European Auto Stocks: A Deep Dive into Unprecedented Declines and Investor Sentiment
By Sruthi Shankar and Danilo Masoni
(Multibagger) - European auto stocks are currently experiencing a significant downturn, with investors continuing to reduce their exposure amid an industry-wide crisis. Despite valuations hitting near-record lows, which would typically attract buyers, the sector remains under intense scrutiny and skepticism.
The Current State of European Auto Stocks
The Autos and Parts index has been one of the worst performers this year. Analysts are predicting a 13.6% drop in earnings for 2024, a stark contrast to the post-pandemic years when supply chain issues allowed car manufacturers to raise prices. Investors are now bracing for extensive cost cuts due to a technological shift, fierce competition from Chinese automakers, and increasingly frugal consumers.
Economies of scale are becoming crucial, especially for mass-market brands like Germany's Volkswagen (ETR:). Volkswagen is currently embroiled in disputes with trade unions over unprecedented plans to shut down factories in Germany, driven by competition from China and rising labor and energy costs.
Valuations and Investor Sentiment
European auto stocks are now trading at a near-record 60% discount to the broader market, as represented by the pan-European STOXX 600 index on a price-to-earnings basis. Despite this, a recent BofA survey showed that autos are the most underweighted sector among regional fund managers overseeing $284 billion.
"This toxic cocktail of weakness in China, deteriorating pricing, stagnant volume growth, and higher labor costs leaves room for these stocks to easily drop by another 10-20% if conditions worsen," said Rolf Ganter, head CIO for European equities at UBS Global Wealth Management. "Valuations are really cheap, but we're not pushing the sector at all."
Potential Future Warnings
Shares in major automakers such as Volkswagen, BMW (ETR:), Mercedes-Benz (OTC:), Renault (EPA:), and Stellantis (NYSE:) have plummeted by as much as 29-50% from their peaks this year, hitting multi-month and even multi-year lows.
"The Western auto industry is under significant pressure from Chinese competition, and consumers are less willing to spend on electric vehicles (EVs) than they were a few years ago," said Gilles Guibout, head of European equity strategy at AXA Investment Managers. "Manufacturers must either justify a premium price to customers or cut costs—there are no other options."
Declining Sales and EV Demand
European Union car sales dropped by more than 18% in August compared to the previous year. Sales of fully electric vehicles fell by 44%, with Germany and France, the bloc's largest EV markets, experiencing steep declines.
"There could be a lot of profit warnings ahead, suggesting it may not be the right time to buy into the auto sector," said Andreas Bruckner, investment strategist at BofA.
The Value Trap
The cooling demand for EVs has led several major automakers to scale back their electrification plans. For example, Sweden's Volvo (OTC:) Cars recently abandoned its target of going fully electric by 2030.
"For electric cars, the basic issue is producing sufficient electricity and systems to make this project feasible," said Carlo Franchini, head of institutional clients at Banca Ifigest. "Autos are not a safe bet right now, and reducing exposure is a prudent move."
A retreat from electrification carries its own risks. Renault CEO Luca de Meo recently warned that European carmakers could face nearly $20 billion in fines in 2025 if they exceed EU carbon emission limits due to slowing EV demand.
The sector is also caught in a trade dispute between the EU and China, with the EU imposing tariffs on Chinese-made EVs due to what it views as excessive and unfair subsidies to Chinese manufacturers.
Conclusion
"It's difficult to say if we've reached the bottom of negative news for the sector. Even if valuations are tempting, it could be a value trap without a recovery," said Chiara Robba, head of LDI equity at Generali (BIT:) Asset Management. "The sector needs a complete transformation of the supply chain, manufacturing, and recharging infrastructure to support mobility and boost EV demand."
Analysis: What This Means for You
Understanding these trends is crucial for anyone invested in or considering investing in the auto sector. The key takeaways are:
- Valuation vs. Risk: While valuations are at near-record lows, the sector faces multiple headwinds that could lead to further declines.
- Technological Shifts: The industry is undergoing a significant technological transformation, which presents both opportunities and risks.
- Economic Factors: Rising labor and energy costs, along with competition from Chinese automakers, are putting pressure on European auto manufacturers.
- Consumer Behavior: A shift in consumer behavior towards more cost-conscious choices is impacting sales, especially for EVs.
Given these factors, it's essential to approach investments in the auto sector with caution. Reducing exposure or diversifying into other sectors may be prudent strategies until more clarity emerges regarding the industry's future direction.