Two Wheeler Induastry
Autos and autoparts
July Global Automotive Monthly
• US economic growth is slowing sharply. A sharp deceleration in the housing market
seems to be negatively affecting consumers who are already under pressure from
higher interest rates and fuel prices. US household debt is at an all-time high, debt
payments are at a record 18% of DPI, and delinquencies are rising, as Car-Mart warned.
• Sentiment on European economic performance continues to be optimistic, but European
consumer and business sentiment is historically highly correlated with US surveys: the
auto sector has tended to fall in absolute terms for at least six to nine months after IFO
starts to fall, although relative underperformance is less marked. However, Eastern
European capacity additions, a weak yen versus the euro, new competition and higher
taxes in 2007 are all threatening European auto margins structurally, in our view.
• US auto sales have been down for the past four months, and are down over 4.3% year
to date. We forecast 16.2m sales in 2H 2006, down from 16.7m in 1H 2006, and we
expect this weakness to continue into 2007, with potential downside to our 2007E US
SAAR of 16.8m to around 16.0m, in our view. We show in this report the high correlation
between demand for pick-ups in the US and US housing market growth. Even high-end
demand seems to be slowing and incentives rising. Residual values on SUVs and pickups
remain weak.
• Consensus auto EPS growth expectations remain optimistic, particularly in Europe, as
investors and analysts continue to believe management restructuring targets will be
met for 2007 and 2008. Consensus forecasts are for the flat global OEM earnings growth
seen in 2005 and 2006E to accelerate, to 22% and 15% in 2007E and 2008E, respectively,
with only one global OEM forecast a decline in growth in 2007E. Consensus
expectations for EPS growth come on top of near-record global OEM EBIT margins
currently, and near-record European OEM margins, despite...