By Geoffrey Smith
Investing.com -- The cyclicals rally in Europe shifted up a gear on Wednesday, bolstered by hopes that the key export market of the U.S. will be fully reopened faster than previously thought, compensating for a still-uneven recovery at home.
The cyclicals-heavy DAX in Germany hit an all-time high in early trading before retracing a fraction to be up 0.8% by 5.30 AM ET (1030 GMT) in Europe. The FTSE MIB also rose 0.9%, shrugging off a fresh tightening of lockdown restrictions in a handful of regions as a result of an uptick in Covid-19 cases.
The moves were driven to a large degree by optimism for the auto sector, on the back of a strong first set of earnings from Stellantis, the atrociously named holding company created by the merger of Peugeot (OTC:PUGOY) and Fiat, and a new report by UBS analysts sharply upgrading their price target for Volkswagen (DE:VOWG_p) in recognition of its progress on the shift to electric mobility.
By 5:30 AM ET, Stellantis (PA:STLA) stock was up 2.4% at its highest since October 2019, when the merger was still not a done deal and the pandemic wasn’t even thought of. The group reported a strong end to 2020 and forecast an operating margin of as much as 7.5% in 2021 as it squeezes out the extra efficiencies promised by the merger.
Volkswagen preferred stock meanwhile rose 4.5% to 184.93 euros, its highest since January last year. The price level stands out because it still represents a discount of nearly 40% to UBS’s new 12-month target price of 300 euros. Analyst Patrick Hummel said in a research note that he had underestimated the potential for VW, especially with regard to its ID.3 model.
VW boss Herbert Diess said last month that “we should prepare for a significant upturn” as vaccination programs allow a global economic recovery. But it’s still unusual for a major investment bank to issue such a radical re-appraisal of a European legacy automaker.
Such big revisions are more reminiscent of Wall Street analysts’ grudgingly bringing their Tesla (NASDAQ:TSLA) forecasts into line with the sky-high expectations of retail investors. However, Tesla trades at over 1,100 times last year’s earnings, while Volkswagen traded at less than 12 times as of Tuesday’s close. Even at UBS’s new target, it’s hard to argue that the valuation gap is sustainable, particularly since many analysts now see Europe, VW’s home market, as driving the shift to electric mobility over the next few years. Stellantis sees European car sales rising 10% this year, compared to 8% growth in North America and 5% in China.
VW isn’t alone in adapting slowly to that trend. UBS also upgraded Renault (PA:RENA) and Continental (DE:CONG) stock to buy from hold, citing their progress in adapting. Renault stock rose 5.2% and Continental rose 5.1%.