European Auto Makers Insist Profits Are Safe, But Storm Clouds Gather

Transportation European Auto Makers Insist Profits Are Safe, But Storm Clouds Gather Neil Winton Senior Contributor Opinions expressed by Forbes Contributors are their own. New! Follow this author to stay notified about their latest stories. Got it! Aug 14, 2022, 08:48am EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin 02 August 2022, Bendorf: The tugboat “Alorba” passes the island of Graswerth in the Rhine River near .

. . [+] the city of Koblenz.

The water level is dropping and the river banks are drying up because of the drought in Germany. Photo: Thomas Frey/dpa (Photo by Thomas Frey/picture alliance via Getty Images) dpa/picture alliance via Getty Images European auto manufacturers reported mixed profits in the first half of 2022 as they emerged from coronavirus lockdowns and a semiconductor shortage. Forecasts for the rest of the year were surprisingly positive, despite worries about peace after Russian invaded Ukraine and an economic recovery threatened by inflation and recession.

But if energy shortages force the lights to go out and factories to shut, all bets are off. Drought is also causing water levels on the Rhine to fall, and this threatens economically crucial trans-European transport. Stellantis was the standout performer, and sees strong profits for the rest of 2022.

Even ailing Renault was able to put a brave face on its prospects. Mercedes was said to be a little overconfident. BMW’s latest profits were down, but it retained its 2022 target.

LMC Automotive’s August forecast predicts sales in Western Europe will slide 6. 4% in 2022, roughly the same as its July prognosis although that’s an improvement on the previous month’s forecast of a 7. 4% fall.

It looks unhealthy compared with its forecast at the start of the year that sales would bound ahead by a healthy 8. 6%. The invasion of Ukraine destroyed that.

Stellantis logo (Photo by JEFF KOWALSKY / AFP) (Photo by JEFF KOWALSKY/AFP via Getty Images) AFP via Getty Images MORE FOR YOU Tesla Challenger Polestar Powers Up With Nasdaq Listing Plan Valuing It At $20 Billion Driver Killed By His Own Car Door While Waiting In Line At Fast-Food Drive-Thru, Providing Cautionary Insights For AI Self-Driving Cars Tesla Cofounder’s Recycling Startup Plans To Become EV Battery Material Powerhouse Stellantis’s adjusted earnings before interest and tax jumped 44% in the first half, compared with the same period of 2021, to €12. 4 billion ($12. 8 billion).

Stellantis was formed by a merger of Groupe PSA and Fiat Chrysler Automobiles in January 2021. Stellantis owns European brands like Peugeot, Citroen, Opel, Vauxhall, Fiat, Maserati, Alfa Romeo and Lancia, and U. S.

ones Jeep, Dodge and Chrysler. The first half profit margin rose to 14. 1% from 11.

4% a year earlier. Stellantis only reports profit every six months. Stellantis still expects double-digit margins for the whole year, despite saying European and North American sales would slide 12% and 8% this year.

Moody’s Investors Service upgaded some Stellantis debt and liked its strong liquidity and high margins “which should be resilient, even at times of increasing headwinds related to product component availability, raw materials as well as energy cost inflation and a deteriorating consumer sentiment,” Moody’s analyst Matthias Heck said. Heck liked Stellantis’s ability to use merger synergies to cut costs. Moody’s summed up the harsh times ahead, common to the world’s biggest automakers.

“Moody’s expects that Stellantis’ margins will come under pressure once global automotive production is less constrained from the global semiconductor shortage. Moreover, consumer sentiment will likely suffer from high price inflation, including higher energy prices and cost of living, and higher interest rates,” Stellantis said. “In such an environment Stellantis’ margins will be burdened, especially from 2023 on.

At the same time, margins will be somewhat protected by lower one-offs and restructuring charges compared to 2022 and the company’s highly competitive cost base which continues to benefit from ongoing synergy realization. ” The logo of German carmaker Volkswagen (VW) is pictured on the roof of the company’s headquarters in . .

. [+] Wolfsburg, northern Germany. (Photo by Ronny Hartmann / AFP) (Photo by RONNY HARTMANN/AFP via Getty Images) AFP via Getty Images Europe’s leading seller Volkswagen and its brands like SEAT, Skoda, Audi, Porsche, Lamborghini and Bentley, saw profits slide almost 30% in the 2 nd quarter to €4.

7 billion ($4. 9 billion) despite a small increase in revenues. Profit was hit by technical accounting factors, and VW retained its forecast that full-year operating profits will be between 7 and 8.

5%. VW used to be the hands-down sales winner in Western Europe, but in the first half of 2022 it barely outsold Stellantis with sales of 1,195,000 versus 1,031,000. Investors will be wary of new leadership at VW, when Herbert Diess is replaced by Porsche CEO Oliver Blume on September 1.

Analysts liked that they saw and expected VW to meet its profit targets, despite the economic and political rumblings which seem to be gathering momentum. “This year is going to be very good for Volkswagen. Demand continues to exceed supply of cars, and an increase in (semiconductor) availability will help (it) ramp volumes.

We expect price improvements to help VW meet the upper range of its 2022 target, but we are wary of 2023: when cost pressures increase and volumes return, price headwinds may return pressuring margins,” said Bernstein Research analyst Daniel Roeska. VW investors will be watching whether the planned flotation of part of luxury sports car subsidiary Porsche goes ahead. “Time for Volkswagen to park its Porsche IPO”, said the Financial Times Lex column last month.

The BMW logo of HQ in Munich (Photo credit should read CHRISTOF STACHE/AFP/Getty Images) Getty BMW reported earnings down 31% in the 2 nd quarter to €3. 4 billion ($3. 5 billion) in line with expectations.

BMW lowered its output forecast, said orders were weakening and worried about a volatile 2 nd half. The company retained its 2022 forecast that auto profits would range between 7 and 9%. The Wall Street Journal’s Heard on the Street column said BMW was flashing its warning lights and pointed out the conmpany cut its free cash flow target for the year to at least €10 billion ($10.

3 billion) from a previous estimate of at least €12 billion ($12. 4 billion). The column said BMW blamed a continuing shortage of semiconductors and higher spending on electric vehicles for the shortfall.

Investors worry that BMW’s electric car plans, under which it currently uses traditional engineering with electric as an add-on, might mean it loses out in the race compared with competitors like Mercedes and VW with their dedicated platforms. This is set to change in 2025 with the introduction of the so-called Neue Klasse. “BMW needs to provide more details on the final bill of the EV transition to help convince long-term holders to buy into the story.

It has been unhelpfully opaque on Neue Klasse – the team now intends to share more details in December. . .

a long time to wait for investors,” Bernstein’s Roeska said. The front of a Mercedes-Benz Vision EQS (Photo by THOMAS KIENZLE / AFP) (Photo by THOMAS KIENZLE/AFP . .

. [+] via Getty Images) AFP via Getty Images Mercedes was more positive about its prospects as it raised its profit forecast for the year. Mercedes’ improved 2 nd quarter earnings 8% to €4.

9 billion ($5. 1 billion) and raised its profit target for the year to between 12 and 14% from a previous target of 11. 5 to 13%.

Berenberg Bank of Hamburg said if Mercedes can make this kind of profit through what is likely to be a recession it might persuade investors that the stock deserves a higher, more luxury stock market rating. Investment researcher Jefferies said despite the more negative BMW outlook it continues to prefer BMW, which it rates as a “Hold”. “We continue to feel that Mercedes has oversold itself on luxury re-rating or that this will take time considering current returns and cyclical exposure,” Jefferies analyst Philippe Houchois said in a report.

Renault logo (Photo by Jeremy Moeller/Getty Images) Getty Images Renault has had a torrid time recently as it consistently fell behind its competition in Europe. This year, it was handicapped by the demise of its Russian operation, but its CEO Luca de Meo has been talking a good game, pointing to the success of its new electric car, the Megane-E-Tech, and reminding investors that Renault has led the way in Europe’s move to electrification. In the first half Renault lost €1.

36 billion ($1. 4 billion) because of the cost of shutting down its Russian operation, but it claimed its turnaround plan is working. The loss included a €2.

2 billion Russian write-down, including its stake in AvtoVAZ. De Meo has said the turnaround plan is based on pursuing profits rather than sales. Renault’s profit forecast for all of 2022 is now more than 5%, up from a previous target of 3%.

In the first half (like Stellantis, Renault only reports the bottom line half-yearly) the operating profit margin was 4. 7% compared with 2. 1% in the same period last year.

Jefferies liked the progress Renault had made, saying although modest, “the stabilization of Renault is accelerating”. Bernstein Research liked what it saw too. “The company now seems to be in a better place and management is more confident in Renault’s potential to achieve their long-term objectives,” said Roeska.

Renault plans a meeting in the fall to update its so-called “Renaulution” strategy, expected to update targets and unveil new product plans. “But ultimately, we remain cautious on market headwinds in 2023. We would not want to buy into the strategy today, given the uncertainties ahead,” Roeska said.

Investors still await news of a resolution of the cross-shareholding with Alliance partner Nissan, which might unlock value for shareholders, one day. Renault plans to float off its electric car assets into a separate company. Ford reported a European 2nd quarter profit of $10 million, $294 million better than the same period last year.

In the first half of 2022 Ford Europe sold 236,000 cars and SUVs, down from 284,000 in the same period of 2021, for a market share of 4. 7%, according to ACEA. LMC Automotive reminded investors that despite the bravado on view, auto industry forecasts have big hurdles to jump.

“The 2022 full-year (Western Europe sales) forecast remains at 9. 9 million, broadly unchanged from last month. That does mean that selling rates will need to pick up over the remainder of the year, and so assumes that, while the production headwinds continue, they will ease from earlier in the year,” LMC said.

“However, there are increasing concerns on the demand side too, as Western Europe faces rapidly rising living costs, natural gas supply shortages and increasing interest rates,” LMC said. Follow me on Twitter . Check out my website .

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