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Summary of Document: Europe: Automobiles

Core Content

This document provides an equity research analysis of the European automotive sector, focusing on the outlook for car sales, pricing, and the impact of foreign exchange (FX) headwinds. It also includes updated ratings and price targets for key automotive OEMs and suppliers.

Main Viewpoints

• Western Europe: The automotive sector in Western Europe is expected to experience a stronger recovery, with light vehicle sales growth forecasted at 6.4% in 2014, 5.8% in 2015, and 3.1% in 2016. This is attributed to improved consumer confidence, which has historically been a good indicator for car sales.
• Eastern Europe and Russia: The outlook for these regions is weaker, with light vehicle sales growth revised to flat in 2014 and -5.0% in 2014 respectively, due to increased economic uncertainty and risks to consumer spending.
• Total European Light Vehicle Sales: The overall growth for the European light vehicle market is expected to be 3.9% in 2014, 6.9% in 2015, and 4.2% in 2016, which is slightly higher than the previous forecast of 3.8%, 4.0%, and 4.2%.
• FX Headwinds: The depreciation of emerging market currencies (EM) has led to a significant FX headwind for European automakers. The total estimated FX headwind to profits over 2014-16 is €4.25 billion, which is 14% of total 2013E EBIT.
• Ratings and Price Targets: Several companies have seen their ratings and price targets updated. Peugeot is added to the Conviction List with a new price target of €14. Daimler and Faurecia remain on the Conviction List, while BMW is upgraded to Buy. Volkswagen, GKN, and Pirelli are downgraded, and Scania is upgraded to Neutral.

Key Information

Updated Forecasts

• Western Europe: Light vehicle sales growth revised to 6.4%, 5.8%, and 3.1% for 2014-16.
• Eastern Europe: Light vehicle sales growth revised to flat in 2014.
• Russia: Light vehicle sales growth revised to -5.0% in 2014.
• Total European Light Vehicle Sales: Expected to grow at 3.9%, 6.9%, and 4.2% in 2014-16.

FX Impact

• EM Currencies Depreciation: EM currencies have depreciated -1.5% relative to the euro since the start of the year.
• FX Headwind to EBIT: Estimated to be €4.25 billion over 2014-16, which is 14% of total 2013E EBIT.
• Most Affected Companies: Volkswagen is expected to face the largest FX headwind, followed by PSA, Renault, BMW, and Daimler.

Ratings and Price Targets

• Peugeot: Added to the Conviction List with a new 12-month price target of €14.
• Daimler: Maintained as a CL Buy with a new 12-month price target of €83.
• Faurecia: Maintained as a CL Buy with a new 12-month price target of €37.
• BMW: Upgraded to Buy with a new 12-month price target of €92.
• Volkswagen: Downgraded to Neutral with a new 12-month price target of €202.
• GKN: Downgraded to Sell with a new 12-month price target of 330p.
• Pirelli: Downgraded to Sell with a new 12-month price target of €10.6.
• Scania: Upgraded to Neutral with a new 12-month price target of Skr132.

Summary Table of Key Ratings and Price Targets

Additional Notes

• The document mentions that European pricing is expected to recover alongside volumes, with a 250 bp improvement in net pricing over 2014-16.
• Daimler is highlighted as one of the top OEM picks, with a 21% and 22% upside to EBIT forecasts for 2014 and 2015.
• Peugeot (PSA) is expected to benefit from a €3 billion capital increase and a stronger alliance with Dongfeng in China.
• Volkswagen is expected to see a 7% to 9% downward impact on its operating profit estimates due to FX headwinds.
• Pirelli is downgraded due to 6% to 10% cuts to earnings forecasts and the devaluation of the Brazilian Real.

Key Risks

• Macroeconomic Deterioration: A worsening macroeconomic outlook could negatively impact the sector.
• FX Movements: Continued depreciation of EM currencies may further drag on profits.
• CO2 Regulations: Stricter CO2 regulations may lead to higher investment requirements.
• M&A Risks: Uncertainty around M&A activities could affect the performance of companies like Scania and PSA.

Conclusion

The European automotive sector is seen as attractive, with a positive outlook for Western Europe and modest changes to earnings estimates. Despite FX headwinds and risks from emerging markets, the sector is expected to benefit from improved consumer confidence and better pricing. Key companies like Daimler, Faurecia, and PSA are highlighted as top picks, while others like GKN and Pirelli are downgraded due to valuation and FX risks. The overall coverage view remains Attractive, with the potential for buying opportunities in the short term.