European Autos: Wait a little
longer
Initiating coverage; Overweight on Daimler
Automobile Manufacture
Ranjit A UnnithanAC
(44-20) 7325-8106
ranjit.a.unnithan@jpmchase.com
J.P. Morgan Securities Ltd.
Klaus Breitenbach
(44-20) 7325-9832
klaus.r.breitenbach@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 106 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Cautious on sector near-term
but attractive entry-points
possible once negative equity
drivers play out.
European OEMs 2009E Net
Debt/EBITDA
2.9
2.2
1.3
-0.4
-2.0 -1.0 -1.3
-1.0
0.0
1.0
2.0
3.0
4.0
RNO PSA Fiat BMW VOW DAI
Source: J.P. Morgan estimates.
• We initiate coverage of the European auto sector with a cautious near-term
bias, but believe the sector may offer attractive entry points as early as
1Q09 once certain negative equity fundamentals play out.
• Key incremental negatives through 1Q09 include: 1) Western European
car sales (SAAR) could continue to see sequential declines, and 2)
4Q08/full year 2008 results and/or earnings/dividend guidance for 2009 are
also likely to be weaker than consensus expectations (JPM expects op.
profits/revenues to decline at least 50% more than consensus).
• Key investment drivers: 1) Valuation has breached historical troughs on
EV/sales (now at 15% vs. previous trough of 22%); 2) industry restructuring
– probably not occurring till 2H09, but with the potential to add 100-200bp
to operating margins; 3) relatively strong industry balance sheets should help
the industry weather this downturn better than previous downturns.
• Overweight at Daimler, Underweight Renault, PSA: On a 12-18 month
view, given weak end markets, we favour names that have an improving
product cycle, strong balance sheets and the capacity/ability to restructure
quickly. Near-term newsflow on Daimler could be negative (earnings miss,
dividend cut) but the new E-Class arriving in 2Q09 should provide a boost
to earnings during 2H09 – this together with a strong balance sheet lead us
to rate DAI Overweight (12-month EV/Sales-based price target