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by Daniel Shvartsman
As we go into the first quarter results, we are focusing on the auto sector. In the last 10 days, Ford (F), General Motors (GM), Fiat Chrysler (FCAU) and Tesla (TSLA) all reported a profit. We are in a market context close to historic highs, but with vehicle sales in the US at roughly the same cyclical peak (plateau?) Since the end of 2015, are there any signs of change? ? And for Tesla, well, between the time we asked these questions on Wednesday and received answers on Friday, they announced a capital increase. The week was therefore very busy for the electric vehicle manufacturer and the California lightning rod.
welcome to The market guide! This weekly newsletter features the authors of our Marketplace who are focusing on one of the topical topics of the week. The Marketplace is our platform for authors to organize services that provide research, advice and insights to investors, as well as lead investor communities. So we thought this newsletter would be a natural way to share some of these ideas and tips on specific topics. We will also highlight related articles and readings of our authors over the past week, as well as any development on the market as a whole. Here is the edition of last week for reference.
Our panel this week:
Ford's report seems to have marked a turning point: North America has shone, restructuring in Europe is becoming clearer and Jim Hackett's plan is beginning to yield results. Do you buy that this is a turnaround and what do you think of the stock?
Arturo Neto: I love Ford more for its market share on trucks in the United States. All the progress made outside of the United States is just the icing on the cake. If you look at domestic auto sales trends versus domestic truck sales, they are going in opposite directions. Although total vehicle sales were close to the range, the distribution of these sales between trucks and cars has changed considerably, with the trucks gaining momentum. Even longer, it seems to me that the younger generations are less and less motivated to drive and even less to buy cars. They are more likely to use carpool, scooter or walking services. This is not the case with trucks. Truck buyers do not buy them to get from point A to point B as much as they do for deliveries, camping, towing, home improvement projects, and so on. These activities can not easily be replaced by a carpooling option.
As for foreign competition, it is intense in the automotive sector but not as much for trucks. A report from Cox Automotive indicates that 71% of truck buyers prefer the heavy truck brand to be located in the country, which means that foreign competition is likely to be less competitive in the sector, particularly in the larger vehicle segment. normal. Customer loyalty to the F-150 is ridiculously sticky and the reintroduction of the Ranger and Bronco could attract new customers. The stock has recovered after a multi-year low and with a dividend yield of 5.8% and a payout ratio of 77%, I think it's also a good fit for investors looking of income.
Anton Wahlman: Ford has benefited from very low expectations, but it has also become clear that new products coming online in the next 6 to 18 months could be really interesting: Explorer, Escape and this all-electric crossover. The first two, in particular, are Ford's best-selling non-pickup truck picks. What you have to understand, however, is that it had already been frozen and put in place before Jim Hackett arrived two years ago. They will launch under his watch, but they have not been designed under his watch.
GM's response has not been quite the same: lower revenues from China and increased competition from Fiat in the van segment are two potential sources of bitter sentiment. How does this quarter fit into your prospects for society?
Bram de Haas: It seems to me that the feeling around General Motors has never been so cheerful in recent years. This $ 54 billion company has cash flow from automotive operations of approximately $ 12 billion (expected for 2019). The free cash flow will probably be about half. I think CapEx is high. It's great on this market. What people do not realize is that Cruise, majority owned by GM, is a leader in self-reliance. It throws a billion a year into this segment and there is no return yet. SoftBank (OTCPK: SFTBY) and Honda (HMC) are external investors who value the GM stake at about $ 11 billion. In the last year, GM has been slightly down on the S & P 500, but since I wrote it in the Special Situations Report, it has significantly outperformed the S & P Index ETF and NASDAQ Global Auto First Trust ( CARZ). I have also mentioned the possibility of shorting CARZ against GM because of the current tariff problems at the time. It would have worked very well.
Anton Wahlman: GM suffered higher expectations than Ford, considering all the progress made in 2018 through various agreements with Softbank and Honda, as well as investments in Cruise and LYFT (LYFT). That alone set the bar much higher than Ford. However, GM pickups are just not as good as FCA RAM or Ford F Series. Journalists are generally disappointed with the Chevrolet Silverado and GMC Sierra, at least in their "1500" half-ton versions, which are simply not competitive with their two main competitors. Just look inside these products and you will probably be able to understand at least half of them.
Fiat has been involved in many discussions on mergers and acquisitions and has, as mentioned, targeted GM in the van segment. What do you do with their relationship and their position among the big three?
Bram de Haas: Mary Barra, CEO of GM, has quietly done at least one great job. Overseas non-profitable segments were sold or restructured. An investment in Lyft has doubled in value so far. The United States is preparing for a slowdown in the automatic cycle. The direction is really on the ball. My only complaint is that they could have been more aggressive with redemptions. Barra has rebuffed Fiat president Sergio Marchionne, and looks to be a capable of spreading capital, not an empire builder. In addition, she was born and raised in a GM family. The likelihood of General Motors merging with Fiat is extremely low.
Anton Wahlman: Fiat is benefiting from weak expectations in general and notably the disappointing forecasts of the last quarter, when stocks had fallen sharply during the initial reaction. This time, the stabilization resulting from the reaffirmation of the forecasts for the whole year was relieved, as was the detailed explanation given by management to its plan to comply with European standards for the issuance of new products, as opposed to purchase additional credits, purchased by Tesla. or someone else.
No preamble for Tesla – what do you do with Q1 and recent developments and what happens next?
Bram de Haas: Tesla raises $ 700 million in shares and almost double with convertible bonds. It's a vital step that he should have taken earlier. The fact that Tesla was not the main reason for my brevity. We still have to see what conditions Tesla is raising. How is it going to be dilutive? How much will the converts' coupon be painful? Who buys? If it's okay for Tesla, I could be out of the court.
Anton Wahlman: The news of the week is clearly the successful capital increase, which probably allows the company to have a year of respite after being on the brink. This despite the fact that management has sold the deal on the basis of something that I do not think will just happen – level 5 (full) autonomy by 2020. It will obviously be a bit of biting society in the back, but for now, it helps. the company in 2019 by not fearing insolvency. This brings us back to the actual performance of the company: April sales were very bad in most countries, and the company has a steep climb to get closer to the June forecast of 90,000 sold to 100,000 cars.
Last question – auto sales are at the top of their cyclical level and have been waiting since the end of 2015, according to FRED's. The data. In light of the first quarter reports, what would you say to investors where we are in the cycle?
Anton Wahlman: I am bearish on the fundamentals of the industry because I believe that the profit comes from the cost associated with compliance with emission standards and other political requirements aimed at sourcing locally. , which has an overall impact, whether on rates or on a reduced scale if you try to bypass the rates. This makes the auto sector one of the worst imaginable right now. That said, the valuations of General Motors, FCA and Ford are very low and they already account for much, if not all. If there was regulatory relief, particularly with respect to emissions laws or even in terms of tariffs and local supply, then these stocks would see their profits increase and increase accordingly.
Editor's Note: Please refer to the information provided by these authors at the end of the article.
Other great stories this week
What you need to know beyond the meat before its IPO by David Trainer
Update on Initial Public Offering: Beyond Meat Prepares for $ 175 Million Initial Offering by Donovan Jones
Recalling that "tech" companies can operate in other sectors (and still win many fools), Beyond Meat (NASDAQ: BYND) was released this week and soared. David Trainer of Value Investing 2.0 and Donovan Jones of IPO Edge provide basic information for all who are interested after its prodigious pop.
Microsoft's Good Results Could Push Stocks Up by Mott Capital Management
Microsoft: Growth surprisingly supported by Michael Wiggins de Oliveira
While Microsoft (MSFT) gets the hype to become the most valuable company in the world, two Marketplace authors are reviewing their recent earnings report. Mott Capital Management of Reading the Markets and Michael Wiggins de Oliveira of Deep Value react in the same way.
A jewel in the crown of General Electric: The Charge by Daniel Jones
GE: Decipher first quarter results by Robert Honeywill
General Electric Improves: Stocks Will Probably Advance Farther From Here by Victor Dergunov
And just after last week's industry review, General Electric (GE) released a positive release on its results, at least by market. Victor Dergunov of Albright Investment Group liked the profits, while Daniel Jones of Crude Value Insights focused on the aviation industry. Robert Honeywill of Analysts Cnr | H2 Supergrid, for its part, highlights how this report was actually more in line with the expectations that were reported.
The real Berkshire Hathaway Trench by Eric Nickolaison
Finally, in light of the current meeting of Berkshire Hathaway (BRK.B) (BRK.A), here is an article by Eric Nickolaison of Wide-Moat Investing Platform on the largest Berkshire ditch, which could play with his involvement in the Western (OXY) bid for Anadarko (APC).
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Market News
This week we have launched two new services that might interest you. This is first of all Moats & Long-Term Investing by Daniel Schönberger. And launch is the appropriate word for the new service of Cestrian Capital Research, Investing in the race for space. Discover their launch articles:
We also published our list of the fastest climbers on the market for April 2019 for anyone interested in seeing influential personalities on the market last month.
Podcast of the market round table
Our roundtable podcast includes 30- to 45-minute interviews with Marketplace writers on investment strategies, their investment backgrounds and developments, as well as current ideas or insights. interesting views of the market. We presented a podcast this week:
Eric Basmajian of EPB Macro Research spoke with Jonathan Liss about the burden of debt on the global economy and its impact on global markets – low growth, low rates and the opportunity to invest in this context.
Listen and subscribe to the Market Roundtable on these podcast platforms:
Thank you for reading! Do you buy or sell the auto industry? Let us know below.
Disclosure: I am / we are long BRK.B. I have written this article myself and it expresses my own opinions. I do not get compensation for that. I do not have any business relationship with a company whose shares are mentioned in this article.
Additional disclosure: Bram de Haas is GM long and short TSLA.
Anton Wahlman is GM long and FCA, and short TSLA
Arturo Neto, CFA is long F.
Daniel Shvartsman is long BRK.B.
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