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Tesla is 'high risk' going into auto earnings season, warn analysts, who like GM and Ford

Published 2024-04-16, 01:20 p/m
© Reuters.  Tesla is 'high risk' going into auto earnings season, warn analysts, who like GM and Ford
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Proactive Investors - General Motors (NYSE:GM) is the great hope of the upcoming automobile sector earnings season, with worries about Tesla, Ford and some component suppliers raised by two investment banks on Tuesday.

UBS said it favoured “legacy OEMs” such as GM and Ford (NYSE:F) amid “tough times for suppliers.”

Analysts at Deutsche Bank (ETR:DBKGn), meanwhile, said they think GM “could report a particularly solid beat to the quarter, given stable pricing for longer, a solid cost reduction program in place to mitigate labor headwinds,” and lower spending on its paused Cruise driverless taxi arm.

They believe GM could raise full-year guidance as soon as this quarter, given stronger pricing for longer than had been assumed.

Tesla's considerable risk

Tesla Inc (NASDAQ:TSLA) earnings are a big worry for the Deutsche team, with the potential for free cash flow “burn” and reduction in full-year volume guidance, and most importantly, if the Model 2 lower-cost model is confirmed as being put on the back burner, as recently reported that is a “potential thesis-changing strategic update.”

If Tesla does confirm that its renewed robotaxi focus comes at the expense of Model 2, “we believe this would introduce considerably higher risk profile for the stock, and remove a key reason many shareholders currently own it”, the Deutsche analysts said.

“More critically, this change in strategy would also make any upside from here tied to Tesla cracking the code on full driverless autonomy, which represents a significant technological and regulatory challenge.”

Downside risk to first-quarter earnings and in some cases to full-year guidance was also highlighted by Deutsche about names including Ford, Adient, Aptiv, Goodyear Tire and potentially Visteon, due to “slow Q1 new launches, soft volumes and cost inflation… requiring major improvement over next quarters.”

As for Rivian (NASDAQ:RIVN), Deutsche saw continued downside risk to the outlook for positive gross margin exiting 2024, with deeper losses expected “especially in light of the weaker EV consumer environment which may require further pricing actions into the year.”

However, UBS upgraded Rivian, removing its ‘Sell’ rating and moving to ‘Neutral’, with analysts saying they believe “the near-term risk/reward is more balanced at current levels.”

Suppliers vs OEMs

UBS said the path for US auto suppliers specifically remains difficult amid "minimal global production growth, lower exposure to faster-growing OEMs, slower new program ramps, return of annual price-downs (vs. recoveries of past few years), labor inflation and FX (Mexican peso) risk."

"Additionally, suppliers that have an EV angle face additional pressure from lower volume and poor EV sentiment," they said.

"Despite these headwinds, most suppliers are looking for annual margin expansion. This seems overly dependent on productivity, which is plausible but somewhat of a 'black box' and generally harder to achieve amid slower growth."

The UBS analysts don’t expect many guidance revisions yet as it's still early in the year but see downward revisions to the full-year consensus for supplier earnings post-print.

"Still, we prefer legacy OEMs into 1Q24 earnings, seeing pricing holding up better than feared and their focus on capital efficiency and capital returns," the Swiss bank said.

"The recent EPA final ruling (and slowing BEV demand) gives them a longer leash to fix EV challenges and a longer runway to milk their ICE (NYSE:ICE) cash cow."

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