Auto Giants Hit 52-Week Low On Global Rout: Pain To Prevail?

Sinking oil prices and coronavirus fears triggered a global stock-market selloff yesterday, with major U.S. indices — the Dow Jones, S&P 500 and NASDAQ — witnessing sharp corrections. Fast-spreading COVID-19 has kept investors on edge lately. Coronavirus continues to spread in the United States and elsewhere, with more than 110,000 confirmed cases globally.

To add to that, break-up of the three-year alliance between Saudi Arabia and Russia was the primary catalyst behind yesterday’s steep market decline. Saudi Arabia and Russia locked horns over production, with oil prices dropping the most since the Gulf War in January 1991.Meanwhile, the yield on the 10-year Treasury note tumbled to a new historic level below 0.4%.

The massive broader market selloff due to oil price crash and coronavirus fears sent a jolt across the auto industry, with various stocks hitting new 52-week lows yesterday. The automotive industry, which has been already grappling with various challenges including new-emission standards, and rising costs amid technological shift and robust demand for ride-sharing services, is now getting further plagued by global headwinds.

U.S. Auto Biggies Hit Fresh 52-Week Low

Shares of Detroit 3 carmakers — General Motors (NYSE:GM) , Ford (NYSE:F) and Fiat Chrysler (NYSE:F) —took a severe beating on Monday due to broader market sell off amid coronavirus fears and oil price plunge. General Motors declined the most, around 14%, to one-year low of $24.15, before closing the session a tad higher at $24.69. Ford hit a 52-week low of $5.87, before closing at $5.90. Fiat Chrysler also dropped to a 52-week low of $10.44, before ending the session at $10.54.

With the auto bigwigs transitioning from fossil-fuel cars to battery-powered vehicles, sinking oil prices do not come as good news for many carmakers. The red-hot U.S. auto stock Tesla (NASDAQ:TSLA) , an all-electric carmaker, witnessed a steep decline of 13.6% yesterday, resulting in a sharp pullback over the last few weeks. Notably, the EV pioneer has tanked 32.5% since Feb 21.

What’s Ahead for These Carmakers?

In order to adapt to changing dynamics and customer preferences, each of the Detroit 3 companies are ramping up investments in EVs, which are the road to the future. Importantly, General Motors made a big EV push recently, aiming to spend more than $20 billion through 2025 to launch gen-next EVs powered by new-low cost batteries. General Motors plans to roll out 11 EVs as part of its ambitious plans through 2025, including at least 20 new models by 2023. Ford will continue with extensive product introductions, featuring electric commercial and passenger vehicles, and carry out investments in smart-vehicle capabilities throughout 2020.Fiat Chrysler is revving up electrification efforts, with Jeep hybrids in the pipeline. Fiat Chrysler's e500 and Chrysler's Pacifica Hybrid van are other models to look for.

While big bets on EVs will prove beneficial in the long term, it is likely to strain near-term financials of the companies. Macro-economic headwinds, and R&D costs and capital expenditure are anticipated to weigh on the carmakers. As it is, General Motors envisions adjusted EPS for 2020 to be flat year over year. Ford also expects weak results from Ford Credit, high investments in Mobility and sagging sales in China to weigh on profits in 2020.

While Fiat Chrysler and Tesla expect to deliver strong performances in 2020, the forecasts had not taken into account coronavirus-related weakness. Tesla’s forecast of 500K deliveries in 2020 seems a little uncertain amid global worries. While investors have big expectations from Tesla, the company, which is banking big on the Shanghai Gigafactory 3, might fail to deliver earnings beat in first-quarter 2020 after surpassing estimates in the trailing two quarters. While Fiat Chrysler sports a Zacks Rank #1 (Strong Buy), Tesla carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Other Auto Stocks in the Red Territory

The top three automakers in Germany — Volkswagen (OTC:VWAGY) , BMW AG (NYSE:F) and Daimler AG (NYSE:F) — also plunged to 52-week lows yesterday,albeit closing the session a tad higher. Other auto companies including Tenneco, Superior industries, Dana Incorporated, Allison Transmission, Meritor, Lear Corporation, Garrett Motion and Modine Manufacturing also felt the heat and plunged to their respective one-year lows yesterday.

Final Thoughts

Vehicle sales in China, which is the world’s largest auto market, are expected to remain weak amid economic slowdown concerns. Becoming excessively dependent on China has certainly taken a toll on the auto industry. The health epidemic not only dented consumer sentiments and waned vehicles’ demand but also triggered supply chain issues globally.

Hit by disruption caused by the coronavirus epidemic, China Association of Automobile Manufacturers forecasts the country’s auto sales to dip more than 10% in the first half of the year and 5% during the full year. The disruptions are expected to significantly hurt automakers’ margins and sales in 2020. Amid the concerns, Moody’s has cut global vehicle sales forecast and now expects the metric to fall 2.5% in 2020 versus the prior estimate of 0.9% decline.

Until coronavirus concerns fade away, even incentive policies are unlikely to have a major impact on car sales. Automakers will have to be prepared for a prolonged period of weakness, and resort to cost containment and other strategies to overcome the resultant challenges.

Economic worries and fuel price declines do not bode well for the capital-intensive EV shift. From a future competitive standpoint, carmakers will have to balance revenue generation with broader challenges and escalating expenses. Eventually, the success will depend on how well the companies manage escalating costs for mass manufacturing and evolving technology.

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