Global vehicle sales are set to decline due to prolonged manufacturing constraints and tight market conditions, but Japan's automakers are likely to avoid any dramatic setbacks, according to Jefferies. "The global automobile sales environment is headed toward a 'W-dip' scenario on a longer period of manufacturing constraints and tight market conditions than expected due to the Delta variant, semi chip shortages, and instability in China's liquidity ," Jefferies analysts wrote in a note dated Oct. 19. "This puts the industry at the bottom of the cycle." The term W-dip is usually associated with a W-shaped recovery that involves two consecutive instances of a sharp decline followed by a sharp increase. Global automakers are struggling to produce vehicles due to a combination of factors. One of the important issues is an ongoing shortage in the semiconductor industry that is expected to cost the industry some $210 billion in revenue this year. "Despite increasing output reductions at [Japan's automakers], we believe the sector is likely to avoid dramatic setback and maintain healthy medium-term profitability," the analysts wrote. They pointed out that automakers could benefit in the near term from a depreciation in the Japanese yen as it can add substantially to their operating profit. "Yen depreciation by a few percent might be capable of absorbing a substantial portion of gross profit lost to the impact of reduced output," the analysts added. Despite being bullish on the sector, Jefferies still lowered the near-term outlook. It also reduced operating profit expectations for the likes of Toyota , Nissan as well as auto parts makers Denso and Aisin for the fiscal year ending in March 2023. Japan's top carmakers Among Japan's top-tier carmakers, Jefferies prefers Toyota, followed by Honda and then Nissan. "Toyota continues to be our top pick, and near-term noise in production cut should be peaking out with the output reduction rate at a modest level in November," the analysts wrote. Among all the Japanese automakers, Toyota has "impressive overall capabilities" to address intense global competition and structural changes. Still, Toyota is set to cut its global auto production next month by 15% — around 150,000 vehicles — due to a shortage of semiconductors and because of the power crunch in China, Japanese business daily Nikkei reported . Jefferies has a "buy" rating on the Japanese carmaker and an unchanged price target of 2,500 yen ($21.93) per share — that represents a 25% upside from Thursday's close. The U.S. investment bank said it also likes carmaker Honda because of its cheap valuation, a lag in its share price performance and a favorable production cycle in the U.S. next year. Honda also has a "buy" rating with an unchanged price target of 4,300 yen. Revised price targets Jefferies said it expects performance among second-tier automakers to also improve. The bank maintained "buy" ratings for Suzuki Motor and Subaru and a "hold" for Mazda . But it raised all of their price targets: Suzuki Motor's price target was raised from 5,800 yen to 6,100 yen, representing 19% upside from Thursday's close. Subaru's price target was raised from 2,600 yen to 2,750, indicating 22.4% upside. Mazda's price target was raised from 1,100 yen to 1,240 yen — a 21.2% upside. "Subaru has arrived at a turning point in terms of fundamentals, and the current share price offers an excellent opportunity over the medium term," the analysts said, adding, "Suzuki is approaching recovery phases in Indian sales and domestic production from [calendar year 2022] and should continue to rebound." Uncertainty for auto parts suppliers The situation remains uncertain for companies that supply various vehicle parts to the automakers as their performance depends on the number of vehicles being produced, according to Jefferies. "The timing of confirming recovery in global output volume in Apr-Jun 2022 should be a good opportunity for robust revival," the analysts said. Jefferies downgraded Denso from a "buy" rating to "hold" while keeping the price target unchanged at 9,000 yen.
The logo of Toyota Motor is displayed at a company's car showroom in Tokyo on February 6, 2019.
Kazuhiro Nogi | AFP | Getty Images
Global vehicle sales are set to decline due to prolonged manufacturing constraints and tight market conditions, but Japan's automakers are likely to avoid any dramatic setbacks, according to Jefferies.