Autos & Auto Parts
5 Reasons to be Cautious on
Truck Demand Recovery
European truck stocks up ~50% YTD, anticipating
an earnings recovery. To justify upside from here, we
believe investors must believe in a sharp rebound in
European truck demand as early as 2010. Given lower
margins in other major regions, we believe this is critical
for earnings normalisation. We highlight five key
reasons why we believe optimism for a sharp European
truck demand correction may ultimately be unfounded:
1. Young fleet age: We believe heavy trucks in
particular remain young relative to historical averages.
2. Used truck competition: New market will have to
compete with a higher availability of used trucks.
3. Road freight coming from low level: Freight growth
is ultimately tied to growth in industrial production, but
freight levels are starting 10-20% below recent peaks.
4. Subpar economic growth: MS forecasts slow
recovery in European GDP growth.
5. Availability of credit: As long as financing remains
constrained for small businesses, recovery in truck
equipment purchasing could remain sluggish.
What's new: Our higher truck forecasts recognise some
production recovery in 2010, the result of non-repeat of
destocking. Despite this and significant cost savings, our
2010/11 EPS estimates remain below consensus.
Stocks need substantial upgrades to maintain
momentum: Given the extremely low base, we see a
recovery in orders as all but inevitable. However, we
believe share prices already anticipate this.
How do we want to be positioned? MAN remains our
preferred truck name with the least downside to our
price target. The bull case upside >40% is most
attractive based on optionality to restructuring, Sinotruk,
additional Power business and synergies from LATAM
and Diesel Turbo integration. Volvo remains our least
preferred truck stock and we would look to pair it against
MAN. We continue to prefer exposure to high-conviction
Overweight names in the autos sector.