As the broad markets try to regain their footing after Monday’s steep declines, one sector showing some early promise this Tuesday is the Automakers.
More Lenient Regulatory Environment
An expectation of the Trump administration generally loosening business regulations combined with 2017’s corporate and individual tax cuts have buoyed U.S. equities in general over the past year and the Automakers are no exception.
This week the EPA announced that they believe that the automotive emissions standards proposed in the Obama era are too restrictive and “Made assumptions that didn’t comport with reality”, signaling an easier environment to come for automakers to comply with the standards.
Though EPA chief Scott Pruitt did not outline the exact level of regulatory rollback he would seek, it is widely expected that the current proposed standards (calling for automakers to increase the average MPG of their fleets to 54.5 by 2025 – almost double current levels) will be relaxed significantly.
Pruitt also signaled that the Federal government would challenge California’s right to set its own emissions rules which - because they are far stricter than the nationwide standards - effectively bifurcate the market for new automobiles in the U.S., a real headache for the manufacturers.
Combined with relaxed regulations, stable oil prices, a strong economy, low unemployment and lower taxes make expensive luxury cars and SUVs accessible to consumers – and these models are the big moneymakers for the Automakers.
Who Will the Winners Be?
How are recent developments are combining to improve the outlook of three of the big players in the space? Let’s take a look…
International giant Fiat Chrysler (FCAU - Free Report) produces popular brands like Fiat, Chrysler, Dodge, Alfa Romeo, Jeep and Ram. With a lineup that includes sporty models, muscle cars and large Ram trucks, the mileage standard reductions are a welcome surprise. Fiat Chrysler has posted a positive earning surprise of between 12% and 30% in each of the last 4 quarters.
The stock prices of companies that consistently exceed analyst estimates tend to outperform their sector competition.
The Zacks Consensus estimate for earnings in 2018 has been steadily rising over the past 90 days, from $2.86/share to $3.64 – an increase of over 27%. Because of the optimistic earnings outlook, Fiat Chrysler has carries a Zacks Rank of #1 (Strong Buy). Along with their propensity to beat even increased estimates, FCAU looks likely to be an industry leader in the coming months and years.
General Motors (GM - Free Report) stock has declined recently in the broader selloff of auto stocks. Its price is off 15% YTD even as its Zack’s Consensus Earnings Estimate has been revised upward. Expected to have earned $1.28/share when it reports Q1 results on April 26, it currently trades at a Forward P/E of 5.6X - considerably less expensive on valuation than others in the industry. It earns a Zack’s Rank #1 (Strong Buy), and a Zacks Style Scores of A in both Value and Growth. It also pays a 4.4% dividend, returning cash to investors quarter after quarter.
The Black Sheep
Tesla Motors (TSLA - Free Report) has been battered of late as the bears have sold the stock off from a high of $389 in September 2017 all the way down to a close of $252 on Monday, concentrating on the company’s huge cash burn, production delays and uncertain earnings outlook.
It was widely reported last week that TSLA would have a need for new financing in 2018, leaving it vulnerable to a bond market where its debt had already been recently downgraded and/or a convertible issue that would dilute current shareholders.
Add in an NTSB investigation into a fatal crash possibly involving the Autopilot driverless technology in one of its Model X SUVs and an expensive recall of 123,000 Model S cars for a brake issue and these have been dark days indeed for TSLA.
Because of the huge uncertainty surrounding how many Model 3s the company can produce and sell, accurate earnings estimates out into the future are difficult to make and the stock currently has a Zacks Rank #4 (Sell).
Rays of Light
In an official release today, CEO Elon Musk gave investors some reasons for optimism. After setting the extremely lofty goal of producing 2500 Model 3s per week by the end of the first quarter, TSLA actually came very close, making 2020 of the mid-priced electric sedans, handily beating some estimates of as few as 1200. Admittedly, this came as a result of an all-hands-on-desk push to make as many cars as possible that had Musk himself taking over production and reportedly sleeping at the factory.
More importantly, Tesla said they will not need to use the credit markets (outside of current lines) to raise cash in 2018. This should be cause for a huge sigh of relief for shareholders. They’re not out of the woods, however, as they find themselves in an interesting catch-22. They need to sell Model 3s to stimulate the cash flow needed to ramp up production, but they need cash now to build the cars.
TSLA stock is trading up $14 this morning or almost 6% on today’s news.
Only the hardiest investors can handle the gut-wrenching swings in the stock price and constant bad news that seem to come with being a Tesla shareholder, but if Musk can pull off the feat of bootstrapping his way to making 10,000 Model 3s per week by next year, this could actually be a profitable company soon. Stay Tuned.