Investment banks are enthusiastic as car sales in Western Europe advance, but Morgan Stanley worries that the recovery might be less healthy than it appears.
Could the increased sales pace be down to desperate manufacturers unloading unsold vehicles from weak markets in Russia and Latin America, with big negative implications for profit margins?
According to LMC Automotive, car sales in Western Europe rose 6.7 percent in April, and it increased its growth forecast for the year to 6.6 percent for a total of 12.9 million vehicles. This compares with the previous month’s forecast for 2015 of a 4.8 percent increase.
“The (European) economy continues to improve, helped by strong real wage growth and an eight-year high measure of European sentiment,” LMC Automotive said.
The German market, Europe’s biggest, rose 6.3 percent in April, led by 11 percent higher company car sales. Private sales though were down 1.2 percent.
Investment researcher Evercore ISI was leading the charge of optimists.
“E.U indicators continue to improve and beat expectations – from consumer confidence, bank lending, money supply, to overall E.U. GDP statistics there remains positive momentum in what looks like the first signs of a real E.U recovery,” said Evercore ISI analyst Arndt Ellinghorst.
“After 3-4 years of death by a thousand cuts, our brand new E.U analysis is showing a sustained tick-up over the last four months in European sales and we expect Western European sales to rise in 2015 by four to six percent. We believe that a return to more normalized, replacement or trend vehicle demand would require a total uplift of 10 to 15 percent over the next two to three years,” Ellinghorst said.
Ellinghorst expects this to be reflected in improved profitability which will carry on into 2016 and beyond.
Barclays Equity Research analyst Michael Tyndall reckons the European economic fundamentals suggest the good times will continue.
“Q2 is ordinarily the strongest selling season for autos in Europe so perhaps the carmakers will be a bit cheerier if we finish the quarter the way we started it,” Tyndall said.
Morgan Stanley analyst Harald Hendrikse isn’t so sure, suspecting that the increased sales in Europe might be linked to collapsing emerging market demand as manufacturers seek to unload surplus production anywhere.
“Clearly, Q1 2015 European car sales were stronger than we had forecast, but we believe this is largely the result of (manufacturers) pushing volume into the market, rather than demand strengthening. With sales slowing in LatAm, Russia and Eastern Europe, where else can (manufacturers) generate growth,” Hendrikse said.
Fitch Ratings wasn’t quite so cautious.
“The sustainability of the current timid recovery in economic sentiment in Europe will be crucial to support new vehicle sales. Sales in western Europe increased by 4.8 percent in 2014 after six years of decline and we expect a further four to 4.5 percent growth in 2015. However, price pressure has not disappeared and the competitive environment is still tough,” Fitch Ratings analyst Emmanuel Bulle said.
Evercore ISI’s Ellinghorst, in an email to clients, said he is standing firm with his positive view on Europe autos and recommends investors keep the faith.
“The improvement in underlying E.U. demand is sustainable, foreign exchange (despite recent easing) and raw materials remain supportive, valuation is low both in absolute terms and relative to stocks history. Auto (manufacturers) have never been cheaper relative to the market,” Ellinghorst said.