JPMorgan and UBS explain why now is the time to buy auto stocks

Published Thu, Oct 28 20215:05 AM EDT

Carmakers from Europe and Asia are expected to report weak earnings and issue profit warnings after the global microchip shortage forced the automotive industry to cut production targets . But analysts at major securities firms say now may be the time to buy some of these stocks. Daimler , BMW and Toyota will all reveal how a lack of semiconductors has affected their output when they report their third-quarter earnings in the coming days. Stellantis missed analyst expectations when it reported its third-quarter results Thursday. Revenue fell 14%, mainly due to a loss of 600,000 vehicles or 30% of planned production, following the chip crisis. It was a similar picture for Volkswagen, which also reported its third quarter-results Thursday. The German carmaker cut its outlook for deliveries, toned down sales expectations and warned of cost cuts as a shortage of computer chips caused the world's number two carmaker to report lower-than-expected operating profit for the quarter. Elsewhere, Mercedes-maker Daimler could see its own income fall by 13.3%, putting the firm among the biggest losers this quarter, according to a UBS note from earlier this month. In a note on Oct. 22, Morgan Stanley analysts said they think Daimler will produce more than 120,000 fewer Mercedes vehicles this quarter than it did in the last quarter. The analysts said the reduction represents a 6 billion euro ($7 billion) shortfall quarter-on-quarter. While the automaker's results appear to be poor compared with previous years, some analysts say now could be the ideal time for investors to buy in. JPMorgan's head of European autos equity research, Jose Asumendi, told CNBC Wednesday that he and his team have been telling investors to increase their exposure to autos for around a month. "We are quite selective in terms of where we see value," Asumendi said, adding that Daimler, Renault and Stellantis are the bank's top stock picks among the European carmakers. The auto sector's results for the most recent quarter will be a "mixed" picture, Asumendi said. Premium car brands like BMW may fare better than mass manufacturers like Stellantis (formally Fiat Chrysler), he explained, adding that VW units like Porsche will likely outperform the main VW brand, which needs to get "leaner and fitter" so that it can respond to new challengers like Tesla . Looking ahead Instead of dwelling on the third quarter, investors are looking forward to the fourth quarter and the first quarter of next year, Asumendi said. Analysts at other investment banks are also bullish on the prospects for automotive stocks. "Time to increase the exposure to auto stocks, in our view," said a UBS analyst team led by Patrick Hummel in a note on Oct. 8. "The low point in the global production run-rate is possibly already behind us (there are signs of stabilization at the OEM level), and car demand still greatly exceeds supply," they added. UBS estimates 88 million cars will be made in 2022, which would be a 15% increase in annual global production. "Against the backdrop of low dealer inventory and a strong order backlog, pricing and mix will likely remain strong," the UBS analysts said. The investment bank has raised its earnings per share expectations for 2022 for OEMs (Original Equipment Manufacturers) by around 15-20%. Earnings per share is an important metric used by traders to gauge the value of a stock. "Autos will likely be amongst the sectors with the highest earnings momentum over the next 12 months," the UBS analysts said.

A flag with the logo of the Mercedes-Benz brand, the Mercedes star, flies in front of a company showroom. On February 18, Daimler AG and Mercedes Benz AG present their annual figures for the past fiscal year.

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