosting. Yet with Detroit's Big 3 sales expected to suffer on a world-wide basis, there may be reason to believe that the GM, Ford and Chrysler will be forced to grow US sales as an off-set to lost foreign demand. That typically means that new and refreshed products which attract dealer footfall are coupled with cross the board yet subtly offered sales incentives to seal deals and reach what may be ambitious state and country-wide sales targets.

With this as Detroit's very real global and national back-drop, the underlying message of NAIAS (North American International Auto Show) at Cobo Hall – just ended - was that although the philosophical broadcast is as 'international' as ever, the pragmatic communiqué is directed toward American buyers and dealers.

In order to excite consumers – and indeed Wall Street analysts – supposed 'concept cars' were rolled-out which intentionally bore more than a passing resemblance to current models so as to try and demonstrate their inherent progressiveness. But in reality – as is so often the case at this point in the economic cycle – are intended as image boosters to current models.

GM offered a compact sports study named the Chevrolet Miray (apparently meaning “future”) from its development centre in Korea, intended to simultaneously highlight the resurgence of the down-sized car – to befit the necessary global fit that enables scale efficiencies - and critical nudging of its sizeable presence in SE Asia's leading economy, with reach across the region. Also under the 'concept' name but seemingly more acutely related to the platform engineering of standard cars were the 2 items shown: the 'Code 130R' in the guise of a downsized Camaro 3-box coupe using Japanese German and Italian surfacing with all-american badging; and the 'Tru 140S', seemingly inspired by the 'organo' wedge-shaped Hondas of recent years. Both cars designed to fight against the 'import' market from Europe and Japan, but made more affordable for the targeted 'Millenium' (youth) consumer, which in reality translates as more affordable 'interpretations' of class leading foreign products for not just the youth but all consumers. An understandable design-policy driven by the strategic aim to build volume by capturing non-GM buyers from other VMs.

In a more candid effort to sell cars Ford offered stylised versions of its standard product range, including special editions of Fiesta, Focus, Taurus and Mustang in respectively, ST, ST-R, SHO and 'Laguna Seca' and 'Shelby GT500' guises. The company then, perhaps without the same pressure as GM to appear concomitantly global and future facing so as to buoy its market capital value, has followed previous US centric stance seen with 'Bold Moves' some years ago by wielding a set of obviously pragmatic 'showroom sellers' which are intended to draw general dealer interest. The new model introductions of course included 2012 versions of the general model range, but most interesting is the mid-size sedan Fusion, which is to be made available in a Plug-In Hybrid format. The investor website well recognised its – of course along with its peers - potential as the 'real-world' viable challenger to Tesla's Model S vehicle; this especially so if produced in Lincoln guise as Lincoln itself undergoes another brand overhaul. This aided by the new MKZ shown.

Chrysler showed the 700C concept, its contemporary take on a modern 'one-box' mini-van; a segment it essentially invented and captured in the mid 1980s after initial exploration with Renault (leading to Espace). Just as the Chrysler Town & Country and Dodge Caravan were – along with small sedan Neon – corporate saviours, so FIAT and Chrysler management seem keen to be seen to re-deploy pages from the history books, and target what appears an out of favour segment that lost its popularity given the 'soccer mom' tag and influx of SUVs and Cross-Overs. By way of more mainstream 'concept' efforts there is the Dodge Charger Redline. But of major interest was the Dodge Dart, the first US vehicle to be directly derived from a FIAT platform, the Alfa Romeo Giulietta. The re-engineering of Dodge with Alfa's sporting prowess should re-inject the brand with lost ride & handling characteristics, and with a $16,000 base price will be an attractive market contender. Importantly, FIAT-Chrysler used the show to display its 1.4L Multi-Air engine, which by historical American standards, and popular perception, a small power unit. However, it is being promoted through its use in the FIAT 500 to try and alter that perception so then able to be planned into later US market FIAT and Chrysler products. Furthermore FIAT used NAIAS to introduce the Maserati Kubang premium cross-over seeking to mimic Porsche's success with Cayenne.

From foreign stables, Toyota spotlighted the NS4 concept, a Camry sized Plug-In Hybrid sedan which intentionally spring-boards aesthetically from Honda's Hydrogen FCX Clarity concept of 2009, including its metallic deep red body colour, so subtly massaging public memory to Toyota's advantage. Toyota also debuts the LC-LF, a successor to its previously well received Lexus SC convertible. Honda itself provides a taste of the next generation NSX sportscar, badged in the US as Acura, and with the remit to kick-start what has been lost interest in the pseudo-premium marque that must switch its own centre of gravity from more recent SUV orientated vehicles to sedans, coupes etc. Whilst Daimler gave the idiosyncratic Smart For-US, trying to grow appeal of its micro-car marque.

This provides a basic view of the US market and US product outlook. However, given the bearish worldwide picture -exempting the surprising 8.9% growth in China in Q4 2011 – investors have great expectations that America can pull itself from the mire. To this end the recently experienced positive consumer traction in autos will be (nigh on) expected to continue as the theory of a self-sustaining America allows itself to kick-start its own upturn.

Yet that 'wished confidence' of a brighter era must be supported by evidence of top-line earnings improvement coupled with lean efficiency cost absorption within an organisation thus providing for appealing profitability and so investment incentive.

GM -

The reborn GM has (like Ford) the benefit of true global reach, but perhaps as never before have its 2 prime markets of China and the US been so important. The apparent 'soft landing' in China allowed GM to see its sales increase by 8.3%, ostensibly in line with general country growth.

In its first full year as a resurrected company, its FY 2010 revenue was $135.6bn, EBIT of $7.0bn, net Operating Cashflow of $6.6bn and FCF of $2.4 (having repaid $4.0bn to pension plans) and EPS of $2.89.
In 2011,
Q1 offered (net) revenue of $36.2bn (up $4.7bn YoY), an (adjusted) EBIT of $2.0, an Operating Income of $0.9bn (down from $1.2bn) and an EPS of $1.77 (up from $0.55), FCF dropped to $-0.9bn (from $1.0bn as a result of finance sourcing change that cost $2.5bn) and showed Automotive Liquidity of $36.5bn, with increased use of credit facilities (worth $5.9bn), this $42.2 set against Debt Obligations of $31.7bn.
Production was 2.32m units.
Q2 gave (net) revenue of $39.4bn (from $33.2bn), an (adjusted) EBIT of $3.0bn (from $2.0bn) and an EPS of $1.54 (from $0.85). FCF was up to $3.8bn (from $2.8bn), and Total Automotive Liquidity was $33.8 at hand and a further $$5.9 available via credit facilities. This total of 39.7bn set against Debt Obligations of $31bn.
Production reached 2.4m units
Q3 provided for (net) revenue of $36.7bn (vs $34.1bn a year earlier), an EBIT of $2.2bn (vs 2.3bn), net income for stockholders of $1.7bn (vs 2.0bn) and an EPS of $1.03 (vs $1.20). Operating cashflow reached $1.8bn and FCF from Autos equalled $0.3bn (from $1.4bn). Total Autos Liquidity equalled $33.0bn at hand with $5.9bn retained credit facility. This $38.8bn set against reduced Debt Obligations of $27.9bn, giving Net Liquidity of $10.9bn
Production dropped to 2.22m units.
As stated no Q4 figures presently available, though the BoD states a Q4 similar to that of Q4 2010

The company's earnings chart sets show that GMNA did near all the 'heavy lifting' in Q3, GMIO (Int Ops) showing reduced income, GM Financial assisting, GMSA (S.America) showing virtually no income and GME (Europe) showing a welcome reduction in losses, but still in the red. This the outcome from slow-down in global deliveries from 2.32m units in Q2 to 2.24m units in Q3.

GM has put effort behind its desire to decrease reliance on incentives, but results have been seasonally sporadic, with in the 16 months to Oct 2011, only 3 months of the series actually showing notable positive difference relative to the industry average 'give away' value, its own re-aligned pricing helping to beat internal targets.

This, looks to be part of the reason that Automotive Cash Generation shrank to $1.8bn in Q3 2011 from $2.4bn a year earlier, this broadly affecting Automotive FCF with the hike in YoY CapEx costs for the quarter from $1.2bn to $1.5bn, thus showing FCF heavily declining from $1.4bn to $0.3bn.

To re-quote the official statement “the company does not expect to achieve its target to break even on an EBIT-adjusted basis before restructuring charges in Europe, due to deteriorating economic conditions”. This then of little surprise. The IR department provides a general quote from Dan Ammann (CFO) “GM continues to execute the plan we outlined for investors in 2010...That includes investing in our products, further strengthening our balance sheet, generating cash and profits each quarter, and maintaining our low break-even level. The next level of performance will come as we systematically eliminate complexity and cost throughout the organization.”

Whatever the rhetoric, GM recognises that investors will need to be assured that the drop in stock-price (since IPO) can be off-set by the attraction of dividends. To this end the 2011 cumulative quarterly EPS rates (though not dividend rates)of Q1 $1.77, Q2 $1.52, Q3 $1.03, so far providing $4.32 will need to show a Q4 EPS of $1.44 to maintain an annualised average, and so theoretical attributable earnings to stock holders. If so, the notional “EPS Yield” generated relative to the $33 IPO price would show a 17% EPS return for 2011, and on the recent $24 price a 24% “EPS Yield”.

The prime aspect investors must watch is that whilst North America appears the most fertile and immediate sales ground, with the Q3 2011 numbers showing 96% of revenue came from NA, the exact methods GM uses for extracting additional value from the region must come under scrutiny. Just as the need must be to rebalance the international earnings contribution, so as not to put all the GM eggs in one basket.

Ford -

FY 2010 saw annual revenue of $129bn (vs $116.2bn in 2009), an EBIT of $7.15bn (vs $2.6bn) and a no paid EPS policy (relinquished in Q1 2012). Total Automotive Cash was $20.5bn (vs 24.9bn) with net (post Debt) sum of $1.4bn (vs $-8.7bn in 2009).
In 2011,
Q1 provided for revenue of $33.1bn (vs $5bn a year previous), an EBIT of $2.83bn (vs $0.82bn) and an unpaid EPS of $0.61 (vs $0.11). Total Automotive Cash stood at $21.3bn (vs $20.5bn), which after Debt Obligations stood at $4.7bn (up from $1.4bn) after debt reductions. Total Liquidity (inc marketable securities etc) stood at $30.7bn (from $27.9bn)
Production was 1.4m units (from 1.25m)
Operating Margin stood at 7.7% (vs 6.2% the preceding year) for the total company, though Ford NA offered 10.3% (vs 8.9%)
Q2 gave revenue of $35.5bn (vs $4.2bn), an EBIT of $2.9bn (vs $-0.06bn) and an EPS of $0.65 (vs $0.03).. Gross Automotive Cash stood at $22bn (vs $0.1bn) with net Cash at $8.0bn (vs $13.4bn).
Total Liquidity stood at $32.2bn
Production was 1.52m units (up from 1.42m)
Operating Margin was 7.0% (down from 9.1% preceding year)
Q3 offered revenue of $33.1bn (vs $4.1bn), an EBIT of $1.94bn (vs $0.111bn) and an EPS of $0.41 (vs $0.02). Gross Cash was $20.8bn (vs $-0.3bn) against Debt Obligations of $12.7bn, thus net Cash of $8.1bn (vs $10.7bn), with Total Liquidity inc credit lines at $31.0bn.
Total Liquidity stood at $31bn
Production was 1.34m units (vs 1.25m preceding year)
Operating Margin was 4.8% (from 6.2%)
Q4 along with FY2011 results to be presented on 27.01.2012..

With the same global market dynamic as GM, it was Ford's N.American operations which gave the greatest boost to revenue and profitability. However, whereas GM saw 96% of its revenue stem from NA, Ford sees only 58%, a far more balanced sales base, even if theoretically prone to ongoing international economic turmoil. The fact that Ford was able to enjoy that contribution in what has been a dire year for International Operations highlights what appears a leanly run ship.

Continuing to use the notional “EPS Yield” calculation, Ford saw EPS earnings of Q1 $0.61, Q2 $0.65 and Q3 $0.41, providing an average of $0.55 that investors would expect to see in Q4. However, as known, Ford decided to halt dividends through 2011 so as to buoy its cash cushion and maintain 'deep pockets' that could support CapEx projects, Working Capital needs and other obligations. That decision undoubtedly surpressed Ford's stock value, its current $12 or so seemingly reflective of that reality in tandem with previous bear-market sentiment, but some might argue that basic corporate fundamentals are brighter than recognised. As to how much the re-initiation of dividends at what is a notably cautious rate affects sentiment remains to be seen.


FY 2010 saw revenue of $41.95bn, a modified EBIT of $763m and Net Loss of $-652m, Cash at Hand of $7.34bn with Gross Debt of $13.12bn, giving Net Debt of $5.77bn
In 2011,
Q1 provided for revenue of $13.1bn (vs $9.7bn in the former year), a modified EBIT of $477m (vs $143 previously), [a modified EBITDA of $1.17bn (vs $787m)], a Net Income of $116m (vs $197m, so first reported profit), Cash at Hand of $9.9bn (vs $7.3bn), Gross Debt of $13.2bn (up from $11.2bn) and so Net Debt of $3.3bn (down from $3.8bn). FCF of $2.5bn (vs $1.6bn)
Total Liquidity was not stated.
Sales Total of 394,000 units (vs 334,000 units)
Operating Margin of 3.6% (vs 1.5% a year earlier)
Q2 gave net revenue of $13.7bn (vs $10.5bn), a modified EBIT of $507m (vs $183m), [a modified EBITDA of $1.3bn (vs $855m)], a Net Loss of $-370m (vs $-172m), Cash at Hand of $10.2bn (vs $9.9bn), and Net Debt of $2.1bn (vs $3.4bn). FCF of $174m (vs $491m),
Total Liquidity was not stated, Debt Obligations $12.3bn ($10.7bn of which is payable in 2016+).
Operating Margin of 3.7% (vs 1.7% a year earlier)
Sales Total of 486,000 units (vs 407,000 previously)
Q3 offered net revenue of $13.06bn (vs $11bn), a modified EBIT of $483m (from $244m) [a modified EBITDA of $1.1bn (vs $937m)], a Net Profit of $212m (vs $-84m), Cash at Hand of $9.45bn (vs $8.2bn), Net Debt of $2.9bn (vs $2.1bn). FCF of $-699m (vs $32m)
Total Liquidity was not stated, Debt Obligations $12.3bn (vs $12bn), Net Debt of $-2.86 (vs $-2.1bn).
Sales Total of 496,000 units (vs 401,000)
Operating Margin of 3.7% (from2.2%)
Q4 and FY results due on 1st February 2012, with the Revised Guidance at Q3 giving:
shipments at over 2m, net revenues over $55bn, modified EBIT of $2bn [modified EBITDA of $4.8bn], adjusted Net Income of approx $0.6bn andf FCF over $1.2bn

As an unlisted company – presently awaiting the right timing for a new IPO – Chrysler has little in the way of investor pressures, now that large portions of the tax-payer funded bail-out have been repaid, and the financial and technical gate-ways for FIAT's expansionary ownership of the corporation have been reached. But to generate a successful IPO, FIAT-Chrysler must demonstrate itself as a strategically strong and well positioned car company. Recent events in Europe have to a degree scuppered what had even previously been a tentative merging of empires. Chrysler's compact car future is effectively reliant upon FIAT platforms (which now need a 3rd partner to drive down costs, eliminate EU production overcapacity and generate credible regional earnings). This a sizable but realistically achievable challenge to be seen to be on track ahead of the US corporations own IPO.


The Detroit show's spotlighting of mainstream models in new model year and supposed 'concept' guises demonstrates the 'Big 3' need to generate showroom footfall and public interest converted into sales.

Yet the strategic positioning of the different firms – GM, Ford and Chrysler – largely reflects their 'playbook' positions seen in the past when re-emerging from recessionary times.

GM's play has historically been, and continues to be price-led, its large cash cushion of $10.9bn in Net Liquidity very probably used to maintain its strength at the coalface by continuing to offer the lowest RRP pricing of the Big 3 in each vehicle segment, and probably the biggest discounts and incentives on its vehicles. Thus, although GM seniors talk of a new company with new attitude, the tack it will take to generate market-share and ensure factories run at high capacity rates looks to be conventional.

Ford was the first to undertake corporate shrinkage during the early part of last decade, the sale of Volvo demonstrating the last vestiges of a yesteryear age that included PAG etc. That downsizing and the undertaking of its biggest 'mortgage' borrowing was part of the rationale to create the 'One Ford' of today, keenly focused on global platform/module set leverage and life extension of platforms to ensure what may be the industry's leading rates of CapEx amortisation. However, its strategic position appears 'historically normal', today setting itself out as the 'technologist' car company (eg SYNC etc) where car content and intelligence is decreed as the blue ovals USP in its mainstream markets, both at home and internationally. But once where historically the 'new era USP' was as the vanguard in styling, today with a need to satiate a broad cultural span of global consumers the maturity of middle of the road design is bolstered by efforts toward mainstream segment technology leadership

Chrysler finds itself in a curiously familiar position to that of the late 1970s and early 1980s, having to rise phoenix-like from what has been a very prolonged and concerning time, where its products where becoming very long in the tooth and its multi-brands appeal rapidly diminishing in brand equity. FIAT's parentage is of course seeking to alter that and the efforts thus far appear a mix of hit (ie new Dodge Dart) and miss (ie Chrysler badged Lancia's in Europe, and the FIAT badged Freemont SUV). Yet success is not yet assured, especially as European sales collapse especially so in Italy as it faces enormous economic strains. So the new onus is on Chrysler to help - along with FIAT's slowing but still potent South American operations - to buoy the parent company, by striking hard and fast in the US homeland. It will need to “pull a rabbit out of a hat” and re-create the new buzz it did in the mid and late 1980s. That was achieved back then with a venturesome daring spirit of the new. Today it must exploit the technical and financial advantages of 'pre-packaged' platforms yet recreate that lost spark seen 30 years ago, only periodically seen since, and distinctly lacking in recent years, offering little more than hackneyed 'Detroit Spin'.

To end, the attached table (top right) provides a brief but meaningful overview of the Big 3's current performance and financial positions; as viewed by :

- Worldwide Regional Production
- Revenue
- N. American Revenue as % of Global Whole
- N. American Operating Margin
- Total Liquidity Available vs Total Debt
- Net Liquidity Available

These very basic measures provide a much needed clarity as both global investors and Detroit looks to this emergent period of 'American Expectation'.

Once upon a time the Mako Shark Corvette, the mid-mounted Mustang and hi-tail Superbird reigned supreme in Detroit. Today, necessarily so, it is all about the numbers.