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Auto glitters


Autos have gained 19% YTD, the best sector performance, and another 1.5% over the last week. The first figure has been driven by the Truck segment’s share price recovery while the second one is pulled up by the Car segment. German manufacturers’ early positive comments on their excellent first half may not yet be fully discounted.

The Chinese sky seems to be the new limit for the industry which is good news for the Germans, decent news for PSA (Buy, France) and mixed news for Renault (Buy, France) which has to rely on 44% owned Nissan’s sino exposure. The Car segment which lost €6bn last year (Porsche (Sell, Germany), regarded as a holding company, and Fiat, not covered, are not included) is now expected to gain €3bn this year but early 2010 expectations were barely for breakeven. So the pace of upgrades is strong. 2011 earnings are seen at €7bn or so but 2012 at €11bn still looks below the peak of 2007 ( €14bn).

The sector will remain volatile as European demand is expected to take the full brunt of an end to subsidies. This is bad news for volume manufacturers and seemingly much less for premium brands. The sector trades at 40x 2010 earnings, a useless metric. It appears to be reasonably priced on an EV/sales basis (1.18x in 2010 vs. 0.97x in 2007) but actually good value on a P/Book : 0.93x in 2010 vs. 1.28x in 2007.

The clear thing is that the share price momentum of every stock is very strong, the upsides are still substantial (25% or more) with the exception of VW (Reduce, Germany) and Daimler (Reduce, Germany), that is until they are upgraded on their H1 earnings.

Disclosure: Appears to be reasonably priced on an EV/sales basis