Wall Street eyes auto industry earnings for signs of ‘demand destruction’

A indication advertises to invest in vehicles at a used car or truck dealership in Arlington, Virginia, February 15, 2022.

Saul Loeb | AFP | Getty Visuals

DETROIT – Since the commence of the pandemic in early 2020, U.S. automakers and dealers have observed report profits as need outpaced provides of new vehicles amid offer chain complications.

But with desire premiums rising, inflation at file highs and economic downturn fears looming, Wall Road is intently viewing third-quarter earnings effects and guidance for any indicators shopper desire could be weakening.

“Auto sentiment is very very poor. We get it. Increased costs, still high selling prices, small purchaser self-confidence, a opportunity economic downturn and European strength chance does not make autos a friendly location,” RBC Money Markets analyst Joseph Spak wrote in an investor be aware final 7 days.

Spak mentioned 3rd-quarter earnings “ought to typically be wonderful,” with the emphasis remaining on company commentary and direction revisions. He reported 2023 estimates for the sector want to “move materially decrease.”

RBC and other financial firms have signaled the auto industry’s offer chain challenges could swiftly change to demand difficulties.

Income for U.S. and European motor vehicle companies are established to fall by half next yr as weakening need sales opportunities to an oversupply of autos, UBS analysts led by Patrick Hummel informed investors past week.

He said the overall automotive sector in 2023 “is deteriorating fast so that need destruction seems unavoidable at a time when source is enhancing.”


On Oct. 10, Hummel also downgraded Normal Motors and Ford Motor, predicting it that it would consider 3 to 6 months for the vehicle business to conclude up in oversupply. He stated that will “put an abrupt stop” to the unparalleled pricing electrical power and revenue margins for the automakers in the earlier 3 many years.

The expenditure company downgraded Ford to “offer” from “neutral” and GM to “neutral” from “invest in” – sending both equally stocks tumbling around 8% throughout intraday buying and selling on Oct. 10.

The downgrades arrived months soon after Ford stated areas shortages afflicted roughly 40,000 to 45,000 cars, generally superior-margin trucks and SUVs that haven’t been in a position to arrive at dealers. Ford also claimed at the time that it expects to ebook an additional $1 billion in unanticipated provider costs throughout the third quarter.

Jim Farley, CEO, Ford, remaining, and Mary Barra, CEO, Common Motors

Reuters Standard Motors

GM has not signaled this kind of troubles for the 3rd quarter, but professional equivalent troubles all through the second quarter that it was expecting to make up for all through the next half of the yr.

GM CEO Mary Barra this past 7 days advised Yahoo! Finance that the Detroit automaker is planning for increased demand for its cars future year, but that it desires to be ready “irrespective of the surroundings” to continue on investing in its electric car or truck ideas.

GM is set to report third-quarter benefits ahead of marketplaces open up Tuesday, followed by Ford a working day later immediately after the bell.

Prior to Detroit’s major automakers report earnings next week, electric auto leader Tesla, which has a cult next among investors, is scheduled to report right after markets close Wednesday.


CarMax fueled Wall Street’s issues final thirty day period soon after the applied motor vehicle seller posted just one of its biggest earnings misses ever. In its fiscal second quarter ending Aug. 31, same-retail outlet unit product sales fell 8.3%, steeper than the 3.6% decline Wall Street expected.

Applied auto price ranges remain elevated, but Cox Automotive stated wholesale charges for vendor auctions have declined for four consecutive months. That could signal people are fed up with the close to-record price ranges.

Citing CarMax’s benefits, J.P. Morgan analyst Rajat Gupta mentioned the sentiment for franchised dealers’ third-quarter earnings “is the most detrimental we have encountered because the pandemic.”

“The sector is not immune to ongoing macro troubles and we are dialing back our estimates for 2023 materially to replicate a gentle economic downturn and hitting a new normal by 2025,” Gupta stated in an Oct. 6 trader take note.

A prospective dazzling location for the sector is the small new car or truck availability and product sales. Even if there is an economic downturn, income could nonetheless boost however earnings would be envisioned to tighten.

Lithia Automotive on Wednesday noted its maximum third-quarter profits and earnings for each share in corporation background, in spite of lacking Wall Street’s major and base-line expectations.

Morgan Stanley analyst Adam Jonas claimed Lithia’s 3rd quarter could be the previous of the “actually, actually, truly great” gross gain for each unit quarter of this cycle.

“When [CarMax’s] weak fiscal 2Q success (noted a couple months back) established the tone for the utilised marketplace, we believe [Lithia’s] 3Q overlook should set the pattern for the franchise players,” he said in an trader take note Wednesday.

Other important sellers scheduled to report third-quarter earnings contain Group 1 Automotive on Oct. 26, followed by AutoNation, Asbury Automotive Team and Sonic Automotive on Oct. 27.

Auto suppliers

Hunting to vehicle suppliers, which have expert major expense improves during the coronavirus pandemic, several Wall Road analysts assume continued development this year, adopted by single-digit expansion, if not fewer, upcoming yr.

Suppliers are mainly paid out after they deliver components or merchandise to bigger suppliers or automakers. Smaller suppliers that develop products or components for lager providers have specially been under stress because of to decreased volumes, greater expenditures and labor shortages.

Gary Silberg, KPMG’s world head of automotive, instructed CNBC that a substantial number of suppliers are going again to the authentic machines brands asking for assist.

“Not only just for them but for their suppliers. It is really a dance in essence that everyone’s doing all the time,” Silberg claimed. “They really don’t have a great deal of leverage is the problem. It’s been a really, pretty rough 18 months” for lesser automotive suppliers.

A KPMG study that involved much more than 100 automotive marketplace CEOs whose providers have annual revenues of more than $500 million identified 86% consider there will be a recession in subsequent 12 months, and 60% mentioned it will be delicate and brief.

Responses for the KPMG CEO Outlook study were submitted from mid-July to late-August.  

Deutsche Lender expects auto suppliers to report 3rd-quarter outcomes in-line with Wall Street’s anticipations. Analyst Emmanuel Rosner claimed in a observe to investors Wednesday that the agency favors suppliers more than automakers into subsequent 12 months, but sees possible earnings downside possibility from lesser suppliers such as American Axle & Manufacturing and Dana Inc.

– CNBC’s Michael Bloom contributed to this report.